Vulcan Materials Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Vulcan is a U.S.-focused construction materials producer, led by aggregates, with asphalt, ready-mixed concrete and calcium operations. Results are compared with Q1 2019 unless stated otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1,049.2 million | $996.5 million | +5% |
| Gross profit / margin | $201.7 million / 19.2% | $191.7 million / 19.2% | Profit +5%; margin flat |
| Operating earnings | $112.3 million | $104.4 million | +8% |
| Continuing-operations earnings | $60.0 million; $0.45 diluted EPS | $63.9 million; $0.48 diluted EPS | Down |
| Net earnings | $60.3 million | $63.3 million | Down 5% |
| Adjusted EBITDA (non-GAAP) | $201.0 million | $192.7 million | +4% |
| Operating cash flow | $82.5 million | $116.2 million | Down $33.7 million |
Aggregates segment sales rose 4% to $868.2 million and gross profit rose 5% to $194.1 million. Aggregates shipments fell 1.3% to 45.0 million tons, while freight-adjusted price per ton increased 4.5% to $14.39. Asphalt shipments increased 2%; ready-mixed concrete shipments increased 10%. SAG expense fell to $86.4 million from $90.3 million and declined to 8.2% of revenue from 9.1%. Interest expense was $30.8 million, down from $32.9 million; the effective tax rate increased to 16.9% from 14.3%.
Cash, debt and liquidity
- Cash and cash equivalents were $120.0 million at March 31, 2020, versus $271.6 million at year-end 2019. Net cash from operating activities was $82.5 million; cash used in investing and financing was $130.2 million and $106.5 million, respectively. Cash purchases of property, plant and equipment were $142.7 million.
- Reported debt was $2.786 billion, largely long-term and unsecured. Debt was 33.3% of total capital. Management reported total debt to trailing-12-month Adjusted EBITDA of 2.2x, or 2.1x net of cash. The weighted-average debt maturity was 14 years and the effective weighted-average interest rate was 4.2%.
- No borrowings were outstanding under the $750 million revolving credit facility; available capacity was $695.9 million after $54.1 million of letters of credit. The company was in compliance with debt covenants.
- On April 10, after quarter-end, Vulcan entered into a $750 million, 364-day delayed-draw term loan, with borrowings due April 2021. Management said it intended to refinance $250 million of notes due in 2020 and $500 million due in 2021 and had the ability to do so through this facility.
Outlook, risks and notable items
- Vulcan withdrew its prior 2020 financial guidance because the COVID-19 impact on construction demand was too uncertain. It said it was operating as an essential business and had experienced minimal financial impact in Q1, while noting that project timing and demand could change. The company reported that shipments remained relatively strong in many markets at filing, but warned the pandemic could affect customers, operations, employees, supply chains and liquidity.
- 2020 capital-spending expectations were reduced to $275–$325 million from the previous $475 million plan. Q1 capital spending was stated as $109 million in management’s discussion; the cash-flow statement reports $142.7 million of cash purchases of property, plant and equipment.
- Q1 results included a $6.4 million pretax foreign-currency translation loss, principally from the rapid devaluation of the Mexican peso, and a $5.1 million mark-to-market loss on Rabbi Trust investments. Adjusted results excluded $1.1 million of non-routine business-development charges, $0.6 million of direct COVID-19 costs and $0.9 million of restructuring charges. Adjusted diluted EPS was $0.47 versus $0.46 in Q1 2019.
- The company recorded a $19.9 million cash settlement of interest-rate locks hedging an anticipated debt issuance. It recorded $1.0 million of the loss in Q1 interest expense and deferred the remainder in other comprehensive income, subject to the anticipated debt issuance.
- Asset-retirement obligations rose to $263.4 million from $210.3 million at year-end, primarily due to $55.4 million of revisions to estimated reclamation costs.
- Contingencies include environmental remediation and litigation associated with former businesses. For the Lower Passaic River matter, the EPA estimated a proposed remedy at $1.38 billion, but Vulcan said its share and the parties responsible for funding had not been determined and it had recorded only an immaterial loss. The company said it could not reasonably estimate losses for certain other open matters, including Texas Brine, New York water-district cases and aspects of the Hewitt Landfill matter.
- Management said it did not currently anticipate material impairment charges, covenant violations or other specified material accounting or restructuring impacts, but emphasized the uncertainty. Other risks include construction cycles, weather, infrastructure funding, interest rates and LIBOR transition.
Most important facts for investors to verify
- How COVID-19 affected shipment volumes, pricing, project schedules, customer collections and liquidity after March 31; full-year financial guidance was withdrawn.
- Whether the delayed-draw loan was used to refinance the 2020 and 2021 floating-rate notes, and the resulting cost, maturity profile and covenant headroom.
- Reconciliation of the $109 million capital-spending figure in management’s discussion with $142.7 million of cash purchases of property, plant and equipment in the cash-flow statement, and progress against the revised $275–$325 million plan.
- Whether reclamation-cost estimates or environmental and discontinued-operations litigation develop in ways that materially increase recorded liabilities or cash outflows.
- Cash conversion and working capital: operating cash flow fell year over year, with management citing higher receivables and inventories and lower current liabilities.