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Vulcan Materials CO - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2014


OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                 to

 

Commission File Number 001-33841

 

VULCAN MATERIALS COMPANY
(Exact name of registrant as specified in its charter)

 

 

 

 

 


New Jersey
(State or other jurisdiction of incorporation)


20-8579133
(I.R.S. Employer Identification No.)


1200 Urban Center Drive, Birmingham, Alabama
(Address of principal executive offices)  


35242
(zip code)


(205) 298-3000    (Registrant's telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes No

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer


Accelerated filer 


Non-accelerated filer  
(Do not check if a smaller reporting company)


Smaller reporting company


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:


                  Class                  
Common Stock, $1 Par Value

 

Shares outstanding
      at September 30, 2014      
131,703,076

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED SEPTEMBER  30, 2014

 

Contents

 

 

 

 

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Comprehensive Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

 

 

 2

 3

 4

 5

 

Item 2.

Management’s Discussion and Analysis of Financial

   Condition and Results of Operations

 

 

25

 

Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

43

 

Item 4.

Controls and Procedures

43

 

 

 

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

44

 

Item 1A.

Risk Factors

44

 

Item 4.

Mine Safety Disclosures

44

 

Item 6.

Exhibits

45

 

 

 

Signatures

 

 

46

 

Unless otherwise stated or the context otherwise requires, references in this report to “Vulcan,” the “Company,” “we,” “our,” or “us” refer to Vulcan Materials Company and its consolidated subsidiaries.

 

 

 

1

 


 

 

 

 

part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited, except for December 31

September 30

 

 

December 31

 

 

September 30

 

in thousands, except per share data

2014 

 

 

2013 

 

 

2013 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$         91,868 

 

 

$       193,738 

 

 

$       245,813 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

485,176 

 

 

344,475 

 

 

450,642 

 

  Less: Allowance for doubtful accounts

(5,428)

 

 

(4,854)

 

 

(5,412)

 

   Accounts and notes receivable, net

479,748 

 

 

339,621 

 

 

445,230 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

254,931 

 

 

270,603 

 

 

255,047 

 

  Raw materials

22,987 

 

 

29,996 

 

 

29,480 

 

  Products in process

1,331 

 

 

6,613 

 

 

6,385 

 

  Operating supplies and other

27,335 

 

 

37,394 

 

 

37,267 

 

   Inventories

306,584 

 

 

344,606 

 

 

328,179 

 

Current deferred income taxes

41,745 

 

 

40,423 

 

 

39,326 

 

Prepaid expenses

34,673 

 

 

22,549 

 

 

31,854 

 

Assets held for sale

 

 

10,559 

 

 

10,559 

 

Total current assets

954,618 

 

 

951,496 

 

 

1,100,961 

 

Investments and long-term receivables

42,117 

 

 

42,387 

 

 

43,275 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

6,608,342 

 

 

6,933,602 

 

 

6,792,470 

 

  Reserve for depreciation, depletion & amortization

(3,539,772)

 

 

(3,621,585)

 

 

(3,578,010)

 

   Property, plant & equipment, net

3,068,570 

 

 

3,312,017 

 

 

3,214,460 

 

Goodwill

3,095,317 

 

 

3,081,521 

 

 

3,081,521 

 

Other intangible assets, net

758,863 

 

 

697,578 

 

 

697,655 

 

Other noncurrent assets

172,053 

 

 

174,144 

 

 

172,184 

 

Total assets

$    8,091,538 

 

 

$    8,259,143 

 

 

$    8,310,056 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$              145 

 

 

$              170 

 

 

$              163 

 

Trade payables and accruals

167,837 

 

 

139,345 

 

 

154,451 

 

Other current liabilities

196,830 

 

 

159,620 

 

 

204,029 

 

Total current liabilities

364,812 

 

 

299,135 

 

 

358,643 

 

Long-term debt

2,005,968 

 

 

2,522,243 

 

 

2,523,389 

 

Noncurrent deferred income taxes

733,613 

 

 

701,075 

 

 

673,135 

 

Deferred revenue

216,205 

 

 

219,743 

 

 

225,863 

 

Other noncurrent liabilities

569,841 

 

 

578,841 

 

 

666,115 

 

Total liabilities

3,890,439 

 

 

4,321,037 

 

 

4,447,145 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $1 par value, Authorized 480,000 shares,

 

 

 

 

 

 

 

 

 Issued 131,703,  130,200 and 129,989 shares, respectively

131,703 

 

 

130,200 

 

 

129,989 

 

Capital in excess of par value

2,719,169 

 

 

2,611,703 

 

 

2,598,744 

 

Retained earnings

1,441,742 

 

 

1,295,834 

 

 

1,288,054 

 

Accumulated other comprehensive loss

(91,515)

 

 

(99,631)

 

 

(153,876)

 

Total equity

4,201,099 

 

 

3,938,106 

 

 

3,862,911 

 

Total liabilities and equity

$    8,091,538 

 

 

$    8,259,143 

 

 

$    8,310,056 

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

 

 

2

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Unaudited

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands, except per share data

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Total revenues

$       873,579 

 

 

$       813,568 

 

 

$    2,239,142 

 

 

$    2,090,463 

 

Cost of revenues

664,537 

 

 

654,585 

 

 

1,821,220 

 

 

1,780,930 

 

  Gross profit

209,042 

 

 

158,983 

 

 

417,922 

 

 

309,533 

 

Selling, administrative and general expenses

66,074 

 

 

65,854 

 

 

199,808 

 

 

195,411 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses, net

1,002 

 

 

9,350 

 

 

238,527 

 

 

36,869 

 

Restructuring charges

(750)

 

 

 

 

(750)

 

 

(1,509)

 

Other operating expense, net

(2,889)

 

 

(2,712)

 

 

(17,645)

 

 

(12,907)

 

  Operating earnings

140,331 

 

 

99,767 

 

 

438,246 

 

 

136,575 

 

Other nonoperating income (expense), net

(593)

 

 

2,310 

 

 

4,030 

 

 

4,968 

 

Interest expense, net

40,891 

 

 

49,134 

 

 

201,531 

 

 

152,757 

 

Earnings (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

98,847 

 

 

52,943 

 

 

240,745 

 

 

(11,214)

 

Provision for (benefit from) income taxes

31,066 

 

 

10,793 

 

 

71,947 

 

 

(21,874)

 

Earnings from continuing operations

67,781 

 

 

42,150 

 

 

168,798 

 

 

10,660 

 

Earnings (loss) on discontinued operations, net of tax

(842)

 

 

(787)

 

 

(1,896)

 

 

4,640 

 

Net earnings

$         66,939 

 

 

$         41,363 

 

 

$       166,902 

 

 

$         15,300 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Reclassification adjustment for cash flow hedges

598 

 

 

679 

 

 

4,167 

 

 

2,368 

 

  Adjustment for funded status of benefit plans

 

 

 

 

2,943 

 

 

60,299 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

1,114 

 

 

2,111 

 

 

1,006 

 

 

8,974 

 

Other comprehensive income

1,712 

 

 

2,790 

 

 

8,116 

 

 

71,641 

 

Comprehensive income

$         68,651 

 

 

$         44,153 

 

 

$       175,018 

 

 

$         86,941 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.51 

 

 

$             0.32 

 

 

$             1.29 

 

 

$             0.08 

 

  Discontinued operations

0.00 

 

 

0.00 

 

 

(0.02)

 

 

0.04 

 

  Net earnings

$             0.51 

 

 

$             0.32 

 

 

$             1.27 

 

 

$             0.12 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.51 

 

 

$             0.32 

 

 

$             1.27 

 

 

$             0.08 

 

  Discontinued operations

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

0.04 

 

  Net earnings

$             0.50 

 

 

$             0.31 

 

 

$             1.26 

 

 

$             0.12 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

131,797 

 

 

130,266 

 

 

131,256 

 

 

130,234 

 

  Assuming dilution

133,369 

 

 

131,320 

 

 

132,759 

 

 

131,368 

 

Cash dividends per share of common stock

$             0.06 

 

 

$             0.01 

 

 

$             0.16 

 

 

$             0.03 

 

Depreciation, depletion, accretion and amortization

$         71,157 

 

 

$         78,320 

 

 

$       208,858 

 

 

$       230,877 

 

Effective tax rate from continuing operations

31.4% 

 

 

20.4% 

 

 

29.9% 

 

 

195.1% 

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of these statements.

 

 

3

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Unaudited

 

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

Operating Activities

 

 

 

 

 

Net earnings

$       166,902 

 

 

$         15,300 

 

Adjustments to reconcile net earnings to net cash provided by operating activities

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

208,858 

 

 

230,877 

 

  Net gain on sale of property, plant & equipment and businesses

(238,527)

 

 

(48,597)

 

  Proceeds from sale of future production, net of transactions costs (Note 16)

 

 

153,095 

 

  Contributions to pension plans

(4,115)

 

 

(3,535)

 

  Share-based compensation

18,425 

 

 

16,789 

 

  Excess tax benefits from share-based compensation

(3,375)

 

 

(896)

 

  Deferred tax provision (benefit)

13,158 

 

 

(25,862)

 

  Cost of debt purchase

72,949 

 

 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(89,888)

 

 

(78,947)

 

Other, net

5,339 

 

 

1,788 

 

Net cash provided by operating activities

$       149,726 

 

 

$       260,012 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(169,220)

 

 

(117,310)

 

Proceeds from sale of property, plant & equipment

21,320 

 

 

14,974 

 

Proceeds from sale of businesses, net of transaction costs

719,089 

 

 

51,604 

 

Payment for businesses acquired, net of acquired cash

(268,604)

 

 

(89,951)

 

Other, net

 

 

 

Net cash provided by (used for) investing activities

$       302,585 

 

 

$     (140,681)

 

Financing Activities

 

 

 

 

 

Proceeds from line of credit

70,000 

 

 

156,000 

 

Payment of current maturities, long-term debt and line of credit

(649,711)

 

 

(306,493)

 

Proceeds from issuance of common stock

30,620 

 

 

 

Dividends paid

(20,973)

 

 

(3,890)

 

Proceeds from exercise of stock options

12,513 

 

 

4,491 

 

Excess tax benefits from share-based compensation

3,375 

 

 

896 

 

Other, net

(5)

 

 

 

Net cash used for financing activities

$     (554,181)

 

 

$     (148,996)

 

Net decrease in cash and cash equivalents

(101,870)

 

 

(29,665)

 

Cash and cash equivalents at beginning of year

193,738 

 

 

275,478 

 

Cash and cash equivalents at end of period

$         91,868 

 

 

$       245,813 

 

The accompanying Notes to the Condensed Consolidated Financial Statements are an integral part of the statements.

 

 

 

 

 

4

 


 

notes to condensed consolidated financial statements

 

Note 1: summary of significant accounting policies

 

NATURE OF OPERATIONS

 

Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation's largest producer of construction aggregates, primarily crushed stone, sand and gravel and a major producer of asphalt mix and ready-mixed concrete.

 

BASIS OF PRESENTATION

 

Our accompanying unaudited condensed consolidated financial statements were prepared in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Our Condensed Consolidated Balance Sheet as of December 31, 2013 was derived from the audited financial statement at that date. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three and nine month periods ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K.

 

Due to the 2005 sale of our Chemicals business as presented in Note 2, the operating results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.

 

RECLASSIFICATIONS

 

Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2014 presentation.

 

REVENUE

 

Total revenues include sales of products to customers, net of any discounts and taxes, and freight and delivery revenues billed to customers. Related freight and delivery costs are included in cost of revenues. Freight and delivery revenues included in total revenues are as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Product sales

$     795,096 

 

 

$     746,392 

 

 

$  2,034,521 

 

 

$  1,915,032 

 

Freight and delivery revenues

78,483 

 

 

67,176 

 

 

204,621 

 

 

175,431 

 

Total revenues

$     873,579 

 

 

$     813,568 

 

 

$  2,239,142 

 

 

$  2,090,463 

 

 

RESTRUCTURING CHARGES

 

In 2014, we announced changes to our executive management team, and a new divisional organization structure that will be effective January 1, 2015. This new structure enables us to pursue growth and profitability while further leveraging the actions we undertook in 2012 as noted below. During the three and nine months ended September 30, 2014, we incurred $750,000 of severance costs related to these initiatives. We are currently unable to estimate the amount of future related charges.

 

In 2012, our Board approved a Profit Enhancement Plan that further leveraged our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During the first nine months of 2013, we incurred $1,509,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan. We did not incur any additional charges in 2014 and do not anticipate any future material charges related to this Profit Enhancement Plan.

 

5

 


 

EARNINGS PER SHARE (EPS)

 

We report two earnings per share numbers: basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

131,797 

 

 

130,266 

 

 

131,256 

 

 

130,234 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock options/SOSARs

661 

 

 

405 

 

 

671 

 

 

449 

 

  Other stock compensation plans

911 

 

 

649 

 

 

832 

 

 

685 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

133,369 

 

 

131,320 

 

 

132,759 

 

 

131,368 

 

 

All dilutive common stock equivalents are reflected in our earnings per share calculations. Antidilutive common stock equivalents are not included in our earnings per share calculations. The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Antidilutive common stock equivalents

2,355 

 

 

2,899 

 

 

2,355 

 

 

2,899 

 

 

 

Note 2: Discontinued Operations

 

In 2005, we sold substantially all the assets of our Chemicals business to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. In addition to the initial cash proceeds, Basic Chemicals was required to make payments under two earn-out agreements. In March 2013, we received the final earn-out payment in the amount of $13,031,000. We were liable for a cash transaction bonus payable annually to certain former key Chemicals employees based on the prior years earn-out results. During the first nine months of 2013, the transaction bonus payment totaled $1,303,000.

 

The financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income for all periods presented. There were no revenues from discontinued operations for the periods presented. Results from discontinued operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax loss

$       (1,393)

 

 

$       (1,302)

 

 

$       (3,132)

 

 

$       (4,063)

 

Gain on disposal, net of transaction bonus

 

 

 

 

 

 

11,728 

 

Income tax (provision) benefit

551 

 

 

515 

 

 

1,236 

 

 

(3,025)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of income taxes

$          (842)

 

 

$          (787)

 

 

$       (1,896)

 

 

$        4,640 

 

 

The pretax losses from discontinued operations noted above were due primarily to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business.

 

 

6

 


 

Note 3: Income Taxes

 

Our estimated annual effective tax rate (EAETR) is based on full year expectations of pretax book earnings, statutory tax rates, permanent differences between book and tax accounting such as percentage depletion, and tax planning alternatives available in the various jurisdictions in which we operate. For interim financial reporting, except in circumstances as described in the following paragraph, we calculate our quarterly income tax provision in accordance with the EAETR. Each quarter, we update our EAETR based on our revised full year expectation of pretax book earnings and calculate the income tax provision so that the year-to-date income tax provision reflects the EAETR. Significant judgment is required in determining our EAETR.

 

When expected pretax book earnings for the full year are at or near breakeven, the EAETR can distort the income tax provision for an interim period due to the size and nature of our permanent differences. In these circumstances, we calculate the interim income tax provision using the year-to-date effective tax rate. This method results in an income tax provision based solely on the year-to-date pretax book earnings as adjusted for permanent differences on a pro rata basis. In the third quarter of 2014, income taxes were calculated based on the EAETR. In the third quarter of 2013, income taxes were calculated based on the year-to-date effective tax rate.

 

We recorded an income tax provision from continuing operations of $31,066,000 in the third quarter of 2014 compared to $10,793,000 in the third quarter of 2013. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.

 

We recorded an income tax provision from continuing operations of $71,947,000 for the first nine months of 2014 compared to an income tax benefit from continuing operations of $21,874,000 for the first nine months of 2013. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.

 

We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our income tax provision includes the net impact of changes in the liability for unrecognized tax benefits.

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement’s carrying amounts of assets and liabilities and the amounts used for income tax purposes. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.

 

Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. A summary of our deferred tax assets is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

On an annual basis, we perform a comprehensive analysis of all forms of positive and negative evidence based on year end results. During each interim period, we update our annual analysis for significant changes to the positive and negative evidence.

 

Based on our third quarter 2014 analysis, we believe it is more likely than not that we will realize the benefit of all our deferred tax assets with the exception of the state net operating loss carryforwards for which a valuation allowance has been recorded. For 2014, we project a valuation allowance of $55,051,000 against our state net operating loss deferred tax asset carryforwards; an increase of $8,771,000 from the prior year-end. Of the $55,051,000 valuation allowance, $53,680,000 relates to our Alabama net operating loss carryforward. This change in the valuation allowance is reflected as a component of our income tax provision.

 

 

7

 


 

Note 4: deferred revenue

 

We have entered into two transactions (September 2013 and December 2012) through which we sold a percentage of the future production from aggregates reserves at eight quarries (seven owned and one leased). These sales were structured as volumetric production payments (VPPs). We received net cash proceeds of $153,282,000 and $73,644,000 for the 2013 and 2012 transactions, respectively. These proceeds were recorded as deferred revenue on the balance sheet and are amortized on a unit-of-sales basis to revenue over the terms of the VPPs. Concurrently, we entered into marketing agreements with the purchaser through which we are designated the exclusive sales agent for the purchaser’s percentage of future production. Acting as the purchaser’s agent, our consolidated total revenues exclude these sales.

 

The common key terms of both VPP transactions are:

 

§

the purchaser has a nonoperating interest in future production entitling them to a percentage of future production

§

there is no minimum annual or cumulative production or sales volume, nor any minimum sales price guarantee

§

the purchaser has the right to take its percentage of future production in physical product, or receive the cash proceeds from the sale of its percentage of future production under the terms of the aforementioned marketing agreement

§

the purchaser's percentage of future production is conveyed free and clear of all future costs

§

we retain full operational and marketing control of the specified quarries

§

we retain fee simple interest in the land as well as any residual values that may be realized upon the conclusion of mining

 

The key terms specific to the 2013 VPP transaction are:

 

§

terminates at the earlier to occur of September 30, 2051 or the sale of 250.8 million tons of aggregates from the specified quarries; based on historical and projected volumes from the specified quarries, it is expected that 250.8 million tons will be sold prior to September 30, 2051

§

the purchaser's percentage of the maximum 250.8 million tons of future production is estimated, based on current sales volume projection, to be 11.5% (approximately 29 million tons); the actual percentage may vary

 

The key terms specific to the 2012 VPP transaction are:

 

§

terminates at the earlier to occur of December 31, 2052 or the sale of 143.2 million tons of aggregates from the specified quarries; based on historical and projected volumes from the specified quarries, it is expected that 143.2 million tons will be sold prior to December 31, 2052

§

the purchaser's percentage of the maximum 143.2 million tons of future production is estimated, based on current sales volume projection, to be 10.5% (approximately 15 million tons); the actual percentage may vary

 

The impact to our total revenues and gross profit related to the VPPs is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Amortization of deferred revenue

$        1,384 

 

 

$           300 

 

 

$        3,725 

 

 

$           876 

 

Purchaser's proceeds from sale of production

(4,322)

 

 

(1,014)

 

 

(11,404)

 

 

(2,911)

 

Decrease to total revenues and gross profit

$       (2,938)

 

 

$          (714)

 

 

$       (7,679)

 

 

$       (2,035)

 

 

The balance of deferred revenue related to these VPP transactions is $221,205,000 at September 30, 2014. Based on expected aggregates sales from the specified quarries, we anticipate recognizing a range of $5,100,000 to $6,100,000 of deferred revenue during the 12-month period ending September 30, 2015.

 

 

 

8

 


 

Note 5: Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as described below:

 

Level 1: Quoted prices in active markets for identical assets or liabilities

Level 2: Inputs that are derived principally from or corroborated by observable market data

Level 3: Inputs that are unobservable and significant to the overall fair value measurement

 

Our assets subject to fair value measurement on a recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       14,986 

 

 

$       15,255 

 

 

$       14,371 

 

 Equities

12,838 

 

 

12,828 

 

 

11,688 

 

Total

$       27,824 

 

 

$       28,083 

 

 

$       26,059 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Common/collective trust funds

$        1,367 

 

 

$        1,244 

 

 

$        1,365 

 

Total

$        1,367 

 

 

$        1,244 

 

 

$        1,365 

 

 

We have established two Rabbi Trusts for the purpose of providing a level of security for the employee nonqualified retirement and deferred compensation plans and for the directors' nonqualified deferred compensation plans. The fair values of these investments are estimated using a market approach. The Level 1 investments include mutual funds and equity securities for which quoted prices in active markets are available. Level 2 investments are stated at estimated fair value based on the underlying investments in those funds (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).

 

Net gains of the Rabbi Trust investments were $2,571,000 and $2,620,000 for the nine months ended September 30, 2014 and 2013, respectively. The portions of the net gains related to investments still held by the Rabbi Trusts at September 30, 2014 and 2013 were $369,000 and $2,468,000,  respectively.

 

The carrying values of our cash equivalents, restricted cash, accounts and notes receivable, current maturities of long-term debt, short-term borrowings, trade payables and accruals, and other current liabilities approximate their fair values because of the short-term nature of these instruments. Additional disclosures for derivative instruments and interest-bearing debt are presented in Notes 6 and 7, respectively.

 

There were no assets or liabilities subject to fair value measurement on a nonrecurring basis in 2013. Assets that were subject to fair value measurement on a nonrecurring basis in 2014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

 

 

 

 

Impairment

 

in thousands

Level 2

 

 

Charges

 

Fair Value Nonrecurring

 

 

 

 

 

Property, plant & equipment

$        2,280 

 

 

$        2,987 

 

Total

$        2,280 

 

 

$        2,987 

 

 

We recorded a $2,987,000 loss on impairment of long-lived assets in the first quarter of 2014 reducing the carrying value of these assets to their estimated fair value of $2,280,000. Fair value was estimated using a market approach (observed transactions involving comparable assets in similar locations).

 

 

9

 


 

Note 6: Derivative Instruments

 

During the normal course of operations, we are exposed to market risks including fluctuations in interest rates, foreign currency exchange rates and commodity pricing. From time to time, and consistent with our risk management policies, we use derivative instruments to hedge against these market risks. We do not utilize derivative instruments for trading or other speculative purposes.

 

The accounting for gains and losses that result from changes in the fair value of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationship. The interest rate swap agreements described below were designated as either cash flow hedges or fair value hedges. The changes in fair value of our interest rate swap cash flow hedges are recorded in accumulated other comprehensive income (AOCI) and are reclassified into interest expense in the same period the hedged items affect earnings. The changes in fair value of our interest rate swap fair value hedges are recorded as interest expense consistent with the change in the fair value of the hedged items attributable to the risk being hedged.

 

CASH FLOW HEDGES

 

We have used interest rate swap agreements designated as cash flow hedges to minimize the variability in cash flows of liabilities or forecasted transactions caused by fluctuations in interest rates. During 2007, we entered into fifteen forward starting interest rate swap agreements for a total stated amount of $1,500,000,000. Upon the 2007 and 2008 issuances of the related fixed-rate debt, we terminated and settled these forward starting swaps for cash payments of $89,777,000. Amounts in AOCI are being amortized to interest expense over the term of the related debt. This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Location on

 

September 30

 

 

September 30

 

in thousands

Statement

 

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$          (989)

 

 

$       (1,127)

 

 

$       (6,892)

 

 

$       (3,928)

 

 

The loss reclassified from AOCI for the nine months ended September 30, 2014 includes the acceleration of a proportional amount of the deferred loss in the amount of $3,762,000 referable to the debt purchase as disclosed in Note 7.

 

For the 12-month period ending September  30, 2015, we estimate that $4,153,000 of the pretax loss in AOCI will be reclassified to earnings.

 

FAIR VALUE HEDGES

We have used interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in the benchmark interest rates for such debt. In June 2011, we issued $500,000,000 of 6.50% fixed-rate notes due in 2016. Concurrently, we entered into interest rate swap agreements in the stated amount of $500,000,000. Under these agreements, we paid 6-month London Interbank Offered Rate (LIBOR) plus a spread of 4.05% and received a fixed interest rate of 6.50%. Additionally, in June 2011, we entered into interest rate swap agreements on our $150,000,000 10.125% fixed-rate notes due in 2015. Under these agreements, we paid 6-month LIBOR plus a spread of 8.03% and received a fixed interest rate of 10.125%. In August 2011, we terminated and settled these interest rate swap agreements for $25,382,000 of cash proceeds. The $23,387,000 forward component of the settlement (cash proceeds less $1,995,000 of accrued interest) was added to the carrying value of the related debt and is being amortized as a reduction to interest expense over the remaining lives of the related debt using the effective interest method. This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30

 

 

September 30

 

in thousands

 

 

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Deferred Gain on Settlement

 

 

 

 

 

 

 

 

 

 

 

 

Amortized to earnings as a reduction

 

 

 

 

 

 

 

 

 

 

 

 

 to interest expense

 

$           493 

 

 

$        1,093 

 

 

$      10,171 

 

 

$        3,223 

 

 

 

10

 


 

The amortized deferred gain for the nine months ended September 30, 2014 includes the acceleration of a proportional amount of the deferred gain in the amount of $8,032,000 referable to the debt purchase as disclosed in Note 7.

 

 

Note 7: Debt

 

Debt is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Long-term Debt

 

 

 

 

 

 

 

 

10.125% notes due 2015 1

$        151,212 

 

 

$      151,897 

 

 

$      152,110 

 

6.50% notes due 2016 2

127,209 

 

 

511,627 

 

 

512,505 

 

6.40% notes due 2017 3

218,585 

 

 

349,907 

 

 

349,902 

 

7.00% notes due 2018 4

399,805 

 

 

399,772 

 

 

399,761 

 

10.375% notes due 2018 5

248,981 

 

 

248,843 

 

 

248,799 

 

7.50% notes due 2021 6

600,000 

 

 

600,000 

 

 

600,000 

 

7.15% notes due 2037 7

239,568 

 

 

239,561 

 

 

239,559 

 

Medium-term note 8

6,000 

 

 

6,000 

 

 

6,000 

 

Industrial revenue bond 9

14,000 

 

 

14,000 

 

 

14,000 

 

Other notes

753 

 

 

806 

 

 

916 

 

Total long-term debt including current maturities

$     2,006,113 

 

 

$   2,522,413 

 

 

$   2,523,552 

 

Less current maturities

145 

 

 

170 

 

 

163 

 

Total long-term debt

$     2,005,968 

 

 

$   2,522,243 

 

 

$   2,523,389 

 

Estimated fair value of long-term debt

$     2,259,218 

 

 

$   2,820,399 

 

 

$   2,795,661 

 

 

 

 

 

Includes an increase for the unamortized deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: September  30, 2014 — $1,330 thousand, December 31, 2013 — $2,082 thousand and September 30, 2013 — $2,315 thousand. Additionally, includes decreases for unamortized discounts, as follows: September  30, 2014 — $118 thousand, December 31, 2013 — $185 thousand and September 30, 2013 — $206 thousand. The effective interest rate for these notes is 9.58%.

Includes an increase for the unamortized deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: September  30, 2014 — $2,208 thousand, December 31, 2013 — $11,627 thousand and September  30, 2013 — $12,505 thousand. The effective interest rate for these notes is 6.00%.

Includes decreases for unamortized discounts, as follows: September 30, 2014 — $48 thousand, December 31, 2013 — $93 thousand and September 30, 2013 — $98 thousand. The effective interest rate for these notes is 7.41%.

Includes decreases for unamortized discounts, as follows: September 30, 2014 — $195 thousand, December 31, 2013 — $228 thousand and September 30, 2013 — $239 thousand. The effective interest rate for these notes is 7.87%.  

Includes decreases for unamortized discounts, as follows: September 30, 2014$1,019 thousand, December 31, 2013 — $1,157 thousand and September 30, 2013 — $1,201 thousand. The effective interest rate for these notes is 10.625%.

The effective interest rate for these notes is 7.75%.

Includes decreases for unamortized discounts, as follows: September 30, 2014 — $620 thousand, December 31, 2013 — $627 thousand and September 30, 2013 — $629 thousand. The effective interest rate for these notes is 8.05%.

This note matures in 2021, has a stated interest rate of 8.85% and an effective interest rate of 8.88%.

This variable-rate tax-exempt bond matures in November 2022 and is backed by a standby letter of credit.

 

Our long-term debt is presented in the table above net of unamortized discounts from par and unamortized deferred gains realized upon settlement of interest rate swaps. Discounts and deferred gains are being amortized using the effective interest method over the respective terms of the notes.

 

The estimated fair value of long-term debt presented in the table above was determined by averaging the asking price quotes for the notes. The fair value estimates were based on Level 2 information (as defined in Note 5) available to us as of their respective balance sheet dates. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since those dates.

 

11

 


 

Our long-term debt is unsecured and essentially all such debt agreements contain customary investment-grade type covenants that primarily limit the amount of secured debt we may incur without ratably securing the outstanding debt.  Our debt may be redeemed prior to maturity at the greater of par value and the make-whole value plus accrued and unpaid interest.

 

There were no material scheduled debt payments during the first nine months of 2014. However, as described below, we purchased $506,366,000 principal amount of outstanding debt through a tender offer in the first quarter of 2014. Scheduled debt payments during 2013 included $10,000,000 in January to retire the 8.70% medium-term note and $140,444,000 in June to retire the 6.30% notes.

 

In March 2014, we purchased $506,366,000 principal amount of outstanding debt through a tender offer as follows: $374,999,000 of 6.50% notes due in 2016 and $131,367,000 of 6.40% notes due in 2017. This debt purchase was funded by the sale of our cement and concrete businesses in the Florida area as described in Note 16. The March 2014 debt purchases cost $579,659,000, including a $71,829,000 premium above the principal amount of the notes and transaction costs of $1,464,000.  The premium primarily reflects the trading prices of the notes relative to par prior to the tender offer commencement. Additionally, we recognized a net benefit of $344,000 associated with the acceleration of a proportional amount of unamortized discounts, deferred gains, deferred financing costs and amounts accumulated in OCI. The combined charge of $72,949,000 is presented in the accompanying Condensed Consolidated Statement of Comprehensive Income as a component of interest expense for the nine month period ended September 30, 2014.

 

Additionally, in  March 2014, we amended our $500,000,000 line of credit to, among other items, extend the term from March 12, 2018 to March 25, 2019. The line of credit is secured by accounts receivable and inventory, but will become unsecured upon the achievement of certain credit metrics and/or credit ratings. The line of credit also contains customary negative and financial covenants for a secured facility.

 

The negative covenants primarily limit our ability to: (1) incur secured debt, (2) make investments, (3) execute acquisitions and divestitures, and (4) make restricted payments, including dividends. Such limitations currently do not impact our ability to execute our strategic, operating and financial plans, and become less restrictive when the line of credit becomes unsecured as described above.

 

The line of credit contains two financial covenants: (1) a maximum ratio of debt to EBITDA that declines over time to 3.5:1 and (2) a minimum ratio of EBITDA to net cash interest expense that increases over time to 3.0:1.

 

As of September 30, 2014, we were in compliance with all of our long-term debt and line of credit covenants.

 

Borrowings on our line of credit are classified as short-term due to our intent to repay any borrowings within twelve months. As of September 30, 2014, our available borrowing capacity was $446,732,000. Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to LIBOR plus a margin ranging from 1.50% to 2.25%, or an alternative rate derived from the lender’s prime rate, based on our ratio of debt to EBITDA.  As of September 30, 2014, the applicable margin for LIBOR based borrowing was 1.75%.

 

Standby letters of credit issued under the line of credit reduce availability and are charged a fee equal to the margin for LIBOR based borrowings plus 0.175%. We also pay a commitment fee on the daily average unused amount of the line of credit. This commitment fee ranges from 0.25% to 0.40% based on our ratio of debt to EBITDA. Once the line of credit becomes unsecured, both the LIBOR margin range for borrowings and the commitment fee range will decline.

 

 

 

12

 


 

Note 8: Commitments and Contingencies

 

STANDBY LETTERS OF CREDIT

 

We provide, in the normal course of business, certain third party beneficiaries standby letters of credit to support our obligations to pay or perform according to the requirements of an underlying agreement. Such letters of credit typically have an initial term of one year, typically renew automatically, and can only be modified or cancelled with the approval of the beneficiary. All of our standby letters of credit are issued by banks that participate in our $500,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of September 30, 2014 are summarized by purpose in the table below:

 

 

 

 

 

 

 

 

in thousands

 

 

Standby Letters of Credit

 

 

Risk management insurance

$       32,839 

 

Industrial revenue bond

14,230 

 

Reclamation/restoration requirements

6,199 

 

Total

$       53,268 

 

 

LITIGATION AND ENVIRONMENTAL MATTERS

 

We are a defendant in various lawsuits in the ordinary course of business. It is not possible to determine with precision the outcome, or the amount of liability, if any, under these lawsuits, especially where the cases involve possible jury trials with as yet undetermined jury panels.

 

In addition to these lawsuits in which we are involved in the ordinary course of business, certain other material legal proceedings are more specifically described below.

 

lower passaic river matter

 

§

Lower Passaic River Study Area (Superfund Site) — The Lower Passaic River Study Area is part of the Diamond Shamrock Superfund Site in New Jersey. Vulcan and approximately 70 other companies are parties to a May 2007 Administrative Order on Consent (AOC) with the U.S. Environmental Protection Agency (EPA) to perform a Remedial Investigation/Feasibility Study (RI/FS) of the lower 17 miles of the Passaic River (River). On April 11, 2014, the EPA issued a proposed Focused Feasibility Study (FFS) that calls for a bank-to-bank dredging remedy for the lower 8 miles of the River. The EPA estimates that the cost of implementing this proposal is approximately $950 million to $1.73 billion. The period for public comment on the proposed FFS is closed.  It is anticipated that the EPA will issue its final record of decision sometime in 2015.

 

At this time, we cannot reasonably estimate our ultimate liability related to this matter because the RI/FS and FFS are not final. Furthermore, the AOC does not obligate us to fund or perform the remedial action contemplated by either the RI/FS or the FFS. Vulcan formerly owned a chemicals operation near River Mile 0.1, which was sold in 1974. The Company has found no evidence that its former chemicals operation contributed any of the primary contaminants of concern to the River. Therefore, neither the ultimate remedial approach and associated costs (or range of costs), nor the parties who will participate in funding the remediation and their respective allocations, have been determined.

 

Based on the facts available at this time, we believe our liability related to any remedial actions will be immaterial.

 

13

 


 

OTHER LITIGATION

 

§

TEXAS BRINE MATTER — During the operation of its former Chemicals Division, Vulcan was the lessee under a salt lease from 1976 – 2005 in an underground salt dome formation in Assumption Parish, Louisiana. The Texas Brine Company operated this salt mine for the account of Vulcan. Vulcan sold its Chemicals Division in 2005 and assigned the lease to the purchaser, and Vulcan has had no association with the leased premises or Texas Brine Company since that time. In August 2012, a sinkhole developed near the salt dome and numerous lawsuits were filed in state court in Assumption Parish, Louisiana. Other lawsuits, including class action litigation, were also filed in August 2012 in federal court in the Eastern District of Louisiana in New Orleans. Certain of the plaintiffs and Texas Brine settled  the Federal Court class action for approximately $48.1 million. This settlement has been approved by the court, and the settlement process is now subject to the terms of the court’s order and settlement agreement.  Vulcan is named as a released party in the settlement agreement along with the other released parties, including  Texas Brine,  and its insurers. Texas Brine and its insurers did not, however, release Vulcan from any alleged claims, including claims for contribution and indemnity.

 

There are numerous defendants to the litigation in state and federal court. Vulcan was first brought into the litigation as a third-party defendant in August 2013 by the Texas Brine Company. Vulcan has since been added as a direct and third-party defendant by other parties, including a direct claim by the State of Louisiana. The damages alleged in the litigation range from individual plaintiffs’ claims for property damage, to the State of Louisiana’s claim for response costs, to claims for alleged physical damages to oil pipelines, to various alleged business interruption claims, and to claims for indemnity and contribution from Texas Brine. It is alleged that the sinkhole was caused, in whole or in part, by Vulcan’s negligent actions or failure to act. It is also alleged that Vulcan breached the salt lease, as well as an operating agreement with Texas Brine. Vulcan denies any liability in this matter and will vigorously defend the litigation. We cannot reasonably estimate any liability related to this matter.

 

It is not possible to predict with certainty the ultimate outcome of these and other legal proceedings in which we are involved, and a number of factors, including developments in ongoing discovery or adverse rulings, or the verdict of a particular jury, could cause actual losses to differ materially from accrued costs. No liability was recorded for claims and litigation for which a loss was determined to be only reasonably possible or for which a loss could not be reasonably estimated. Legal costs incurred in defense of lawsuits are expensed as incurred. In addition, losses on certain claims and litigation described above may be subject to limitations on a per occurrence basis by excess insurance, as described in our most recent Annual Report on Form 10-K.

 

 

14

 


 

Note 9: Asset Retirement Obligations

 

Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets.

 

Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the ARO is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement.

 

We record all AROs for which we have legal obligations for land reclamation at estimated fair value. Essentially all these AROs relate to our underlying land parcels, including both owned properties and mineral leases. For the three and nine month periods ended September 30, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

ARO Operating Costs

 

 

 

 

 

 

 

 

 

 

 

Accretion

$        2,892 

 

 

$        2,908 

 

 

$        8,745 

 

 

$        7,731 

 

Depreciation

1,080 

 

 

886 

 

 

3,060 

 

 

2,495 

 

Total

$        3,972 

 

 

$        3,794 

 

 

$      11,805 

 

 

$      10,226 

 

 

ARO operating costs are reported in cost of revenues. AROs are reported within Other noncurrent liabilities in our accompanying Condensed Consolidated Balance Sheets.

 

Reconciliations of the carrying amounts of our AROs are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Asset Retirement Obligations

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     225,117 

 

 

$     222,851 

 

 

$     228,234 

 

 

$     150,072 

 

  Liabilities incurred

3,604 

 

 

3,524 

 

 

3,604 

 

 

69,111 

 

  Liabilities settled

(7,684)

 

 

(2,328)

 

 

(20,527)

 

 

(8,839)

 

  Accretion expense

2,892 

 

 

2,908 

 

 

8,745 

 

 

7,731 

 

  Revisions up (down), net

4,539 

 

 

6,606 

 

 

8,412 

 

 

15,486 

 

Balance at end of period

$     228,468 

 

 

$     233,561 

 

 

$     228,468 

 

 

$     233,561 

 

 

The liabilities incurred during the first nine months of 2013 relate primarily to reclamation activities required under a development agreement and a conditional use permit at an aggregates facility on owned property in Southern California.

 

 

Note 10: Benefit Plans

 

We sponsor three funded, noncontributory defined benefit pension plans. These plans cover substantially all employees hired prior to July 15, 2007, other than those covered by union-administered plans. Normal retirement age is 65, but the plans contain provisions for earlier retirement. Benefits for the Salaried Plan and the Chemicals Hourly Plan are generally based on salaries or wages and years of service; the Construction Materials Hourly Plan provides benefits equal to a flat dollar amount for each year of service. In addition to these qualified plans, we sponsor three unfunded, nonqualified pension plans.

 

Effective July 15, 2007, we amended our defined benefit pension plans to no longer accept new participants. In December 2013, we amended our defined benefit pension plans so that future service accruals for salaried pension participants ceased effective December 31, 2013. This change included a special transition provision which will allow covered compensation through December 31, 2015 to be considered in the participants’ benefit calculations. The amendment resulted in a curtailment and remeasurement of the salaried and nonqualified pension plans as of May 31, 2013 that reduced our 2013 pension expense by approximately $7,600,000 (net of the one-time curtailment loss) of which $800,000 was related to discontinued operations.

 

15

 


 

The following table sets forth the components of net periodic pension benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSION BENEFITS

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

 

 

 

 

 

 

Service cost

$        1,039 

 

 

$        4,958 

 

 

$        3,118 

 

 

$      16,852 

 

Interest cost

11,098 

 

 

10,179 

 

 

33,294 

 

 

30,816 

 

Expected return on plan assets

(12,701)

 

 

(11,926)

 

 

(38,102)

 

 

(35,500)

 

Curtailment loss

 

 

 

 

 

 

855 

 

Amortization of prior service cost

47 

 

 

79 

 

 

141 

 

 

259 

 

Amortization of actuarial loss

2,806 

 

 

4,264 

 

 

8,416 

 

 

16,259 

 

Net periodic pension benefit cost

$        2,289 

 

 

$        7,554 

 

 

$        6,867 

 

 

$      29,541 

 

Pretax reclassification from AOCI included in

 

 

 

 

 

 

 

 

 

 

 

 net periodic pension benefit cost

$        2,853 

 

 

$        4,343 

 

 

$        8,557 

 

 

$      17,373 

 

 

Prior contributions, along with the existing funding credits, are sufficient to cover required contributions to the qualified plans through 2015.

 

In addition to pension benefits, we provide certain healthcare and life insurance benefits for retired employees. In 2012, we amended our postretirement healthcare plan to cap our portion of the medical coverage cost at the 2015 level. Substantially all our salaried employees and where applicable, hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain service requirements. Generally, company-provided healthcare benefits terminate when covered individuals become eligible for Medicare benefits, become eligible for other group insurance coverage or reach age 65, whichever occurs first.

 

The following table sets forth the components of net periodic postretirement benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER POSTRETIREMENT BENEFITS

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

 

 

 

 

 

 

Service cost

$           536 

 

 

$           708 

 

 

$        1,609 

 

 

$        2,123 

 

Interest cost

824 

 

 

815 

 

 

2,473 

 

 

2,445 

 

Curtailment gain

 

 

 

 

(3,832)

 

 

 

Amortization of prior service credit

(1,081)

 

 

(1,215)

 

 

(3,245)

 

 

(3,647)

 

Amortization of actuarial loss

57 

 

 

343 

 

 

170 

 

 

1,029 

 

Net periodic postretirement benefit cost

$           336 

 

 

$           651 

 

 

$       (2,825)

 

 

$        1,950 

 

Pretax reclassification from AOCI included in

 

 

 

 

 

 

 

 

 

 

 

 net periodic postretirement benefit cost

$       (1,024)

 

 

$          (872)

 

 

$       (6,907)

 

 

$       (2,618)

 

 

The reclassifications from AOCI noted in the tables above are related to curtailment gains, amortization of prior service costs or credits and actuarial losses as shown in Note 11.

 

The March 2014 sale of our cement and concrete businesses in the Florida area (see Note 16) significantly reduced total expected future service of our postretirement plans resulting in a one-time curtailment gain of $3,832,000. This gain was reflected within gain on sale of property, plant & equipment, net in our accompanying Condensed Consolidated Statement of Comprehensive Income for the nine months ended September 30, 2014.

 

 

 

16

 


 

Note 11: other Comprehensive Income

 

Comprehensive income comprises two subsets: net earnings and other comprehensive income (OCI). The components of other comprehensive income are presented in the accompanying Condensed Consolidated Statements of Comprehensive Income, net of applicable taxes.

 

Amounts in accumulated other comprehensive income (AOCI), net of tax, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

AOCI

 

 

 

 

 

 

 

 

Cash flow hedges

$       (21,011)

 

 

$       (25,178)

 

 

$       (25,802)

 

Pension and postretirement benefit plans

(70,504)

 

 

(74,453)

 

 

(128,074)

 

Total

$       (91,515)

 

 

$       (99,631)

 

 

$     (153,876)

 

 

Changes in AOCI, net of tax, for the nine months ended September  30, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and 

 

 

 

 

 

Cash Flow

 

 

Postretirement

 

 

 

 

in thousands

Hedges

 

 

Benefit Plans

 

 

Total

 

AOCI

 

 

 

 

 

 

 

 

Balance as of December 31, 2013

$       (25,178)

 

 

$       (74,453)

 

 

$       (99,631)

 

Other comprehensive income

 

 

 

 

 

 

 

 

 before reclassifications  1

 

 

2,943 

 

 

2,943 

 

Amounts reclassified from AOCI

4,167 

 

 

1,006 

 

 

5,173 

 

Net current period OCI changes

4,167 

 

 

3,949 

 

 

8,116 

 

Balance as of September 30, 2014

$       (21,011)

 

 

$       (70,504)

 

 

$       (91,515)

 

 

Remeasurement of the postretirement obligation was a result of the March 2014 sale of our cement and concrete businesses in the Florida area (see Note 16).

 

Amounts reclassified from AOCI to earnings, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Reclassification Adjustment for Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 Hedge Losses

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$            989 

 

 

$         1,127 

 

 

$         6,892 

 

 

$         3,928 

 

Benefit from income taxes

(391)

 

 

(448)

 

 

(2,725)

 

 

(1,560)

 

Total

$            598 

 

 

$            679 

 

 

$         4,167 

 

 

$         2,368 

 

Amortization of Pension and Postretirement

 

 

 

 

 

 

 

 

 

 

 

 Plan Actuarial Loss and Prior Service Cost

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

$         1,465 

 

 

$         2,827 

 

 

$         1,324 

 

 

$       11,837 

 

Selling, administrative and general expenses

362 

 

 

644 

 

 

326 

 

 

2,918 

 

Benefit from income taxes

(713)

 

 

(1,360)

 

 

(644)

 

 

(5,781)

 

Total

$         1,114 

 

 

$         2,111 

 

 

$         1,006 

 

 

$         8,974 

 

Total reclassifications from AOCI to earnings

$         1,712 

 

 

$         2,790 

 

 

$         5,173 

 

 

$       11,342 

 

 

 

 

 

17

 


 

Note 12: Equity

 

Our capital stock consists solely of common stock, par value $1.00 per share. Holders of our common stock are entitled to one vote per share. Our Certificate of Incorporation also authorizes preferred stock of which no shares have been issued. The terms and provisions of such shares will be determined by our Board of Directors upon any issuance of preferred shares in accordance with our Certificate of Incorporation.

 

In the second quarter of 2014, we issued 16,896 shares of common stock in connection with the purchase of a permitted quarry in Alabama.  In the third quarter of 2014, we issued a total of 698,108 shares in connection with the California acquisition, as described in Note 16.

 

We occasionally sell shares of common stock to the trustee of our 401(k) retirement plans to satisfy the plan participants’ elections to invest in our common stock. Under this arrangement, the stock issuances and resulting cash proceeds were as follows:

 

§

nine months ended September 30, 2014 —  issued 485,306 shares for cash proceeds of $30,620,000

§

twelve months ended December 31, 2013 —  issued 71,208 shares for cash proceeds of $3,821,000

§

nine months ended September  30, 2013 —  no shares issued

 

Changes in total equity for the nine months ended September  30, 2014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

in thousands

 

 

 

Equity

 

Balance at December 31, 2013

 

 

$    3,938,106 

 

Net earnings

 

 

166,902 

 

Common stock issued

 

 

 

 

  Acquisition

 

 

 

45,185 

 

  401(k) Trustee

 

 

30,620 

 

  Share-based compensation plans

 

 

11,349 

 

Share-based compensation expense

 

 

18,425 

 

Excess tax benefits from share-based compensation

 

 

3,375 

 

Cash dividends on common stock ($0.16 per share)

 

 

(20,973)

 

Other comprehensive income

 

 

8,116 

 

Other

 

 

(6)

 

Balance at September 30, 2014

 

 

$    4,201,099 

 

 

There were no shares held in treasury as of September 30, 2014, December 31, 2013 and September 30, 2013. As of September 30, 2014,  3,411,416 shares may be repurchased under the current purchase authorization of our Board of Directors.

 

 

Note 13: Segment Reporting

 

We have four operating (and reportable) segments organized around our principal product lines: aggregates, asphalt mix, concrete and cement. The vast majority of our activities are domestic. We sell a relatively small amount of construction aggregates outside the United States. Intersegment sales are made at local market prices for the particular grade and quality of product utilized in the production of ready-mixed concrete and asphalt mix. Management reviews earnings from the product line reporting segments principally at the gross profit level.

 

The changes to our executive management team and organization structure (described in Note 1) have not affected our segment reporting structure as the financial information reviewed by our Chief Executive Officer to assess performance and allocate resources remains unchanged.

 

18

 


 

segment financial disclosure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Total Revenues

 

 

 

 

 

 

 

 

 

 

 

Aggregates 1

$        688.9 

 

 

$        596.8 

 

 

$     1,752.6 

 

 

$     1,528.8 

 

Asphalt Mix

136.4 

 

 

130.2 

 

 

330.0 

 

 

308.3 

 

Concrete 2

99.0 

 

 

129.8 

 

 

288.8 

 

 

349.9 

 

Cement 3

2.3 

 

 

25.6 

 

 

22.6 

 

 

72.9 

 

 Segment sales

926.6 

 

 

882.4 

 

 

2,394.0 

 

 

2,259.9 

 

Aggregates intersegment sales

(53.0)

 

 

(56.5)

 

 

(145.7)

 

 

(134.5)

 

Cement intersegment sales

0.0 

 

 

(12.3)

 

 

(9.2)

 

 

(34.9)

 

Total revenues

$        873.6 

 

 

$        813.6 

 

 

$     2,239.1 

 

 

$     2,090.5 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

Aggregates

$        188.0 

 

 

$        149.8 

 

 

$        388.1 

 

 

$        301.7 

 

Asphalt Mix

14.5 

 

 

13.6 

 

 

28.3 

 

 

24.8 

 

Concrete 2

5.5 

 

 

(3.9)

 

 

(0.5)

 

 

(19.8)

 

Cement 3

1.0 

 

 

(0.5)

 

 

2.0 

 

 

2.8 

 

Total

$        209.0 

 

 

$        159.0 

 

 

$        417.9 

 

 

$        309.5 

 

Depreciation, Depletion, Accretion

 

 

 

 

 

 

 

 

 

 

 

 and Amortization (DDA&A)

 

 

 

 

 

 

 

 

 

 

 

Aggregates

$          58.5 

 

 

$          56.7 

 

 

$        169.2 

 

 

$        169.2 

 

Asphalt Mix

2.6 

 

 

2.2 

 

 

7.5 

 

 

6.4 

 

Concrete 2

5.0 

 

 

8.4 

 

 

15.7 

 

 

24.5 

 

Cement 3

0.2 

 

 

5.4 

 

 

1.4 

 

 

13.8 

 

Other

4.9 

 

 

5.6 

 

 

15.1 

 

 

17.0 

 

Total

$          71.2 

 

 

$          78.3 

 

 

$        208.9 

 

 

$        230.9 

 

Identifiable Assets 4

 

 

 

 

 

 

 

 

 

 

 

Aggregates

 

 

 

 

 

 

$     7,409.1 

 

 

$     6,936.5 

 

Asphalt Mix

 

 

 

 

 

 

238.2 

 

 

251.6 

 

Concrete 2

 

 

 

 

 

 

235.6 

 

 

384.2 

 

Cement 3

 

 

 

 

 

 

5.9 

 

 

411.9 

 

Total identifiable assets

 

 

 

 

 

 

$     7,888.8 

 

 

$     7,984.2 

 

General corporate assets

 

 

 

 

 

 

110.8 

 

 

80.1 

 

Cash items

 

 

 

 

 

 

91.9 

 

 

245.8 

 

Total

 

 

 

 

 

 

$     8,091.5 

 

 

$     8,310.1 

 

 

 

 

 

Includes crushed stone, sand and gravel, sand, other aggregates, as well as freight and delivery revenues (see Note 1) associated with the aggregates business.

Includes ready-mixed concrete. On March 7, 2014, we sold our concrete business in the Florida area (see Note 16) which in addition to ready-mixed concrete, included concrete block, precast concrete, as well as building materials purchased for resale.

Includes cement and calcium products. On March 7, 2014, we sold our cement business (see Note 16).

Certain temporarily idled assets are included within a segment's Identifiable Assets but the associated DDA&A is shown within Other in the DDA&A section above as the related DDA&A is excluded from segment gross profit.

 

 

 

  

 

19

 


 

Note 14: Supplemental Cash Flow Information

 

Supplemental information referable to our Condensed Consolidated Statements of Cash Flows is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

Cash Payments

 

 

 

 

 

Interest (exclusive of amount capitalized)

$     163,593 

 

 

$     102,137 

 

Income taxes

64,539 

 

 

29,909 

 

Noncash Investing and Financing Activities

 

 

 

 

 

Accrued liabilities for purchases of property, plant

 

 

 

 

 

 & equipment

$         5,777 

 

 

$         9,197 

 

Amounts referable to business acquisitions

 

 

 

 

 

 Liabilities assumed

24,881 

 

 

232 

 

 Fair value of noncash assets and liabilities exchanged

4,914 

 

 

 

 Fair value of equity consideration

45,185 

 

 

 

 

 

Note 15: Goodwill

 

Goodwill is recognized when the consideration paid for a business exceeds the fair value of the tangible and identifiable intangible assets acquired. Goodwill is allocated to reporting units for purposes of testing goodwill for impairment. The changes to our executive management team and organization structure (described in Note 1) have not affected our reporting units as the financial information reviewed by segment management to review operating performance remains unchanged. There were no charges for goodwill impairment in the nine month periods ended September 30, 2014 and 2013.

 

We have four reportable segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. The changes in the carrying amount of goodwill by reportable segment from December 31, 2013 to September 30, 2014 as summarized below:

 

GOODWILL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in thousands

Aggregates

 

 

Concrete

 

 

Asphalt Mix

 

 

Cement

 

 

Total

 

Goodwill, Gross Carrying Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total as of December 31, 2013

$  2,989,888 

 

 

$             0 

 

 

$    91,633 

 

 

$  252,664 

 

 

$    3,334,185 

 

Goodwill of acquired businesses 1

13,796 

 

 

 

 

 

 

 

 

13,796 

 

Total as of September 30, 2014

$  3,003,684 

 

 

$             0 

 

 

$    91,633 

 

 

$  252,664 

 

 

$    3,347,981 

 

Goodwill, Accumulated Impairment Losses 2

 

 

 

 

 

 

 

 

 

 

 

 

 

Total as of December 31, 2013

$                0 

 

 

$             0 

 

 

$             0 

 

 

$
(252,664)

 

 

$      (252,664)

 

Total as of September 30, 2014

$                0 

 

 

$             0 

 

 

$             0 

 

 

$
(252,664)

 

 

$      (252,664)

 

Goodwill, net of Accumulated Impairment Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Total as of December 31, 2013

$  2,989,888 

 

 

$             0 

 

 

$    91,633 

 

 

$             0 

 

 

$    3,081,521 

 

Total as of September 30, 2014

$  3,003,684 

 

 

$             0 

 

 

$    91,633 

 

 

$             0 

 

 

$    3,095,317 

 

 

 

 

 

The goodwill of acquired businesses relates to the 2014 acquisitions as outlined in Note 16.

The goodwill for the Cement segment was fully impaired in 2008.

 

We test goodwill for impairment on an annual basis or more frequently if events or circumstances change in a manner that would more likely than not reduce the fair value of a reporting unit below its carrying value. A decrease in the estimated fair value of one or more of our reporting units could result in the recognition of a material, noncash write-down of goodwill.

 

 

 

20

 


 

Note 16: Acquisitions and Divestitures

 

In the third quarter of 2014, we completed six acquisitions for total consideration of $318,001,000 (as detailed in the Fair Value of Purchase Consideration table below). Assets acquired include:

 

§

five aggregates facilities and associated downstream assets in Arizona and New Mexico

§

two aggregates facilities in Delaware, serving northern Virginia and Washington, D.C.

§

four aggregates facilities in the San Francisco Bay Area

§

an aggregates operation and distribution yards that serve the greater Dallas/Fort Worth market

 

The 2014 acquisitions listed above are reported in our condensed consolidated financial statements as of their respective acquisition dates. The amounts of total revenues, net earnings and acquisition related costs for these acquisitions (collectively) are included in our Condensed Consolidated Statements of Comprehensive Income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

 

 

 

2014 

 

 

 

 

 

2014 

 

Actual Results

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

$       13,090 

 

 

 

 

 

$       13,090 

 

Net earnings

 

 

 

91 

 

 

 

 

 

91 

 

Acquisition Related Costs

 

 

 

 

 

 

 

 

 

 

 

Selling, administrative and general expenses

 

 

 

$            734 

 

 

 

 

 

$         1,156 

 

 

None of the 2014 acquisitions listed above are material to our results of operations or financial position either individually or collectively. The fair value of consideration transferred for these acquisitions and the preliminary amounts of assets acquired and liabilities assumed (based on estimated fair values at their acquisition dates), are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in thousands, except for share data

 

 

 

 

 

 

 

 

 

 

 

Fair Value of Purchase Consideration

 

 

Cash

$     268,396 

 

Real property

2,414 

 

Payable to seller

2,500 

 

Vulcan Materials Company, common stock (698,108 shares)

44,691 

 

Total fair value of purchase consideration

$     318,001 

 

Identifiable Assets Acquired and Liabilities Assumed

 

 

Accounts and notes receivable, net

$         9,676 

 

Inventories

13,767 

 

Other current assets

25 

 

Property, plant & equipment, net

178,784 

 

Other intangible assets

 

 

 Contractual rights in place

125,478 

 

Deferred income taxes, net

(13,796)

 

Liabilities assumed

(10,329)

 

Remaining minority interest in a consolidated entity

600 

 

Net identifiable assets acquired

$     304,205 

 

Goodwill

$       13,796 

 

 

Estimated fair values of assets acquired and liabilities assumed are preliminary pending appraisals of contractual rights in place and property, plant & equipment.

 

The contractual rights in place noted above will be amortized against earnings using the unit-of-production method over an estimated weighted-average period in excess of 20 years and all but $41,576,000 will be deductible for income tax purposes over 15 years.  The goodwill noted above (none of which will be deductible for income tax purposes) represents the balance of deferred tax liabilities generated from carrying over the seller’s tax basis in the assets acquired.

 

21

 


 

In 2014, we sold:

 

§

March 2014 — our cement and concrete businesses in the Florida area for total consideration of $721,359,000 (as of September 30, 2014, $719,089,000 has been received in cash) resulting in a pretax gain of $227,910,000. We retained all of our Florida aggregates operations, our Cement segment’s calcium operation in Brooksville, Florida and real estate associated with certain former ready-mixed concrete facilities. Under a separate supply agreement, we will continue to provide aggregates to the divested concrete facilities, at market prices, for a period of 20 years. As a result of the continuing cash flows (generated via the supply agreement and the retained operation and assets), the disposition is not reported as discontinued operations

§

March 2014a previously mined and subsequently reclaimed tract of land in Maryland (Aggregates segment) for net pretax cash proceeds of $10,727,000 resulting in a pretax gain of $168,000

§

January 2014unimproved land in Tennessee previously containing a sales yard (Aggregates segment) for net pretax cash proceeds of $5,820,000 resulting in a pretax gain of $5,790,000

 

The structure of these 2014 transactions — along with the fourth quarter 2013 acquisition noted below — enabled us to defer income taxes on approximately $145,000,000 in capital gains.

 

In 2013, we acquired:

 

§

Fourth quarterland containing 136 million tons of aggregates reserves at an existing quarry in southern California for $117,000,000. We previously mined these reserves under a lease which was scheduled to expire in 2017

§

Second quarteran aggregates production facility and four ready-mixed concrete facilities in Texas for $29,983,000.  As a result, we recognized $5,425,000 of contractual rights in place. The contractual rights in place will be amortized against earnings using the unit-of-production method over an estimated weighted-average period in excess of 50 years and will be deductive for income tax purposes over 15 years

§

First quartertwo aggregates production facilities in Georgia for $59,968,000.  After finalizing the purchase price allocation, we recognized $3,620,000 of amortizable intangible assets (contractual rights in place). The contractual rights in place will be amortized against earnings using the unit-of-production method over an estimated weighted-average period in excess of 20 years and will be deductible for income tax purposes over 15 years

 

In 2013, we sold:

 

§

Third quarter reclaimed land associated with a former site of a ready-mixed concrete facility in Virginia for net pretax cash proceeds of $11,261,000 resulting in a pretax gain of $9,027,000

§

Third quarter —  a percentage of the future production from aggregates reserves at certain owned quarries. The sale was structured as a volumetric production payment (VPP) for which we received gross cash proceeds of $154,000,000 and incurred transaction costs of $905,000. The net proceeds were recorded as deferred revenue and are amortized on a unit-of-sales basis to revenues over the term of the VPP. See Note 4 for the key terms of the VPP

§

Second quarter —  four aggregates production facilities in Wisconsin for net pretax cash proceeds of $34,743,000 resulting in a pretax gain of $21,183,000. We allocated $4,521,000 of goodwill to these dispositions based on the relative fair values of the businesses disposed of and the portion of the reporting unit retained

§

First quarter —  an aggregates production facility in Wisconsin and its related replacement reserve land for net pretax cash proceeds of $5,133,000 resulting in a pretax gain of $2,802,000. We allocated $674,000 of goodwill to this disposition based on the relative fair values of the business disposed of and the portion of the reporting unit retained

 

Effective land management is both a business strategy and a social responsibility. We strive to achieve value through our mining activities as well as incremental value through effective post-mining land management. Our land management strategy includes routinely reclaiming and selling our previously mined land. Additionally, this strategy includes developing conservation banks by preserving land as a suitable habitat for endangered or sensitive species. These conservation banks have received approval from the United States Fish and Wildlife Service to offer mitigation credits for sale to third parties who may be required to compensate for the loss of habitats of endangered or sensitive species.

 

22

 


 

No assets meet the criteria for held for sale at September 30, 2014. As of December 31, 2013 and September  30, 2013, a previously mined and subsequently reclaimed tract of land within our Aggregates segment is presented in the accompanying Condensed Consolidated Balance Sheets as assets held for sale. This land tract sold in the first quarter of 2014. Assets classified as held for sale are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31

 

September 30

 

in thousands

 

 

 

 

 

 

2013 

 

 

2013 

 

Held for Sale

 

 

 

 

 

 

 

 

 

 

 

Property, plant & equipment, net

 

 

 

 

 

 

$       10,559 

 

 

$       10,559 

 

Total assets held for sale

 

 

 

 

 

 

$       10,559 

 

 

$       10,559 

 

 

 

Note 17: New Accounting Standards

 

ACCOUNTING STANDARDS RECENTLY ADOPTED

 

GUIDANCE ON FINANCIAL STATEMENT PRESENTATION OF UNRECOGNIZED TAX BENEFIT  As of and for the interim period ended March 31, 2014, we adopted Accounting Standards Update (ASU) No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." Under this ASU, an unrecognized tax benefit, or portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except when specific conditions are met as outlined in the ASU. When these specific conditions are met, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.

 

GUIDANCE FOR OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS  As of and for the interim period ended March 31, 2014, we adopted ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date."  This ASU provides guidance for the recognition, measurement and disclosure of such obligations that are within the scope of the ASU. Obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled litigation and judicial rulings. Under this ASU, an entity (1) recognizes such obligations at the inception of the arrangement, (2) measures such obligations as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors and (3) discloses the nature and amount of such obligations as well as other information about those obligations. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.

 

TANGIBLE PROPERTY REGULATIONS  As of January 1, 2014, the Internal Revenue Service’s new tangible property regulations became effective. These regulations apply to amounts paid to acquire, produce or improve tangible property, as well as dispose of such property. The effect of this tax law change had no material impact on our financial position, results of operations or liquidity.

 

ACCOUNTING STANDARDS PENDING ADOPTION

 

GOING CONCERN In August 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-15, “Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” which requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern (meet its obligations as they become due) within one year after the date that the financial statements are issued. If conditions or events raise substantial doubt about the entity’s ability to continue as a going concern, certain disclosures are required. This ASU is effective for annual reporting periods ending after December 15, 2016, and interim reporting periods thereafter. Early adoption is permitted. We will adopt this standard as of and for the annual period ending December 31, 2016. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

23

 


 

SHARE-BASED  AWARDS  In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period,” which clarifies the proper method of accounting for share-based awards when the terms of an award provide that a performance target could be achieved after the requisite service period. Under current guidance, there is a lack of consistency in the measurement of the grant-date fair values of awards with these types of performance targets. Under ASU 2014-12, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition and, as a result, should not be included in the estimation of the grant-date fair value. Rather, an entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. This ASU is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods within those annual reporting periods. We currently account for share-based  awards with these types of performance targets in accordance with ASU 2014-12; therefore, we do not expect the adoption of this ASU to have any impact on our consolidated financial statements.

 

REVENUE RECOGNITION  In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU provides a more robust framework for addressing revenue issues and expands required revenue recognition disclosures.  This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim reporting periods within those annual reporting periods. Early adoption is not permitted. We are currently evaluating the impact of adoption of this ASU on our consolidated financial statements.

 

DISCONTINUED OPERATIONS REPORTING  In April 2014, the FASB issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which changes the definition of and expands the disclosure requirements for discontinued operations. Under the new definition, discontinued operations reporting is limited to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The expanded disclosures for discontinued operations are meant to provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. Additionally, this ASU requires an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. This ASU is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years.

 

 

 

24

 


 

ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

GENERAL COMMENTS

 

Overview

 

Vulcan provides the basic materials for the infrastructure needed to expand the U.S. economy. We are the nation's largest producer of construction aggregates, primarily crushed stone, sand and gravel; a major producer of asphalt mix and ready-mixed concrete.

 

Demand for our products is dependent on construction activity. The primary end uses include public construction, such as highways, bridges, airports, schools and prisons, as well as private nonresidential (e.g., manufacturing, retail, offices, industrial and institutional) and private residential construction (e.g., single-family houses, duplexes, apartment buildings and condominiums). Customers for our products include heavy construction and paving contractors; commercial building contractors; concrete products manufacturers; residential building contractors; state, county and municipal governments; railroads and electric utilities.

 

We operate primarily in the United States and our principal product — aggregates — is used in virtually all types of public and private construction projects and in the production of asphalt mix and ready-mixed concrete. Aggregates have a high weight-to-value ratio and, in most cases, must be produced near where they are used; if not, transportation can cost more than the materials, rendering them uncompetitive compared to locally produced materials. Exceptions to this typical market structure include areas along the U.S. Gulf Coast and the Eastern Seaboard where there are limited supplies of locally available high quality aggregates. We serve these markets from quarries that have access to long-haul transportation shipping by barge and rail — and from our quarry on Mexico's Yucatan Peninsula. We transport aggregates from Mexico to the U.S. principally on our three Panamax-class, self-unloading ships.

 

There are practically no substitutes for quality aggregates. Because of barriers to entry created by zoning and permitting regulation and because of high transportation costs relative to the value of the product, the location of reserves is a critical factor to long-term success.

 

While aggregates is our primary business, we believe vertical integration between aggregates and downstream products, such as asphalt mix and concrete, can be managed effectively in certain markets to generate acceptable financial returns. We produce and sell asphalt mix and ready-mixed concrete primarily in our mid-Atlantic, Georgia, southwestern and western markets. Aggregates comprise approximately 95% of asphalt mix by weight and 78% of ready-mixed concrete by weight. In all of these downstream businesses, we supply virtually all of the required aggregates from our own operations.

 

Seasonality and cyclical nature of our business

 

Almost all our products are produced and consumed outdoors. Seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Therefore, the financial results for any quarter do not necessarily indicate the results expected for the year. Normally, the highest sales and earnings are in the third quarter and the lowest are in the first quarter. Furthermore, our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, primarily in the private sector. The levels of construction spending are affected by changing interest rates and demographic and population fluctuations.

 

 

25

 


 

EXECUTIVE SUMMARY

 

Financial highlights for Third Quarter 2014

 

Compared to third quarter 2013:

 

§

Total revenues increased $60.0 million, or 7%

§

Gross profit increased $50.1 million, or 31%

§

Aggregates segment gross profit increased $38.2 million, or 26%

§

Incremental gross profit as a percentage of freight-adjusted revenues was 58%

§

Shipments increased 12%, or 5.1 million tons

§

Same-store shipments increased 10.5%, or 4.5 million tons

§

Freight-adjusted revenues increased 14%, or $65.9 million

§

Cash gross profit per ton was $5.15, an increase of $0.32 per ton, or 7%

§

Average sales price increased 2%, including unfavorable mix impact

§

Exclusive of unfavorable mix, average sales price increased 4%

§

Asphalt, Concrete and Cement segment gross profit improved $11.8 million, collectively

§

Earnings from continuing operations were $0.51 per diluted share as compared to $0.32

§

The current year’s third quarter includes $0.03 per diluted share of costs related to acquisition and divestiture activity and restructuring changes

§

The prior year’s third quarter includes $0.04 per diluted share of income associated with the gain on sale of reclaimed real estate

§

Adjusted EBITDA was $215.4 million, an increase of $44.5 million, or 26%

 

Growth in private end markets continues to drive increased construction activity and demand for our products. Leading indicators, such as housing starts, nonresidential contract awards and employment levels, continue to show favorable above-average growth trends in Vulcan-served markets and Vulcan markets continue to grow faster than U.S. markets as a whole.

 

Strong growth in aggregates volumes and solid operating performance in our aggregates businesses led to our significant earnings growth. Our third quarter results continued to demonstrate the earnings leverage of volume growth in our aggregates business. We are also seeing the benefit of our continuing efforts to grow unit profitability and leverage our overhead structure. Over the past twelve months, aggregates shipments have increased 9%, or 13.2 million tons. During the same period, Aggregates segment gross profit has increased 30%, or $116.8 million.

 

The overall pricing outlook for our aggregates products continues to improve with the recovery in demand for construction materials.  Our aggregates shipments have grown for six consecutive quarters, and we expect this demand momentum to lead to accelerating price growth. This lead-lag relationship between growing volumes followed by accelerating price growth is typical for our business. We already see price increases between 5% and 10% in certain markets, particularly where the recovery in construction activity is further along. As we look ahead, we believe price momentum will increase with continued volume growth.

 

During the third quarter, we completed six acquisitions for total consideration of $318.0 million (see Note 16 to the condensed consolidated financial statements). Collectively, these acquisitions include 450 million tons of proven and probable reserves in attractive markets: San Francisco, California; Phoenix, Arizona: Albuquerque and Santa Fe, New Mexico; Dallas, Texas; and northern Virginia and Washington D.C. Annual aggregates production volumes of the acquired assets totaled approximately 8 million tons in 2013. Additionally, the acquisitions in Phoenix and New Mexico include asphalt mix and ready-mixed concrete operations. The structure of these transactions — along with an earlier investment in reserves at a key quarry serving San Diego — has enabled us to defer income taxes on approximately $145 million in capital gains. We incurred $3.0 million of one-time costs associated with these acquisitions in the third quarter.

 

Our business continues to improve. Our employees remain focused on increasing unit profitability, delivering expected incremental earnings, and improving our valuable aggregates franchise. Our confidence in the prospects for a sustained multi-year recovery in aggregates demand continues to grow. Our markets are recovering from trough levels of demand and are outpacing the rest of the U.S. We are excited about our future as the leading aggregates supplier in the U.S. We remain focused on further improving the profitability of our existing businesses, strategically expanding our unmatched asset base to serve the needs of our customers, and continuing our disciplined management of capital.

 

26

 


 

In February 2012, our Board approved a two-year Planned Asset Sales initiative with targeted net proceeds of at least $500 million through the sale of non-core assets. The initiative concluded in the first quarter of 2014 with the sale of our cement and concrete businesses in the Florida area to Cementos Argos.  Including the $719.1 million of net proceeds from the Argos transaction, the Planned Asset Sales initiative generated over $1.1 billion of net proceeds. The proceeds from these sales were used to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create value for shareholders. Over this two-year period, we retired over $800 million of debt and reinvested over $240 million to strengthen our aggregates position in our strategic markets of California, Georgia, Texas and Virginia.

 

 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

Gross profit as a percentage of total revenues excluding freight and delivery is not a Generally Accepted Accounting Principle (GAAP) measure. We present this metric as it is consistent with the basis by which we review our operating results. Likewise, we believe that this presentation is consistent with the basis by which investors analyze our operating results considering that freight and delivery services represent pass-through activities. Reconciliation of this metric to its nearest GAAP measure is presented below:

 

 

gross profit margin in accordance with gaap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

dollars in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Gross profit

$        209.0 

 

 

$        159.0 

 

 

$        417.9 

 

 

$        309.5 

 

Total revenues

$        873.6 

 

 

$        813.6 

 

 

$     2,239.1 

 

 

$     2,090.5 

 

Gross profit margin

23.9% 

 

 

19.5% 

 

 

18.7% 

 

 

14.8% 

 

 

 

gross profit margin excluding freight and delivery revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

dollars in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Gross profit

$        209.0 

 

 

$        159.0 

 

 

$        417.9 

 

 

$        309.5 

 

Total revenues

$        873.6 

 

 

$        813.6 

 

 

$     2,239.1 

 

 

$     2,090.5 

 

Freight and delivery revenues

78.5 

 

 

67.2 

 

 

204.6 

 

 

175.4 

 

Total revenues excluding freight and delivery revenues

$        795.1 

 

 

$        746.4 

 

 

$     2,034.5 

 

 

$     1,915.1 

 

Gross profit margin excluding

 

 

 

 

 

 

 

 

 

 

 

 freight and delivery revenues

26.3% 

 

 

21.3% 

 

 

20.5% 

 

 

16.2% 

 

 

 

27

 


 

Aggregates segment gross profit as a percentage of freight-adjusted revenues is not a GAAP measure. We present this metric as it is consistent with the basis by which we review our operating results. We believe that this presentation is more meaningful to our investors as it excludes related transportation revenues (a pass-through activity) and other service-related revenues, such as landfill tipping fees. Incremental gross profit as a percentage of freight-adjusted revenues represents the year-over-year change in gross profit divided by the year-over-year change in freight-adjusted revenues. Reconciliation of these metrics to their nearest GAAP measure is presented below:

 

 

Aggregates segment gross profit margin in accordance with gaap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

dollars in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Aggregates segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$        188.0 

 

 

$        149.8 

 

 

$        388.1 

 

 

$        301.7 

 

Segment sales

$        688.9 

 

 

$        596.8 

 

 

$     1,752.6 

 

 

$     1,528.8 

 

Gross profit margin

27.3% 

 

 

25.1% 

 

 

22.1% 

 

 

19.7% 

 

 

 

Aggregates segment gross profit as a percentage of freight-adjusted revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

dollars in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Aggregates segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$        188.0 

 

 

$        149.8 

 

 

$        388.1 

 

 

$        301.7 

 

Segment sales

$        688.9 

 

 

$        596.8 

 

 

$     1,752.6 

 

 

$     1,528.8 

 

Excluding

 

 

 

 

 

 

 

 

 

 

 

 Freight and delivery revenues

73.8 

 

 

66.0 

 

 

194.6 

 

 

164.7 

 

 Transportation to remote distribution sites

56.9 

 

 

37.3 

 

 

146.5 

 

 

107.7 

 

 Other revenues

26.6 

 

 

27.8 

 

 

72.3 

 

 

67.5 

 

Freight-adjusted revenues

$        531.6 

 

 

$        465.7 

 

 

$     1,339.2 

 

 

$     1,188.9 

 

Gross profit as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 freight-adjusted revenues

35.4% 

 

 

32.2% 

 

 

29.0% 

 

 

25.4% 

 

Incremental gross profit as a percentage of

 

 

 

 

 

 

 

 

 

 

 

 freight-adjusted revenues

58.0% 

 

 

 

 

 

57.5% 

 

 

 

 

 

 

28

 


 

GAAP does not define free cash flow,” "cash gross profit" and “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA). Thus, free cash flow should not be considered as an alternative to net cash provided by operating activities or any other liquidity measure defined by GAAP. Likewise, cash gross profit and EBITDA should not be considered as alternatives to earnings measures defined by GAAP. We present these metrics for the convenience of investment professionals who use such metrics in their analyses and for shareholders who need to understand the metrics we use to assess performance and to monitor our cash and liquidity positions. The investment community often uses these metrics as indicators of a company's ability to incur and service debt and to assess the operating performance of a company’s businesses. We use free cash flow, cash gross profit, EBITDA and other such measures to assess liquidity and the operating performance of our various business units and the consolidated company. Additionally, we adjust EBITDA for certain items to provide a more consistent comparison of performance from period to period.  We do not use these metrics as a measure to allocate resources. Reconciliations of these metrics to their nearest GAAP measures are presented below:

 

 

free cash flow

 

Free cash flow deducts purchases of property, plant & equipment from net cash provided by operating activities.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30

 

in millions

2014 

 

 

2013 

 

Net cash provided by operating activities

$        149.7 

 

 

$        260.0 

 

Purchases of property, plant & equipment

(169.2)

 

 

(117.3)

 

Free cash flow

$         (19.5)

 

 

$        142.7 

 

 

 

cash gross profit

 

Cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization (DDA&A) to gross profit. Cash gross profit per ton is computed by dividing cash gross profit by tons shipped.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions, except per ton data

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Aggregates segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$        188.0 

 

 

$        149.8 

 

 

$        388.1 

 

 

$        301.7 

 

DDA&A

58.5 

 

 

56.7 

 

 

169.2 

 

 

169.2 

 

Aggregates segment cash gross profit

$        246.5 

 

 

$        206.5 

 

 

$        557.3 

 

 

$        470.9 

 

Unit shipments - tons

47.8 

 

 

42.8 

 

 

121.1 

 

 

110.2 

 

Aggregates segment cash gross profit per ton

$          5.15 

 

 

$          4.83 

 

 

$          4.60 

 

 

$          4.27 

 

Asphalt Mix segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$          14.5 

 

 

$          13.6 

 

 

$          28.3 

 

 

$          24.8 

 

DDA&A

2.6 

 

 

2.2 

 

 

7.5 

 

 

6.4 

 

Asphalt Mix segment cash gross profit

$          17.1 

 

 

$          15.8 

 

 

$          35.8 

 

 

$          31.2 

 

Concrete segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$            5.5 

 

 

$           (3.9)

 

 

$           (0.5)

 

 

$         (19.8)

 

DDA&A

5.0 

 

 

8.4 

 

 

15.7 

 

 

24.5 

 

Concrete segment cash gross profit

$          10.5 

 

 

$            4.5 

 

 

$          15.2 

 

 

$            4.7 

 

Cement segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$            1.0 

 

 

$           (0.5)

 

 

$            2.0 

 

 

$            2.8 

 

DDA&A

0.2 

 

 

5.4 

 

 

1.4 

 

 

13.8 

 

Cement segment cash gross profit

$            1.2 

 

 

$            4.9 

 

 

$            3.4 

 

 

$          16.6 

 

 

 

29

 


 

EBITDA and adjusted ebitda

 

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization and excludes discontinued operations. We adjust EBITDA for certain items to provide a more consistent comparison of performance from period to period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Net earnings

$          66.9 

 

 

$          41.4 

 

 

$        166.9 

 

 

$          15.3 

 

Provision for (benefit from) income taxes

31.1 

 

 

10.8 

 

 

71.9 

 

 

(21.9)

 

Interest expense, net

40.9 

 

 

49.1 

 

 

201.5 

 

 

152.8 

 

(Earnings) loss on discontinued operations, net of taxes

0.8 

 

 

0.8 

 

 

1.9 

 

 

(4.6)

 

Depreciation, depletion, accretion and amortization

71.2 

 

 

78.3 

 

 

208.9 

 

 

230.8 

 

EBITDA

$        210.9 

 

 

$        180.4 

 

 

$        651.1 

 

 

$        372.4 

 

(Gain) loss on sale of real estate and businesses

$            1.2 

 

 

$           (9.2)

 

 

$       (235.9)

 

 

$         (35.4)

 

Charges associated with acquisitions and divestitures

3.9 

 

 

0.0 

 

 

15.5 

 

 

0.0 

 

Amortization of deferred revenue

(1.4)

 

 

(0.3)

 

 

(3.7)

 

 

(0.9)

 

Restructuring charges

0.8 

 

 

0.0 

 

 

0.8 

 

 

1.5 

 

Adjusted EBITDA

$        215.4 

 

 

$        170.9 

 

 

$        427.8 

 

 

$        337.6 

 

 

 

30

 


 

RESULTS OF OPERATIONS

 

Total revenues include sales of products to customers, net of any discounts and taxes, and freight and delivery revenues billed to customers. Related freight and delivery costs are included in cost of revenues. This presentation is consistent with the basis on which we review our consolidated results of operations. We discuss separately our discontinued operations, which consist of our former Chemicals business.

 

The following table highlights significant components of our consolidated operating results including  EBITDA and Adjusted EBITDA.

 

consolidated operating Result highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions, except per share data

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Total revenues

$        873.6 

 

 

$        813.6 

 

 

$     2,239.1 

 

 

$     2,090.5 

 

Cost of revenues

664.6 

 

 

654.6 

 

 

1,821.2 

 

 

1,781.0 

 

Gross profit

$        209.0 

 

 

$        159.0 

 

 

$        417.9 

 

 

$        309.5 

 

Selling, administrative and general expenses

$          66.1 

 

 

$          65.9 

 

 

$        199.8 

 

 

$        195.4 

 

Operating earnings

$        140.3 

 

 

$          99.8 

 

 

$        438.2 

 

 

$        136.6 

 

Interest expense, net

$          40.9 

 

 

$          49.1 

 

 

$        201.5 

 

 

$        152.8 

 

Earnings (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

$          98.8 

 

 

$          52.9 

 

 

$        240.7 

 

 

$         (11.2)

 

Earnings from continuing operations

$          67.8 

 

 

$          42.2 

 

 

$        168.8 

 

 

$          10.7 

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of taxes

(0.9)

 

 

(0.8)

 

 

(1.9)

 

 

4.6 

 

Net earnings

$          66.9 

 

 

$          41.4 

 

 

$        166.9 

 

 

$          15.3 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$          0.51 

 

 

$          0.32 

 

 

$          1.29 

 

 

$          0.08 

 

  Discontinued operations

0.00 

 

 

0.00 

 

 

(0.02)

 

 

0.04 

 

Basic net earnings per share

$          0.51 

 

 

$          0.32 

 

 

$          1.27 

 

 

$          0.12 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$          0.51 

 

 

$          0.32 

 

 

$          1.27 

 

 

$          0.08 

 

  Discontinued operations

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

0.04 

 

Diluted net earnings per share

$          0.50 

 

 

$          0.31 

 

 

$          1.26 

 

 

$          0.12 

 

EBITDA

$        210.9 

 

 

$        180.4 

 

 

$        651.1 

 

 

$        372.4 

 

Adjusted EBITDA

$        215.4 

 

 

$        170.9 

 

 

$        427.8 

 

 

$        337.6 

 

 

31

 


 

ADJUSTED CONCRETE AND CEMENT SEGMENT FINANCIAL DATA

 

Comparative financial data adjusted for the March 7, 2014 sale of our concrete and cement businesses in the Florida area is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Concrete Segment

 

 

 

 

 

 

 

 

 

 

 

 Segment sales

 

 

 

 

 

 

 

 

 

 

 

   As reported

$          99.0 

 

 

$        129.8 

 

 

$        288.8 

 

 

$        349.9 

 

   Adjusted

$          99.0 

 

 

$          86.9 

 

 

$        256.1 

 

 

$        227.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total revenues

 

 

 

 

 

 

 

 

 

 

 

   As reported

$          99.0 

 

 

$        129.8 

 

 

$        288.8 

 

 

$        349.9 

 

   Adjusted

$          99.0 

 

 

$          86.9 

 

 

$        256.1 

 

 

$        227.3 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Gross profit

 

 

 

 

 

 

 

 

 

 

 

   As reported

$            5.5 

 

 

$           (3.9)

 

 

$           (0.5)

 

 

$         (19.8)

 

   Adjusted

$            5.5 

 

 

$            2.9 

 

 

$            3.2 

 

 

$           (0.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

  DDA&A

 

 

 

 

 

 

 

 

 

 

 

   As reported

$            5.0 

 

 

$            8.4 

 

 

$          15.7 

 

 

$          24.5 

 

   Adjusted

$            5.0 

 

 

$            4.6 

 

 

$          14.3 

 

 

$          13.0 

 

Cement Segment

 

 

 

 

 

 

 

 

 

 

 

 Segment sales

 

 

 

 

 

 

 

 

 

 

 

   As reported

$            2.3 

 

 

$          25.6 

 

 

$          22.6 

 

 

$          72.9 

 

   Adjusted

$            2.3 

 

 

$            2.3 

 

 

$            6.6 

 

 

$            7.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Total revenues

 

 

 

 

 

 

 

 

 

 

 

   As reported

$            2.3 

 

 

$          13.3 

 

 

$          13.4 

 

 

$          38.0 

 

   Adjusted

$            2.3 

 

 

$            2.3 

 

 

$            6.6 

 

 

$            7.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Gross profit

 

 

 

 

 

 

 

 

 

 

 

   As reported

$            1.0 

 

 

$           (0.5)

 

 

$            2.0 

 

 

$            2.8 

 

   Adjusted

$            1.0 

 

 

$            0.7 

 

 

$            2.4 

 

 

$            2.2 

 

 

 

 

 

 

 

 

 

 

 

 

 

  DDA&A

 

 

 

 

 

 

 

 

 

 

 

   As reported

$            0.2 

 

 

$            5.4 

 

 

$            1.4 

 

 

$          13.8 

 

   Adjusted

$            0.2 

 

 

$            0.0 

 

 

$            0.4 

 

 

$            0.3 

 

 

 

third quarter 2014 Compared to third Quarter 2013

 

Total revenues for the third quarter of 2014 were $873.6 million, up 7% from the third quarter of 2013. Shipments increased in aggregates (+12%) and asphalt mix (+3%) while, as a result of our first quarter sale of our cement and concrete businesses in the Florida area, shipments declined in ready-mixed concrete (-25%) and our cement shipments ceased. Average sales price was up in aggregates (+2%) and unit profitability as measured by materials margin (average sales price less unit cost of raw materials) was up in asphalt mix (+3%) and ready-mixed concrete (+17%).

 

Net earnings for the third quarter of 2014 were $66.9 million, or $0.50 per diluted share, compared to $41.4 million, or $0.31 per diluted share, in the third quarter of 2013. Each period’s results were impacted by discrete items, as follows:

 

§

The third quarter of 2014 results include a pretax charge of $1.2 million to reduce the gain on sale of real estate and businesses, a pretax charge of $3.9 million related to acquisition and disposition activities, and a $0.8 million charge for restructuring

§

The third quarter of 2013 results include a pretax gain of $4.3 million related to the sale of reclaimed real estate

 

32

 


 

Continuing Operations — Changes in earnings from continuing operations before income taxes for the third quarter of 2014 versus the third quarter of 2013 are summarized below:

 

earnings from continuing operations before income taxes

 

 

 

 

 

 

 

 

in millions

 

 

Third quarter 2013

$       52.9 

 

Higher aggregates gross profit

38.2 

 

Higher asphalt mix gross profit

0.9 

 

Higher concrete gross profit

9.4 

 

Higher cement gross profit

1.5 

 

Higher selling, administrative and general expense

(0.2)

 

Lower gain on sale of property, plant & equipment and businesses

(8.3)

 

Higher restructuring charges

(0.8)

 

Lower interest expense

8.2 

 

All other

(3.0)

 

Third quarter 2014

$       98.8 

 

 

Aggregates segment sales were $688.9 million, up 15% from the prior year’s third quarter due mostly to strong volume growth across most of our footprint. Third quarter aggregates shipments increased 12% compared to the prior year. Shipments in Illinois and Texas increased 31% and 21%, respectively, due in part to large-project work. Other markets including Florida, Georgia, North Carolina and Virginia, reported volume growth of  10% to 15% versus the prior year. During the third quarter, we completed several bolt-on acquisitions (See Note 16 to the condensed consolidated financial statements). On a same-store basis, aggregates shipments increased 10.5% from the prior year.

 

Freight-adjusted average sales price for aggregates increased 2%, or $0.23 per ton, versus the prior year’s third quarter as almost all of our markets realized price improvement. This quarterly price improvement marks the thirteenth consecutive quarter of year-over-year price improvement. The sharp volume increase in Illinois negatively impacted the overall increase in average selling price by 1%. Additionally, several large shipments of base material and other lower-priced products also impacted the reported average selling price for the quarter by approximately 1%. The widespread price improvement combined with reductions in costs, drove a $0.43 per ton, or 12%, increase in our Aggregates segment gross profit per ton. Despite relatively modest price growth during these early stages of demand recovery, trailing twelve-month gross profit per ton has increased $0.52, or 19%, from the prior year’s third quarter.

 

As a percentage of freight-adjusted revenues, Aggregates segment gross profit margin improved 3.2 percentage points (320 basis points) over the prior year’s third quarter. This strong gross profit margin expansion includes certain costs associated with acquisitions closed in the third quarter. Excluding acquisitions completed in the third quarter, freight-adjusted revenues increased $59.8 million and gross profit associated with these revenues was approximately $39.0 million (incremental gross profit margin of 65%).

 

Asphalt Mix segment gross profit improved $0.9 million due to higher margins and earnings from recently completed acquisitions. Asphalt mix volumes approximated those of the prior year.

 

Concrete segment gross profit was $5.5 million compared to a loss of $3.9 million in the third quarter of the prior year. Last year’s third quarter results included our Florida concrete business that was sold in the first quarter of 2014. Adjusted for the sale of our concrete business in the Florida area, Concrete segment volume and pricing improved, driven primarily by increased private construction activity, while same-store gross profit increased $2.6 million as reflected in the chart on the preceding page.

 

Our cement business was also sold in the first quarter of 2014 along with the Florida concrete business. We retained our calcium products business that is included in the Cement segment. This calcium products business reported third quarter 2014 Cement segment sales of $2.3 million and gross profit of $1.0 million, reflecting a $0.3 million increase in gross profit on essentially flat sales on a same-store prior year comparison.

 

Selling, administrative and general (SAG) expenses in the third quarter of 2014 were essentially flat compared with the prior year’s third quarter,

 

33

 


 

Gain on sale of property, plant & equipment and businesses was $1.0 million in the third quarter of 2014 compared to $9.3 million in the third quarter of 2013. The sale of reclaimed land in the third quarter of 2013 accounted for a $9.2 million pretax gain while there were no business divestitures in the third quarter of 2014 (see Note 16 to the condensed consolidated financial statements).

 

Restructuring charges were $0.8 million in the third quarter of 2014 compared to none in the third quarter of 2013. See
Note 1 to the condensed consolidated financial statements for an explanation of these costs.

 

Net interest expense was $40.9 million in the third quarter of 2014 compared to $49.1 million in 2013. The lower interest expense resulted from the decrease in outstanding debt due to the $506.4 million principal amount debt purchase in the first quarter of 2014.

 

We recorded an income tax provision from continuing operations of $31.1 million in the third quarter of 2014 compared to $10.8 million in the third quarter of 2013. In the third quarter of 2014, income taxes were calculated based on the EAETR, while the year-to-date effective tax rate was used to calculate income taxes in the third quarter of 2013. Both the EAETR and year-to-date effective tax rate methods for calculating income taxes are discussed in Note 3 to the condensed consolidated financial statements. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.

 

Earnings from continuing operations were $0.51 per diluted share compared to $0.32 per diluted share in the third quarter of 2013.

 

Discontinued OperationsThird quarter pretax loss from discontinued operations was $1.4 million in 2014 and $1.3 million in 2013. Both periods include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. For additional details, see Note 2 to the condensed consolidated financial statements.

 

 

YEAR-TO-DATE september 30, 2014 Compared to YEAR-TO-DATE september 30, 2013

 

Total revenues for the first nine months of 2014 were $2,239.1 million, up 7% from the first nine months of 2013. Shipments increased in aggregates (+10%) and asphalt mix (+6%) and declined in ready-mixed concrete (-19%) and cement (-78%).  The decrease in ready-mixed concrete and cement shipments resulted from the first quarter sale of our cement and concrete businesses in the Florida area. Average sales price was up in aggregates (+3%), and unit profitability as measured by materials margin was up in asphalt mix (+3%) and ready-mixed concrete (+16%).

 

Net earnings for the first nine months of 2014 were $166.9 million, or $1.26 per diluted share, compared to $15.3 million, or $0.12 per diluted share, for the first nine months of 2013. Each period’s results were impacted by discrete items, as follows:

 

§

Net earnings for the first nine months of 2014 include a pretax gain of $235.9 million related to the sale of real estate and businesses including our cement and concrete businesses in the Florida area, a pretax charge of $15.5 million related to acquisition and disposition activities, a $0.8 million charge for restructuring, and a pretax loss on debt purchase of $72.9 million (see Note 7 to the condensed consolidated financial statements)

§

Net earnings for the first nine months of 2013 include a pretax gain of $35.4 million related to the sale of real estate and businesses and a $1.5 million charge for restructuring

 

34

 


 

Continuing Operations — Changes in earnings from continuing operations before income taxes for year-to-date September 30, 2014 versus year-to-date September 30, 2013 are summarized below:

 

earnings from continuing operations before income taxes

 

 

 

 

 

 

 

 

in millions

 

 

Year-to-date September 30, 2013

$     (11.2)

 

Higher aggregates gross profit

86.4 

 

Higher asphalt mix gross profit

3.5 

 

Higher concrete gross profit

19.3 

 

Lower cement gross profit

(0.8)

 

Higher selling, administrative and general expenses

(4.4)

 

Higher gain on sale of property, plant & equipment and businesses

201.7 

 

Lower restructuring charges

0.8 

 

Higher interest expense

(48.8)

 

All other

(5.8)

 

Year-to-date September 30, 2014

$    240.7 

 

 

Gross profit for the Aggregates segment was $388.1 million for the first nine months of 2014 versus $301.7 million in 2013. This $86.4 million (29%) increase in gross profit resulted from higher volumes and selling prices. At $4.60, our Aggregates segment cash gross profit per ton increased $0.33, or 8%, compared with the first nine months of 2013. As a percentage of freight-adjusted revenues, Aggregates segment gross profit margin improved 3.6 percentage points (360 basis points) over the prior year’s first nine months.

 

Asphalt Mix segment gross profit of $28.3 million was $3.5 million above the first nine months of 2013. This increase resulted from both the increased volume (+6%) and the favorable materials margin (+3%).

 

Concrete segment gross profit was a loss of $0.5 million for the first nine months of 2014, an improvement of $19.3 million from the prior year. Ready-mixed concrete materials margin increased 16% while shipment decreased 19%. Last year’s results and most of this year’s first quarter results include our Florida concrete business that was sold in the first quarter of 2014. Same-store Concrete segment gross profit improved $3.6 million compared to 2013 as reflected in the chart on page 32.

 

Cement segment gross profit of $2.0 million was $0.8 million below the first nine months of 2013. As previously stated, we sold our cement business in the first quarter of 2014 along with the Florida concrete business. We retained a calcium products business that is included within the Cement segment. Same-store Cement segment gross profit was $2.4 million for the first nine months of 2014 compared to $2.2 million in the first nine months of 2013.

 

SAG  expenses in the first nine months of 2014 were up $4.4 million, or 2%, from the prior year due to  increased performance-based compensation and costs associated with acquisitions and divestitures.

 

Gain on sale of property, plant & equipment and businesses was $238.5 million in the first nine months of 2014 compared to $36.9 million in the first nine months of 2013. The 2014 gain includes the sale of our cement and concrete businesses in Florida to Cementos Argos for a $227.9 million pretax gain and the sale of two reclaimed operating sites for a $6.0 million pretax gain. The 2013 gain  includes a $9.0 million pretax gain on the sale of reclaimed land associated with a former site of a ready-mixed concrete facility and a $24.0 million pretax gain on the sale of five aggregates production facilities.

 

The first nine months of 2014 include  $0.7 million of restructuring charges as compared to $1.5 million in the first nine months of 2013. See Note 1 to the condensed consolidated financial statements for an explanation of these costs.

 

Net interest expense was $201.5 million in the first nine months of 2014 compared to $152.8 million in the first nine months of 2013. The higher interest cost resulted from the aforementioned $72.9 million pretax loss on debt purchase partially offset by reduced interest expense due to the lower debt level (current year debt purchase and the November 2013 scheduled debt retirement).

 

We recorded an income tax provision from continuing operations of $71.9 million for the first nine months of 2014 compared to an income tax benefit of $21.9 million for the first nine months of 2013. For the first nine months of 2014, income taxes were calculated based on the EAETR,  while the year-to-date effective tax rate was used to calculate income taxes for the first nine months of 2013. Both the EAETR and year-to-date effective tax rate methods for calculating income taxes are discussed in Note 3 to the condensed consolidated financial statements. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.

35

 


 

 

Earnings from continuing operations were $1.27 per diluted share compared to $0.08 per diluted share in the first nine months of 2013.

 

Discontinued OperationsYear to-date September pretax loss from discontinued operations was $3.1 million in 2014 compared to a pretax gain of $7.7 million in 2013. Both periods include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The 2013 gain was the result of an $11.7 million pretax gain related to the final payment from the earn-out. For additional details, see Note 2 to the condensed consolidated financial statements.

 

 

LIQUIDITY AND FINANCIAL RESOURCES

 

Our primary sources of liquidity are cash provided by our operating activities, a bank line of credit and access to the capital markets. Additional sources of liquidity include the sale of reclaimed and surplus real estate, and dispositions of non-strategic operating assets. We believe these liquidity and financial resources are sufficient to fund our future business requirements, including:

 

§

cash contractual obligations

§

capital expenditures

§

debt service obligations

§

potential future acquisitions

§

dividend payments

 

We actively manage our capital structure and resources in order to minimize the cost of capital while properly managing financial risk. We seek to meet these objectives by adhering to the following principles:

 

§

maintain substantial bank line of credit borrowing capacity

§

use the bank line of credit only for seasonal working capital requirements and other temporary funding requirements

§

proactively manage our long-term debt maturity schedule such that repayment/refinancing risk in any single year is low

§

minimize financial and other covenants that limit our operating and financial flexibility

§

opportunistically access the capital markets when conditions and terms are favorable

 

 

Cash

 

Included in our September 30, 2014 cash and cash equivalents balance of $91.9 million is $62.7 million of cash held at one of our foreign subsidiaries. A majority of this $62.7 million of cash relates to earnings prior to January 1, 2012 that are permanently reinvested offshore. Use of this permanently reinvested cash is currently limited to our foreign operations.

 

cash from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30

 

in millions

2014 

 

 

2013 

 

Net earnings

$          166.9 

 

 

$            15.3 

 

Depreciation, depletion, accretion and amortization (DDA&A)

208.9 

 

 

230.9 

 

Net earnings before noncash deductions for DDA&A

$          375.8 

 

 

$          246.2 

 

Net gain on sale of property, plant & equipment and businesses

(238.5)

 

 

(48.6)

 

Proceeds from sale of future production, net of transaction costs

0.0 

 

 

153.1 

 

Cost of debt purchase

72.9 

 

 

0.0 

 

Other operating cash flows, net

(60.5)

 

 

(90.7)

 

Net cash provided by operating activities

$          149.7 

 

 

$          260.0 

 

 

As noted in the table above, net earnings before noncash deductions for DDA&A increased $129.6 million to $375.8 million during the nine months ended September 30, 2014. Included in net earnings for nine months ended September 30, 2014 is

36

 


 

a pretax gain of $227.9 million (see Note 16 to the condensed consolidated financial statements) from the sale of our cement and concrete businesses in the Florida area. Cash received associated with the sale of property, plant & equipment and businesses is presented as a component of investing activities. Additionally, we purchased $506.4 million principal amount of outstanding debt through a tender offer and incurred a loss of $72.9 million (see Note 7 to the condensed consolidated financial statements). Cash paid for the debt purchase is presented as a component of financing activities. In September 2013, we sold a percentage of future production from aggregates reserves resulting in net cash proceeds of $153.3 million (see Note 4 to the condensed consolidated financial statements).

 

cash flows from investing activities

 

Net cash provided by investing activities was $302.6 million during the nine months ended September 30, 2014, a $443.3 million increase compared to the same period of 2013. This increase resulted from a $673.8 million increase in proceeds from the sale of property, plant & equipment and businesses partially offset by a $230.6 million increase in purchases of property, plant & equipment and businesses. During the nine months ended September 30, 2014, we sold: a previously mined and subsequently reclaimed tract of land for $10.7 million, land previously containing a sales yard for $5.8 million, and our cement and concrete businesses in the Florida area for $721.4 million (as of September 30, 2014, $719.1 million has been received). In the same period, we completed several acquisitions for total consideration of $318.0 million, of which $268.4 million was paid in cash (see Note 16 to the condensed consolidated financial statements).

 

cash flows from financing activities

 

Net cash used for financing activities of $554.2 million increased $405.2 million in the nine months ended September 30, 2014 compared to the same period of 2013. This increase is primarily attributable to a $343.2 million increase in debt payments and an $86.0 million decrease in proceeds from drawing on our line of credit. As previously mentioned, in the first quarter of 2014 we purchased $506.4 million principal amount of outstanding debt through a tender offer as follows: $375.0 million of 6.50% notes due in 2016 and $131.4 million of 6.40% notes due in 2017. Total tender costs were $579.7 million including $71.8 million premium and $1.5 million in transaction costs. This increase in cash used for financing activities is partially offset by a $30.6 million increase in proceeds from the issuance of common stock.  For the nine months ended September 30, 2014, we issued 0.5 million shares of common stock to the trustee of our 401(k) savings and retirement plans for cash proceeds of $30.6 million.

 

 

debt

 

Certain debt measures are outlined below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

December 31

 

September 30

 

dollars in millions

2014 

 

 

2013 

 

 

2013 

 

Debt

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$            0.1 

 

 

$            0.2 

 

 

$            0.2 

 

Long-term debt

2,006.0 

 

 

2,522.2 

 

 

2,523.4 

 

Total debt

$     2,006.1 

 

 

$     2,522.4 

 

 

$     2,523.6 

 

Capital

 

 

 

 

 

 

 

 

Total debt

$     2,006.1 

 

 

$     2,522.4 

 

 

$     2,523.6 

 

Equity

4,201.1 

 

 

3,938.1 

 

 

3,862.9 

 

Total capital

$     6,207.2 

 

 

$     6,460.5 

 

 

$     6,386.5 

 

Total Debt as a Percentage of Total Capital

32.3% 

 

 

39.0% 

 

 

39.5% 

 

Weighted-average Effective Interest Rates

 

 

 

 

 

 

 

 

  Long-term debt

8.10% 

 

 

7.73% 

 

 

7.72% 

 

Fixed versus Floating Interest Rate Debt

 

 

 

 

 

 

 

 

  Fixed-rate debt

99.3% 

 

 

99.4% 

 

 

99.5% 

 

  Floating-rate debt

0.7% 

 

 

0.6% 

 

 

0.5% 

 

 

 

 

 

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Our long-term debt is unsecured and essentially all such debt agreements contain customary investment-grade type covenants that primarily limit the amount of secured debt we may incur without ratably securing the outstanding debt.  Our debt may be redeemed prior to maturity at the greater of par value and the make-whole value plus accrued and unpaid interest.

 

There were no material scheduled debt payments during the first nine months of 2014. However, we purchased $506.4 million  principal amount of outstanding debt through a tender offer as described in Note 7 to the condensed consolidated financial statements. This debt purchase was funded by the aforementioned sale of our cement and concrete businesses in the Florida area.

 

Our $0.1 million of current maturities of long-term debt as of September  30, 2014 is due as follows:

 

 

 

 

 

 

 

 

 

Current

 

in millions

Maturities

 

Fourth quarter 2014

$
0.1 

 

First quarter 2015

0.0 

 

Second quarter 2015

0.0 

 

Third quarter 2015

0.0 

 

 

We expect to retire the current maturities using existing cash.

 

In March 2014, we amended our $500.0 million line of credit to, among other items, extend the term from March 12, 2018 to March 25, 2019. The line of credit is secured by accounts receivable and inventory, but will become unsecured upon the achievement of certain credit metrics and/or credit ratings. The line of credit contains customary negative and financial covenants for a secured facility.

 

The negative covenants primarily limit our ability to: (1) incur secured debt, (2) make investments, (3) execute acquisitions and divestitures, and (4) make restricted payments, including dividends.  Such limitations currently do not impact our ability to execute our strategic, operating and financial plans, and become less restrictive when the line of credit becomes unsecured as described above.

 

The line of credit contains two financial covenants: (1) a maximum ratio of debt to EBITDA that declines over time to 3.5:1 and (2) a minimum ratio of EBITDA to net cash interest expense that increases over time to 3.0:1.

 

As of September 30, 2014, we were in compliance with all of our long-term debt and line of credit covenants.

 

Borrowings on our line of credit are classified as short-term due to our intent to repay any borrowings within twelve months. As of September 30, 2014, our available borrowing capacity under the line of credit was $446.7 million. Utilization of the borrowing capacity was as follows:

 

§

none was drawn

§

$53.3 million was used to provide support for outstanding standby letters of credit

 

Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to the London Interbank Offered Rate (LIBOR) plus a margin ranging from 1.50% to 2.25%, or an alternative rate derived from the lender’s prime rate,  based on our ratio of debt to EBITDA.  Standby letters of credit issued under the line of credit reduce availability and are charged a fee equal to the margin for LIBOR based borrowing plus 0.175%.  As of September 30, 2014, the applicable margin was 1.75%. We also pay a commitment fee on the daily average unused amount of the line of credit. This commitment fee ranges from 0.25% to 0.40% based on our ratio of debt to EBITDA. Once the line of credit becomes unsecured, both the LIBOR margin range for borrowings and the commitment fee range will decline.

 

38

 


 

debt ratings

 

Our debt ratings and outlooks as of September 30, 2014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating/Outlook

 

Date

 

 

Description

 

Senior Secured Line of Credit

 

 

 

 

Moody's

Ba1/stable

 

4/22/2014

 

 

upgraded from Ba2/negative

 

Senior Unsecured 1

 

 

 

 

 

 

Moody's

Ba3/stable

 

4/22/2014

 

 

outlook changed from negative to stable

 

Standard & Poor's

BB+/stable

 

7/31/2014

 

 

upgraded from BB/positive

 

 

 

 

Not all of our long-term debt is rated.

 

 

Equity

 

Our common stock issuances are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

December 31

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Common stock shares at beginning of year,

 

 

 

 

 

 

 

 

 issued and outstanding

130,200 

 

 

129,721 

 

 

129,721 

 

Common Stock Issuances

 

 

 

 

 

 

 

 

Acquisition

715 

 

 

 

 

 

401(k) retirement plans

485 

 

 

71 

 

 

 

Share-based compensation plans

303 

 

 

408 

 

 

268 

 

Common stock shares at end of period,

 

 

 

 

 

 

 

 

 issued and outstanding

131,703 

 

 

130,200 

 

 

129,989 

 

 

During the second quarter of 2014, we issued 16.9 thousand shares in connection with the purchase of a permitted quarry in Alabama. In the third quarter of 2014, we issued a total of 698.1 thousand shares in connection with the California acquisition, as described in Note 16 to the condensed consolidated financial statements.

 

We occasionally sell shares of common stock to the trustee of our 401(k) retirement plans to satisfy the plan participants’ elections to invest in our common stock. Under this arrangement, the stock issuances and resulting cash proceeds were as follows:

 

§

nine months ended September  30, 2014 —  issued 485.3 thousand shares for cash proceeds of $30.6 million

§

twelve months ended December 31, 2013 —  issued 71.2 thousand shares for cash proceeds of $3.8 million

§

nine months ended September 30, 2013 —  no shares issued

 

There were no shares held in treasury as of September 30, 2014, December 31, 2013 and September 30, 2013. There were 3,411,416 shares remaining under the current purchase authorization of the Board of Directors as of September 30, 2014.

 

 

off-balance sheet arrangements

 

We have no off-balance sheet arrangements, such as financing or unconsolidated variable interest entities, that either have or are reasonably likely to have a current or future material effect on our:

 

§

results of operations and financial position

§

capital expenditures

§

liquidity

§

capital resources

 

 

39

 


 

Standby Letters of Credit

 

For a discussion of our standby letters of credit see Note 8 to the condensed consolidated financial statements.

 

 

Cash Contractual Obligations

 

Our obligation to make future payments under contracts is presented in our most recent Annual Report on Form 10-K.

 

As a result of our March 2014 debt purchases as described in Note 7 to the condensed consolidated financial statements, our obligations to make future payments under contracts decreased as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Year

in millions

2014 

 

2015-2016

 

2017-2018

 

Thereafter

 

Total

 

Cash Contractual Obligations

 

 

 

 

 

 

 

 

 

 

 Long-term debt excluding bank line of credit

 

 

 

 

 

 

 

 

 

 

   Principal payments

$        0.0 

 

$      (375.0)

 

$      (131.4)

 

$            0.0 

 

$      (506.4)

 

   Interest payments

(25.6)

 

(63.6)

 

(8.4)

 

0.0 

 

(97.6)

 

Total

$     (25.6)

 

$      (438.6)

 

$      (139.8)

 

$            0.0 

 

$      (604.0)

 

 

 

CRITICAL ACCOUNTING POLICIES

 

We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our Annual Report on Form 10-K for the year ended December 31, 2013 (Form 10-K).

 

We prepare these financial statements to conform with accounting principles generally accepted in the United States of America. These principles require us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. We base our estimates on historical experience, current conditions and various other assumptions we believe reasonable under existing circumstances and evaluate these estimates and judgments on an ongoing basis. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.

 

We believe that the accounting policies described in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of our Form 10-K require the most significant judgments and estimates used in the preparation of our financial statements, so we consider these to be our critical accounting policies. There have been no changes to our critical accounting policies during the nine months ended September 30, 2014.

 

 

new Accounting standards

 

For a discussion of the accounting standards recently adopted or pending adoption and the affect such accounting changes will have on our results of operations, financial position or liquidity, see Note 17 to the condensed consolidated financial statements.

 

 

40

 


 

FORWARD-LOOKING STATEMENTS

 

Certain matters discussed in this report, including expectations regarding future performance, contain forward-looking statements that are subject to assumptions, risks and uncertainties that could cause actual results to differ materially from those projected. These assumptions, risks and uncertainties include, but are not limited to:

 

§

general economic and business conditions

§

the timing and amount of federal, state and local funding for infrastructure

§

changes in our effective tax rate that can adversely impact results

§

the increasing reliance on information technology infrastructure for our ticketing, procurement, financial statements and other processes can adversely affect operations in the event that the infrastructure does not work as intended or experiences technical difficulties or is subjected to cyber attacks

§

the impact of the state of the global economy on our business and financial condition and access to capital markets

§

changes in the level of spending for residential and private nonresidential construction

§

the highly competitive nature of the construction materials industry

§

the impact of future regulatory or legislative actions

§

the outcome of pending legal proceedings

§

pricing of our products

§

weather and other natural phenomena

§

energy costs

§

costs of hydrocarbon-based raw materials

§

healthcare costs

§

the amount of long-term debt and interest expense we incur

§

changes in interest rates

§

the impact of our below investment grade debt rating on our cost of capital

§

volatility in pension plan asset values and liabilities which may require cash contributions to the pension plans

§

the impact of environmental clean-up costs and other liabilities relating to previously divested businesses

§

our ability to secure and permit aggregates reserves in strategically located areas

§

our ability to manage and successfully integrate acquisitions

§

the potential of goodwill or long-lived asset impairment

§

the potential impact of future legislation or regulations relating to climate change or greenhouse gas emissions or the definition of minerals

§

other assumptions, risks and uncertainties detailed from time to time in our periodic reports

 

All forward-looking statements are made as of the date of filing. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented in our filings, and are advised to consult any of our future disclosures in filings made with the Securities and Exchange Commission and our press releases with regard to our business and consolidated financial position, results of operations and cash flows.

 

 

41

 


 

INVESTOR information

 

We make available on our website, www.vulcanmaterials.com, free of charge, copies of our:

 

§

Annual Report on Form 10-K

§

Quarterly Reports on Form 10-Q

§

Current Reports on Form 8-K

 

We also provide amendments to those reports filed with or furnished to the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as well as all Forms 3, 4 and 5 filed with the SEC by our executive officers and directors, as soon as the filings are made publicly available by the SEC on its EDGAR database (www.sec.gov).

 

The public may read and copy materials filed with the SEC at the Public Reference Room of the SEC at 100 F Street, NE, Washington, D. C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. In addition to accessing copies of our reports online, you may request a copy of our Annual Report on Form 10-K, including financial statements, by writing to Jerry F. Perkins Jr., Secretary, Vulcan Materials Company, 1200 Urban Center Drive, Birmingham, Alabama 35242.

 

We have a:

 

§

Business Conduct Policy applicable to all employees and directors

§

Code of Ethics for the CEO and Senior Financial Officers

 

Copies of the Business Conduct Policy and the Code of Ethics are available on our website under the heading “Corporate Governance.” If we make any amendment to, or waiver of, any provision of the Code of Ethics, we will disclose such information on our website as well as through filings with the SEC.

 

Our Board of Directors has also adopted:

 

§

Corporate Governance Guidelines

§

Charters for its Audit, Compensation, Finance, Governance and Safety, Health & Environment Committees

 

These documents meet all applicable SEC and New York Stock Exchange regulatory requirements.

 

The Audit, Compensation and Governance Charters are available on our website under the heading, “Corporate Governance,” or you may request a copy of any of these documents by writing to Jerry F. Perkins Jr., Secretary, Vulcan Materials Company, 1200 Urban Center Drive, Birmingham, Alabama 35242.

 

 

42

 


 

 

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

MARKET RISK

 

We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. In order to manage or reduce these market risks, we may utilize derivative financial instruments. We do not enter into derivative financial instruments for speculative or trading purposes.

 

We are exposed to interest rate risk due to our various credit facilities and long-term debt instruments. At times, we use interest rate swap agreements to manage this risk.

 

At September 30, 2014, the estimated fair value of our long-term debt instruments including current maturities was $2,259.4 million compared to a book value of $2,006.1 million. The estimated fair value was determined by averaging the asking price quotes for the notes. The fair value estimate is based on information available as of the measurement date. Although we are not aware of any factors that would significantly affect the estimated fair value amount, it has not been comprehensively revalued since the measurement date. The effect of a decline in interest rates of one percentage point would increase the fair value of our liability by $107.6 million.

 

We are exposed to certain economic risks related to the costs of our pension and other postretirement benefit plans. These economic risks include changes in the discount rate for high-quality bonds, the expected return on plan assets and the rate of increase in the per capita cost of covered healthcare benefits. The impact of a change in these assumptions on our annual pension and other postretirement benefits costs is discussed in our most recent Annual Report on Form 10-K.

 

 

ITEM 4

controls and procedures

 

disclosure controls and procedures

We maintain a system of controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. These disclosure controls and procedures (as defined in the Securities and Exchange Act of 1934 Rules 13a - 15(e) or 15d - 15(e)), include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer, with the participation of other management officials, evaluated the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

We have completed the replacement of our legacy information technology systems and have completed implementation of our financial reporting software, which was a major component of the replacement. The new information technology systems are the source for most of the information presented in this Quarterly Report on Form 10-Q.

 

As part of the divestiture of our cement and concrete businesses in the Florida area, we entered into a Transition Services Agreement with the buyer, whereby we agreed to continue to provide certain services for the divested facilities during 2014. All services will be performed in our existing systems and under our current control environment. The service agreement does not require significant changes to our current control environment beyond ensuring proper segregation of duties over processing of third-party transactions. Controls were established and implemented to facilitate proper handling of the third-party data, including controls to protect against commingling of information and controls to prevent improper access to information.

 

No other changes were made to our internal control environment that would materially impact our controls over financial reporting during the third quarter of 2014.

 

 

43

 


 

part Ii   other information

ITEM 1

legal proceedings

 

 

Certain legal proceedings in which we are involved are discussed in Note 12 to the consolidated financial statements and Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2013, and in Note 8 to the condensed consolidated financial statements and Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. See Note 8 to the condensed consolidated financial statements of this Form 10-Q for a discussion of certain recent developments concerning our legal proceedings.

 

 

ITEM 1A

risk factors

 

 

There were no material changes to the risk factors disclosed in Item 1A of Part I in our Form 10-K for the year ended December 31, 2013.

 

 

ITEM 4

MINE SAfETY DISCLOSURES

 

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this report.

 

 

44

 


 

ITEM 6

exhibits

 

 

 

 

Exhibit 10(a)

Terms of Employment and General Release dated July 11,2014 between the Company and
Daniel F. Sansone

Exhibit 31(a)

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31(b)

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32(a)

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32(b)

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 95

MSHA Citations and Litigation

Exhibit 101.INS

XBRL Instance Document

Exhibit 101.SCH

XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB

XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

45

 


 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

VULCAN MATERIALS COMPANY

 

 

 

 

 

Date       November 5, 2014

/s/ Ejaz A. Khan

Ejaz A. Khan

Vice President, Controller and Chief Information Officer

(Principal Accounting Officer)

 

 

 

 

 

Date       November 5, 2014

/s/ John R. McPherson

John R. McPherson

Executive Vice President and Chief Financial and Strategy Officer

(Principal Financial Officer)

 

46