Vulcan Materials CO - Quarter Report: 2015 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

For the transition period from                 to

 

Commission File Number 001-33841

 

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

 

 

 

 

 

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part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

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VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

 

 

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VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

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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, 2014 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 month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. 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.

 

RESTRICTED CASH

 

Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.

 

RESTRUCTURING CHARGES

 

In 2014, we announced changes to our executive management team, and a new divisional organization structure that was effective January 1, 2015. During the three months ended March 31, 2015, we incurred $2,818,000 of costs related to these initiatives. Future related charges for these initiatives are estimated to be less than $3,000,000.

 

EARNINGS PER SHARE (EPS)

 

Earnings per share 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:

 

 

 

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. In periods of loss, shares that otherwise would have

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been included in our diluted weighted-average common shares outstanding computation are excluded. These excluded shares are as follows: three months ended March 31, 2015 — 1,711,000 shares.

 

The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price is as follows:

 

 

 

 

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. 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:

 

 

 

The 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.

 

 

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 first quarters of 2015 and 2014, income taxes were calculated based on the EAETR.

 

We recorded an income tax benefit from continuing operations of $14,075,000 in the first quarter of 2015 compared to an income tax provision from continuing operations of $22,900,000 in the first quarter of 2014. The change in our income tax provision resulted largely from applying the statutory rate to the decrease in our pretax book earnings.

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement 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.

 

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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.

 

Based on our first quarter 2015 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 2015, we currently project a valuation allowance of $64,977,000 against our state net operating loss carryforwards,  an  increase of $8,110,000 from the prior year end. This change in the valuation allowance is reflected as a component of our income tax provision.

 

Of the $64,977,000 valuation allowance, $63,572,000 relates to our Alabama net operating loss carryforward. We are evaluating a tax planning strategy that may allow for utilization of some or all of our Alabama net operating loss carryforward. Should this strategy become prudent and feasible in the future, the amount of the valuation allowance against the Alabama net operating loss carryforward will be remeasured.

 

We recognize a tax benefit associated with a 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 measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. A liability is established for the unrecognized portion of any tax benefit. Our liability for 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.

 

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, 2014.

 

 

Note 4: deferred revenue

 

We 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 key terms specific to the 2013 VPP transaction are:

 

 

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The key terms specific to the 2012 VPP transaction are:

 

 

Reconciliation of the deferred revenue balances (current and noncurrent) is as follows:

 

 

 

Based on expected aggregates sales from the specified quarries, we anticipate recognizing an estimated $6,000,000 of deferred revenue (reflected in other current liabilities in our 2015 Condensed Consolidated Balance Sheet) during the 12-month period ending March 31, 2016.

 

 

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:

 

 

 

 

 

 

 

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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 trading gains of the Rabbi Trust investments were $807,000 and $2,395,000 for the three months ended March 31, 2015 and 2014, respectively. The portions of the net trading gains related to investments still held by the Rabbi Trusts at March 31, 2015 and 2014 were $646,000 and $1,995,000, respectively.

 

The carrying values of our cash equivalents, restricted cash, accounts and notes receivable, 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 2015. Assets that were subject to fair value measurement on a nonrecurring basis in 2014 are summarized below:

 

 

 

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).

 

 

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.

 

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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:

 

 

 

The loss reclassified from AOCI for the three months ended March 31, 2015 and 2014 includes the acceleration of a proportional amount of the deferred loss in the amount of $2,700,000 and $3,762,000, respectively, referable to the debt purchases as disclosed in Note 7.

 

For the 12-month period ending March 31, 2016, we estimate that $6,604,000 of the pretax loss in AOCI will be reclassified to earnings. This includes the acceleration of a proportional amount of the deferred loss in the amount of $4,503,000 referable to subsequent debt purchases as disclosed in Note 18.

 

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:

 

 

 

The amortized deferred gain for the three months ended March 31, 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.

 

 

 

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Note 7: Debt

 

Debt is summarized as follows:

 

 

 

 

 

 

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 debt presented in the table above was determined by averaging several asking price quotes for the publicly traded notes and assuming par value for the remainder of the debt. The fair value estimates for the publicly traded notes were based on Level 2 information (as defined in Note 5) as of the balance sheet dates.

 

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Our debt, other than the line of credit, is unsecured. 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 such debt. Such debt may be redeemed prior to maturity at the greater of par value and the make-whole value plus accrued and unpaid interest.

 

In March 2015, we issued $400,000,000  of  4.50% senior notes due 2025. Proceeds (net of underwriter fees and other transaction costs) of $395,207,000 were partially used to fund the March 30, 2015 purchase, via tender offer, of $127,303,000 principal amount of the 7.00% notes due 2018 (and the subsequent purchase of $185,000 in April 2015). The March 2015 debt purchase cost $145,899,000, including an $18,140,000 premium above the principal amount of the notes and transaction costs of $456,000. The premium primarily reflects the trading price of the notes relative to par prior to the tender offer commencement. Additionally, we recognized $3,138,000 of non-cash cost associated with the acceleration of a proportional amount of unamortized discounts, deferred financing costs and amounts accumulated in OCI. The combined charge of $21,734,000 is presented in the accompanying Condensed Consolidated Statement of Comprehensive Income as a component of interest expense for the three month period ended March 31, 2015.

 

The remaining net proceeds from the March 2015 debt issuance, together with cash on hand and borrowings under our line of credit, will fund:  (1) the April 9, 2015 redemption of our 6.40% notes due 2017, (2) the April 16, 2015 redemption of our 6.50% notes due 2016, (3) the expected redemption of our 8.85% notes due 2021  and (4) the expected prepayment of our industrial revenue bond due 2022. All debt as of March 31, 2015 which we intend to prepay, as described above, is classified in the accompanying Condensed Consolidated Balance Sheet as current maturities of long-term debt. See Note 18 for a discussion of our subsequent debt redemptions.

 

In March 2014, we purchased $506,366,000 principal amount of 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 three month period ended March 31, 2014.

 

Our $500,000,000 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. In May 2015, we expect to close on a new line of credit that will, among other things, increase the amount to $750,000,000 and extend the term from March 2019 to May 2020. The line of credit also contains affirmative, negative and financial covenants customary for a secured facility.

 

The negative covenants primarily limit our ability to: (1) incur secured debt, (2) make certain 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 March 31, 2015, we were in compliance with all of our notes and line of credit covenants.

 

As of March 31, 2015, our line of credit available borrowing capacity was $446,528,000. 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 March 31, 2015, the applicable margin for LIBOR based borrowing was 1.50%.

 

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. As of March 31, 2015, the commitment fee was 0.25%. Once the line of credit becomes unsecured, both the LIBOR margin range for borrowings and the commitment fee range will decline.

 

 

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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 March 31, 2015 are summarized by purpose in the table below:

 

 

 

 

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

 

 

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.

 

Neither the ultimate remedial approach, nor the parties who will participate in funding the remediation and their respective allocations, have been determined. However, we have recorded an immaterial loss for this matter in the first quarter of 2015 based on the cost estimate of the preferred RI/FS remedial action supported by the Cooperating Parties Group.

 

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OTHER LITIGATION

 

 

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 Texas Brine. 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.

 

 

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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 month periods ended March 31, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:

 

 

 

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:

 

 

 

The 2015  upward revisions relate to revised cost estimates and  spending patterns for several quarries located primarily in 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.

 

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

 

 

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 some 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 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 three months ended March 31, 2014.

 

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

 

 

 

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.

 

 

 

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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:

 

 

 

Changes in AOCI, net of tax, for the three months ended March 31, 2015 are as follows:

 

 

 

Amounts reclassified from AOCI to earnings, are as follows:

 

 

 

 

 

 

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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.

 

Under a program that was discontinued in the fourth quarter of 2014, we occasionally sold 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:

 

 

Changes in total equity for the three months ended March 31, 2015 are summarized below:

 

 

 

There were no shares held in treasury as of March 31, 2015, December 31, 2014 and March 31, 2014. As of March 31, 2015, 3,411,416 shares may be repurchased under the current purchase authorization of our Board of Directors.

 

 

 

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Note 13: Segment Reporting

 

We have four operating (and reportable) segments organized around our principal product lines: Aggregates, Asphalt Mix, Concrete and Calcium. 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.

 

 

segment financial disclosure

 

 

 

 

 

 

  

 

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Note 14: Supplemental Cash Flow Information

 

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

 

 

 

 

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. There were no charges for goodwill impairment in the three month periods ended March 31, 2015 and 2014.

 

We have four reportable segments organized around our principal product lines: Aggregates, Asphalt Mix, Concrete and Calcium.  The changes in the carrying amount of goodwill by reportable segment from December 31, 2014 to March 31, 2015 as summarized below:

 

GOODWILL

 

 

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.

 

 

 

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Note 16: Acquisitions and Divestitures

 

ACQUISITIONS

Through the three months ended March 31, 2015, we purchased the following for $20,000,000 of consideration (in the form of twelve California ready-mixed concrete operations valued at $20,000,000):

 

 

As a result, we recognized $7,168,000 of amortizable intangible assets (contractual rights in place). The contractual rights in place will be amortized against earnings on a straight-line basis over 20 years and will be deductible for income tax purposes over 15 years. The purchase price allocation is preliminary pending appraisals of contractual rights in place and property, plant & equipment.

 

For the full year 2014, we purchased the following for total consideration of $331,836,000  ($284,237,000 cash;  $2,414,000 exchanges of real property and businesses; and $45,185,000 Vulcan Materials Company common stock (715,004 shares)):

 

 

 

DIVESTITURES AND PENDING DIVESTITURES

As noted above, in the first quarter of 2015, we exchanged twelve ready-mixed concrete operations in California (representing all of our California concrete operations) for thirteen asphalt mix plants (primarily in Arizona) resulting in a pretax gain of $5,886,000.

 

For the full year 2014, we sold:

 

 

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.

 

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No assets met the criteria for held for sale at March 31, 2015. As of December 31, 2014, twelve ready-mixed concrete facilities in California are presented in the accompanying Condensed Consolidated Balance Sheets as assets held for sale and liabilities of assets held for sale. During the first quarter of 2015, we swapped these ready mixed concrete facilities for thirteen asphalt mix operations, primarily in Arizona (as noted above). No assets met the criteria for held for sale at March 31, 2014. For all periods presented, the major classes of assets and liabilities of assets classified as held for sale are as follows:

 

 

 

 

Note 17: New Accounting Standards

 

ACCOUNTING STANDARDS RECENTLY ADOPTED

 

SHARE-BASED AWARDS  As of and for the interim period ended March 31, 2015, we adopted Accounting Standards Update (ASU) No. 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.” This ASU clarified 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 prior guidance, there was 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. Previously, we accounted for share-based awards with these types of performance targets in accordance with ASU 2014-12. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.

 

DISCONTINUED OPERATIONS REPORTING  As of and for the interim period ended March 31, 2015, we adopted ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changed the definition of and expanded 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. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.

 

ACCOUNTING STANDARDS PENDING ADOPTION

 

DEBT ISSUANCE COST  In April 2015, the Financial Accounting Standards Board (FASB) issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which changes the presentation of debt issuance costs in financial statements. Under the new presentation, debt issuance costs will be presented in the balance sheet as a deduction from the related debt liability (rather than as a prepaid expense). The amortization of such costs will continue to be reported as interest expense. This ASU is effective for annual reporting periods beginning after December 15, 2015, and including interim periods within that reporting period. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

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CONSOLIDATION  In February 2015, the FASB issued ASU 2015-02, “Amendments to the Consolidation Analysis,” which amends existing consolidation guidance for reporting entities that are required to evaluate whether they should consolidate certain legal entities. This ASU is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. We will adopt this standard as of and for the interim period ending March 31, 2016. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

GOING CONCERN  In August 2014, the 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.

 

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.

 

 

Note 18:  subsequent events

 

In April 2015, we redeemed $343,819,000 principal amount of debt as follows: $125,001,000 of 6.50% notes due 2016, $218,633,000 of 6.40% notes due 2017 and an additional $185,000 of 7.00% notes due 2018 ($127,303,000 of these 2018 notes were purchased in March). These debt redemptions were funded by a portion of the net proceeds of the March issuance of $400,000,000 of 4.50% senior notes due 2025, cash on hand and borrowings under our line of credit. The April 2015 debt redemptions cost $384,990,000, including a $41,153,000 premium above the principal amount of the notes and transaction costs of $18,000.  The premium reflects the make-whole cost of redeeming the 2016 and 2017 notes prior to maturity and the trading price of the 2018 notes relative to par. Additionally, we recognized a non-cash cost of $4,132,000 associated with the acceleration of unamortized discounts, deferred gains, deferred financing costs and amounts accumulated in OCI. The combined charge of $45,303,000 will be presented in the Condensed Consolidated Statement of Comprehensive Income as a component of interest expense.

 

 

 

 

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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) and a  major producer of asphalt mix and ready-mixed concrete.

 

Demand for our products is dependent on construction activity and correlates positively with changes in population growth, household formation and employment. 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 in many metropolitan markets 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 our long-term success.

 

While aggregates is our focus and 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/or 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, aggregates are primarily supplied 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.

 

 

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EXECUTIVE SUMMARY

 

Financial highlights for First Quarter 2015

 

Compared to first quarter 2014:

 

Our first quarter results reflect strong earnings growth and improvement in our aggregates unit profitability. Although demand for our products remains well below normal levels, the gradual recovery in construction activity continues across most of our markets. As a result of improving market conditions and our continued focus on internal profit improvements, both pricing and margins continue to expand.

 

We were pleased with our first quarter results, despite challenging weather in several key markets. Underlying demand remains strong and we are seeing accelerating momentum in aggregates volumes and pricing throughout our markets. The growth rate in our trailing twelve month aggregates shipments has increased for seven consecutive quarters and, as expected, that momentum is beginning to benefit aggregates pricing. This momentum underscores our confidence in our full year expectations.

 

Our full year expectations for 2015 include Adjusted EBITDA of $775 to $825 million, driven by strong growth in Aggregates segment gross profit, earnings improvement in our non-aggregates businesses and continuing leverage of our selling, administrative and general expenses. Supporting these expectations for strong earnings growth is an 11% increase in aggregates shipments (8% same-store) and a 6% increase in pricing. During the first quarter, we realized cost savings from lower costs for diesel fuel. If diesel prices remain at current levels, our Adjusted EBITDA expectations would move towards the high end of our guidance.

 

During March and subsequently in April, we completed major components of the refinancing plan announced during our February 25, 2015 Investor Day. In March, we issued $400.0 million of 4.50% unsecured notes due in 2025, repurchased $127.3 million of 7.00% notes due 2018 and fully syndicated a $250.0 million increase in our revolving credit facility (we expect to close on a new facility in May 2015). Subsequently in April, we repurchased $343.8 million of debt due in 2016, 2017 and 2018. Therefore, through April, we have repurchased $471.1 million of debt that would otherwise have matured over the next five years. Furthermore, we will utilize the expanded capacity of our revolving credit facility to refinance the $150.0 million note due December 2015. The results of these actions include: total debt remaining at approximately $2.0 billion, enhanced financial flexibility, a better match of the debt portfolio duration to our asset base, and a lower weighted-average interest rate. 

 

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Refinancing expenses, including the acceleration of previously deferred financing costs associated with the completed and planned actions, are expected to be approximately $68.6 million, $21.7 million of which was incurred in the first quarter and was reported as part of interest expense. The remainder will be reported as part of interest expense in the second quarter. The timing of these actions resulted in a temporary $272.3 million year-to-date increase to total debt as of March 31, 2015. Subsequent to the April redemptions, total debt returned to approximately $2.0 billion.

 

In January 2015, we completed an exchange transaction in which we exited the ready-mixed concrete business in California and added thirteen asphalt plant locations,  primarily in Arizona. We will continue to supply aggregates to our former ready-mixed concrete plants in California. This transaction resulted in a gain of $5.9 million, partially offset by $2.4 million of transaction related charges.

 

 

 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

Gross profit  margin excluding freight and delivery revenues 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

 

 

 

gross profit margin excluding freight and delivery revenues

 

 

 

 

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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 freight, delivery and transportation revenues which are pass-through activities. It also excludes immaterial other revenues related to services, such as landfill tipping fees, that are derived from our aggregates business. 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. Reconciliations of these metrics to their nearest GAAP measures are presented below:

 

 

Aggregates segment gross profit margin in accordance with gaap

 

 

 

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

 

 

 

 

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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.

 

 

 

 

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.

 

 

 

 

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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.

 

 

 

 

 

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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

 

 

 

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ADJUSTED CONCRETE AND Calcium SEGMENT FINANCIAL DATA

 

Comparative financial data adjusted for both the January 2015 exchange of our California concrete business and the March 2014 sale of our concrete and cement businesses in the Florida area is summarized below:

 

 

 

 

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FIRST quarter 2015 Compared to FIRST Quarter 2014

 

Total revenues for the first quarter of 2015 were $631.3 million, up 10% from the first quarter of 2014. Shipments increased in aggregates (+13%) and asphalt mix (+23%) while they declined in ready-mixed concrete (-40%). The reduction in ready-mixed concrete shipments resulted from our exiting the concrete businesses in Florida and California; as noted on the previous page, same-store concrete shipments were flat. Lower diesel fuel costs resulted in approximately $13.8 million in pretax cost savings, with most of the benefit realized in the Aggregates segment.

 

Results for the first quarter of 2015 were a net loss of $39.7 million, or $0.30 per diluted share, compared to net earnings of $54.0 million, or $0.41 per diluted share, in the first quarter of 2014. Each period’s results were impacted by discrete items, as follows:

 

 

Continuing Operations — Changes in earnings from continuing operations before income taxes for the first quarter of 2015 versus the first quarter of 2014 are summarized below:

 

earnings from continuing operations before income taxes

 

 

 

Aggregates freight-adjusted revenues were $379.9 million, up 17% from the prior year’s first quarter, supported by strong volume growth across most of our footprint. On a same-store basis, total aggregates shipments increased 9% from the prior year, despite unseasonably cold winter weather in certain key markets. Overall, first quarter aggregates shipments increased 13%, or 3.9 million tons, compared to the prior year.

 

Shipment momentum continued to improve across most of our footprint, driven by strengthening construction activity across all end-use markets. On a same-store basis, Arizona, Florida, Illinois, North Carolina, Texas and Virginia each saw shipment growth greater than 10%. Same-store aggregates shipments in California increased 8%.  In  contrast, Georgia aggregates shipments for the quarter declined 4% due to adverse weather conditions; our full year outlook for Georgia shipments remains unchanged. These shipment increases, coming despite weather limiting available construction days in several markets, reflect the growing strength of the recovery in aggregates demand in Vulcan-served markets. For the twelve months ended March 31, same-store shipments rose 11% over the prior year period. This quarter was the seventh consecutive quarter in which the rate of shipment growth, on a consecutive trailing twelve month basis, has increased. We should note, however, that overall demand for aggregates remains well below historic levels despite these recent gains.

 

Freight-adjusted average sales price for aggregates increased approximately 4%, or $0.40 per ton ($0.44 per ton on a same-store basis), versus the prior year’s first quarter, with most markets realizing accelerating price improvement. Product mix muted the impact of real price increases in some key markets, including Virginia, where large shipments of lower-priced fines product combined with weather-related shipment delays contributed to an approximately 5% decline in quarterly average selling prices over the prior year. In many markets, price increases announced April 1 have been well accepted. Given these and other indicators, we expect overall aggregates pricing to continue to rise throughout the year.

 

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During the first quarter, same-store unit margins continued to expand faster than unit pricing. Aggregates segment gross profit per ton increased $0.81, or 62%, from the prior year. Cash gross profit per ton increased $0.57, or 18%, from the prior year. On a trailing twelve month basis, same-store unit gross profit increased 21%, while unit cash gross profit has increased 10% to $4.85 per ton – a new twelve month high despite cyclically low volumes. These results, which were aided in the first quarter by the year-on-year decline in diesel costs, also reflect our continued commitment to plant-level cost controls and operating disciplines.

 

Incremental gross profit margin leverage was strong in the first quarter – on a same-store basis we exceeded our goal of 60% over time. Lower costs for diesel fuel helped offset costs associated with the integration of acquisitions completed late last year. Compared to last year, our first quarter cost of revenues benefitted approximately $13.8 million from lower diesel fuel costs, with approximately $12.7 million of this benefit realized in the Aggregates segment.

 

Asphalt Mix segment gross profit was $8.8 million in the first quarter of 2015 versus $4.7 million in the prior year. This year-over-year improvement was due to improved margins and higher volumes. Same-store asphalt volumes increased 6% due to strong growth in Arizona and California.

 

Concrete segment gross profit improved $10.0 million from a loss of $9.2 million in the prior year. Last year’s first quarter results included our Florida concrete business that was sold in March 2014 as well as our California concrete business that was divested via an asset swap in January 2015. On a same-store basis, sales volumes were flat versus the prior year due to unusually cold weather in Virginia and Maryland. Pricing and unit profitability improved and as a result, same store gross profit increased $6.0 million (see chart two pages preceding).

 

Our cement business was also sold in March of last year. We retained our calcium products business that is now reported separately as a segment.  The Calcium segment reported first quarter gross profit of $0.6 million as compared to $0.4 million on a same-store basis in the first quarter of 2014 (see chart two pages preceding).

 

SAG expenses in the first quarter of 2015 were in line with the first quarter of 2014. We intend to further leverage SAG expenses to sales throughout the remainder of the year. We expect that full-year pension and post-retirement related costs, a portion of which flow through selling, administrative and general (SAG) expenses, will be approximately $9.6 million higher (or $5.8 million excluding a one-time curtailment gain of $3.8 million recognized in the first quarter of 2014) than the prior year primarily due to changes in assumptions used to value future obligations.

 

Gain on sale of property, plant & equipment and businesses was $6.4 million in the first quarter of 2015 compared to $236.4 million in the first quarter of 2014. The 2015 gain includes the first quarter exchange (we exited the ready-mixed concrete business in California and added thirteen asphalt plant locations, primarily in Arizona) which resulted in a pretax gain of $5.9 million. The 2014 gain includes the first quarter sale of our cement and concrete businesses in Florida to Cementos Argos which resulted in a pretax gain of $230.1 million. Additionally, the sale of two reclaimed production sites increased the 2014 pretax gain by $6.0 million.

 

Restructuring charges were $2.8 million in the first quarter of 2015 compared to none in the first quarter of 2014. See Note 1 to the condensed consolidated financial statements for an explanation of these costs.

 

Net interest expense was $62.5 million in the first quarter of 2015 compared to $120.1 million in 2014.  The lower interest expense resulted primarily from the lower ($21.7 million first quarter of 2015 vs. $72.9 million first quarter of 2014) pretax loss on debt purchase. See Note 7 to the condensed consolidated financial statements for an explanation of these costs.

 

We recorded an income tax benefit from continuing operations of $14.1 million in the first quarter of 2015 compared to an income tax provision of $22.9 million in the first quarter of 2014.  In the first quarters of 2015 and 2014, income taxes were calculated based on the EAETR. The EAETR method for calculating income taxes is discussed in Note 3 to the condensed consolidated financial statements. The change in our income tax provision resulted largely from applying the statutory rate to the decrease in our pretax book earnings.

 

Results from continuing operations were a loss of $0.28 per diluted share compared to earnings of $0.41 per diluted share in the first quarter of 2014.

 

Discontinued Operations — First quarter pretax loss from discontinued operations was $5.0 million in 2015 and $0.8 million in 2014. 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.

 

 

 

 

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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:

 

 

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:

 

 

 

Cash

 

Included in our March 31, 2015 cash and cash equivalents balance of $392.7 million is $56.6 million of cash held at one of our foreign subsidiaries. A majority of this $56.6 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

 

 

 

 

 

As noted in the table above, net earnings before noncash deduction for DDA&A decreased $96.4 million during the first quarter of 2015 to $27.0 million. Included in net earnings for the first quarter of 2014 is a pretax gain of $230.1 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 gain on sale of property, plant & equipment and businesses is presented as a component of investing activities. In the first quarter of 2015, we purchased $127.3 million principal amount of outstanding debt through a tender offer and incurred charges of $21.7 million. In the first quarter of 2014, we purchased $506.4 million principal amount of outstanding debt through a tender offer and incurred charges of $72.9 million (see Note 7 to the condensed consolidated financial statements). Cash paid for the debt purchases is presented as a component of financing activities.

 

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cash flows from investing activities

 

Net cash used for investing activities was $47.6 million during the three months ended March 31, 2015, a $676.4 million decrease compared to the same period of 2014. This decrease resulted from a $735.5 million decrease in proceeds from the sale of property, plant & equipment and businesses. During the first three months of 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 $720.1 million. Conversely, $63.0 million of the cash proceeds from this prior year sale of property was placed into an escrow account (restricted cash) that was available for the acquisition of replacement property under like-kind exchange agreements.

 

cash flows from financing activities

 

Net cash provided by financing activities of $279.8 million increased $828.6 million in the first three months of 2015 compared with the same period of 2014. This increase in cash provided by financing activities is attributable to the issuance of $400.0 million of long-term debt in the first quarter of 2015 and a  $433.8 million decrease in debt related payments. In the first quarter of 2015 we purchased $127.3 million principal amount of outstanding debt through a tender offer. Conversely, in the first quarter of 2014 we purchased $506.4 million principal amount of outstanding debt through a tender offer. Total tender offer costs (including premiums and transaction costs) were $145.9 million and $579.7 million in 2015 and 2014, respectively. 

 

 

debt

 

Certain debt measures are outlined below:

 

 

 

 

 

 

Our debt, other than the line of credit, is unsecured. 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 such debt.  Such debt may be redeemed prior to maturity at the greater of par value and the make-whole value plus accrued and unpaid interest.

 

In March 2015, we issued $400.0 million of 4.50% senior notes due 2025. The net proceeds, after underwriter fees and other transaction expenses, of $395.2 million were partially used to fund the March 30, 2015 purchase, via tender offer, of $127.3 million principal amount of the 7.00% notes due 2018 (and the subsequent purchase of $0.2 million in April 2015). The March 2015 debt purchase cost $145.9 million, including an $18.1 million premium above the principal amount of the notes and transaction costs of $0.5 million. The premium primarily reflects the trading price  of the notes relative to par prior to the tender offer commencement. Additionally, we recognized $3.1 million of non-cash cost associated with the acceleration of a proportional amount of unamortized discounts, deferred financing costs and amounts accumulated in OCI.

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The combined charge of $21.7 million is presented as a component of interest expense for the three month period ended March 31, 2015.

 

The remaining net proceeds from the March 2015 debt issuance, together with cash on hand and borrowings under our line of credit, will be used to fund:  (1) the April 9, 2015 redemption of our 6.40% notes due 2017 ($218.6 million), (2) the April 16, 2015 redemption of our 6.50% notes due 2016 ($125.0 million), (3) the expected redemption of our 8.85% notes due 2021 ($6.0 million) and (4) the expected prepayment of our industrial revenue bond due 2022 ($14.0 million). All debt as of March 31, 2015 which we intend to prepay, as described above, is classified as current maturities of long-term debt. See Note 18 to the condensed consolidated financial statements for a discussion of our subsequent debt redemptions.

 

In the first quarter of 2014, 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.

 

The  $365.4 million of current maturities of long-term debt as of March 31, 2015 includes all debt which we intend to pay within twelve months, as described above, and is due as follows:

 

 

 

We expect to retire the second quarter current maturities as described in Note 18 to the condensed consolidated financial statements.

 

Our $500.0 million 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 affirmative, 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 March 31, 2015, we were in compliance with all of our notes and line of credit covenants.

 

As of March 31, 2015, our available borrowing capacity under the line of credit was $446.5 million. Utilization of the borrowing capacity was as follows:

 

 

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 March 31, 2015, the applicable margin was  1.50%. 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.

 

In May 2015, we expect to close on a new five year $750.0 million line of credit with our existing lender group. The line of credit, based on current discussions, is expected to be unsecured and contain affirmative, negative and financial covenants customary for an unsecured facility. The negative covenants will primarily limit our ability to incur secured debt and make foreign investments.

 

The new line of credit will contain two financial covenants: (1) a maximum ratio of debt to EBITDA of 3.5:1 that steps down to 3.25:1 at December 2016, and (2) a minimum ratio of EBITDA to net cash interest of 3.0:1.

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debt ratings

 

Our debt ratings and outlooks as of March 31, 2015 are summarized below:

 

 

 

 

 

 

Equity

 

Our common stock issuances are summarized below:

 

 

 

 

During 2014, we issued 715.0 thousand shares of our common stock in connection with business acquisitions as described in Note 16 to the condensed consolidated financial statements.

 

Under a program that was discontinued in the fourth quarter of 2014, we occasionally sold shares of our 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:

 

 

There were no shares held in treasury as of March 31, 2015, December 31, 2014 and March 31, 2014. There were 3,411,416 shares remaining under the current purchase authorization of the Board of Directors as of March 31, 2015.

 

 

 

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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:

 

 

 

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 2015 debt issuance and  purchase, and the April 2015 debt restructuring as described in Notes  7 and 18 to the condensed consolidated financial statements, our obligations to make future payments under contracts increased (decreased) as follows:

 

 

 

 

 

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, 2014 (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 three months ended March  31, 2015.

 

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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.

 

 

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:

 

 

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.

 

 

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INVESTOR information

 

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

 

 

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:

 

 

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:

 

 

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.

 

 

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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 March 31, 2015, the estimated fair value of our long-term debt instruments including current maturities was $2,564.0 million compared to a book value of $2,277.9 million. The estimated fair value was determined by averaging several asking price quotes for publicly traded notes and assuming par value for the remainder of the debt. 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 $134.5 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 March 31, 2015. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

In 2014, 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 were performed utilizing our existing systems and under our current control environment. The service agreement did 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 third-party data, including controls to protect against comingling of information and controls to prevent improper access to information.

 

On November 1, 2014, we completed our obligations under the initial Transition Services Agreement for the sold concrete facilities and the buyer began processing transactions of the newly acquired concrete facilities in their systems. A new Transition Services Agreement was put in place for cement operations through March 31, 2015. On March 1, 2015, the buyer began processing transactions for the cement operations in their system. We continued to provide support through the terms of the agreement that ended on March 31, 2015. We have now completed our obligation under the new Transition Service Agreement. As of March 31, 2015, the third-party buyer no longer has access to our systems.

 

No other changes were made during the first quarter of 2015 to our internal controls over financial reporting, nor have there been other factors that materially affect these controls.

 

 

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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, 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, 2014.

 

 

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.

 

 

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ITEM 6

exhibits

 

 

 

 

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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.

 

 

 

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