Vulcan Materials CO - Quarter Report: 2017 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 supplier of construction aggregates (primarily crushed stone, sand and gravel) and a major producer of asphalt mix and ready-mixed concrete.



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. We serve markets in twenty states, Washington D.C., and the local markets surrounding our operations in Mexico and the Bahamas. Our primary focus is serving metropolitan markets in the United States that are expected to experience the most significant growth in population, households and employment. These three demographic factors are significant drivers of demand for aggregates. While aggregates is our focus and primary business, we produce and sell asphalt mix and/or ready-mixed concrete in our mid-Atlantic, Georgia, Southwestern, Tennessee and Western markets.



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, 2016 was derived from the audited financial statement, but it does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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 described in Note 2, the results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.



SHARE-BASED COMPENSATION – ACCOUNTING STANDARDS UPDATE



We adopted Accounting Standards Update (ASU) 2016-09, “Improvement to Employee Share-Based Payment Accounting,” in the fourth quarter of 2016. The provisions of this standard were applied as of the beginning of the year of adoption resulting in revisions to our 2016 interim financial statements.



Under ASU 2016-09, tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are reflected as discrete income tax benefits in the period of exercise or issuance. Before the adoption of this standard, excess tax benefits were recorded directly to equity (APIC). Net excess tax benefits are reflected as a reduction to our income tax expense for the three months ended March 31, 2017 ($15,513,000) and revised 2016 ($21,234,000). As a result, we also revised our March 31, 2016 diluted share calculation to exclude the assumption that proceeds from excess tax benefits would be used to purchase shares, resulting in an increase in dilutive shares of 648,000.



Under ASU 2016-09, gross excess tax benefits are classified as operating cash flows rather than financing cash flows. As a result, for the three months ended March 31, 2016 we increased our operating cash flows and decreased our financing cash flows by $21,235,000. Additionally, this ASU requires cash paid for shares withheld to satisfy statutory income tax withholding obligations be classified as financing activities rather than operating activities. As a result, for the three months ended March 31, 2016 we increased our operating cash flows and decreased our financing cash flows by $24,636,000.



CHANGE IN ACCOUNTING ESTIMATE



During the first quarter of 2017, we completed a review of the estimated useful lives of our railcar fleet and determined that the economic useful life of our railcars was greater than the useful life used to calculate depreciation. As a result, effective January 1, 2017, we revised the useful lives of our railcars resulting in a decrease in depreciation expense of $715,000 and an increase in net earnings of $460,000 (no effect on diluted earnings per share) for the quarter ended March 31, 2017.



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RECLASSIFICATIONS



Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2017 presentation.



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 been included in our diluted weighted-average common shares outstanding computation are excluded. There were no excluded shares for the periods presented.



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:







Our discontinued operations include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The results noted above primarily reflect charges and insurance recoveries associated with the Texas Brine matter as further discussed in Note 8.

 

 

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Note 3: Income Taxes



Our estimated annual effective tax rate (EAETR) is based on full-year expectations of pretax 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, 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 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.



In the first quarter of 2017, we recorded an income tax benefit from continuing operations of $3,175,000 compared to an income tax benefit from continuing operations of $11,470,000 in the first quarter of 2016. Excess tax benefits related to share-based compensation were $15,513,000 for the first quarter of 2017 compared to $21,234,000 for the first quarter of 2016 and represent the majority of the decrease in income tax benefit. In addition, these excess tax benefits resulted in significant variations in the relationship between income tax expense and pretax income in both periods.



We recognize deferred tax assets and liabilities (which reflect our best assessment of the future taxes we will pay) based on the differences between the book basis and tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns while deferred tax liabilities represent items that will result in additional tax in future tax returns.



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 2017 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 certain state net operating loss carryforwards. For December 31, 2017, we project deferred tax assets related to state net operating loss carryforwards of $53,124,000, of which $52,033,000 relates to Alabama. The Alabama net operating loss carryforward, if not utilized, would expire in years 2023 – 2029. Before 2015, this Alabama deferred tax asset carried a full valuation allowance. During 2015, we restructured our legal entities which resulted in a partial release of the valuation allowance in the amount of $4,655,000. During the fourth quarter of 2016, we achieved three consecutive years of positive Alabama adjusted earnings which resulted in an additional partial release of the valuation allowance in the amount of $4,791,000. We expect one additional partial release of this valuation allowance once we have returned to sustained profitability, which we project could occur in the fourth quarter of 2017 (“Alabama adjusted earnings” and “sustained profitability” are defined in our most recent Annual Report on Form 10-K).



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, 2016.

 

 

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Note 4: deferred revenue



In 2013 and 2012, we sold a percentage interest in future production structured as volumetric production payments (VPPs).



The VPPs:





Our consolidated total revenues exclude the sales of aggregates owned by the VPP purchaser.



We received net cash proceeds from the sale of the VPPs 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 to revenue on a unit-of-sales basis over the terms of the VPPs (expected to be approximately 25 years, limited by volume rather than time).



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







Based on expected sales from the specified quarries, we expect to recognize approximately $8,080,000 of deferred revenue as income during the 12-month period ending March 31, 2018 (reflected in other current liabilities in our 2017 Condensed Consolidated Balance Sheet).

 

 

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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:









We have 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 the fund (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).



Net gains of the Rabbi Trust investments were $239,000 and $82,000 for the three months ended March 31, 2017 and 2016, respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at March 31, 2017 and 2016 were $(197,000) and $(1,024,000), respectively.



The carrying values of our cash equivalents, restricted cash, accounts and notes receivable, short-term debt, 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.



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Assets subject to fair value measurement on a nonrecurring basis are summarized below:







We recorded $9,646,000 of losses on impairment of long-lived assets for the three months ended March 31, 2016, reducing the carrying value of these Aggregates segment assets to their estimated fair value of $0. 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 interest rates, foreign currency exchange rates and commodity prices. From time to time, and consistent with our risk management policies, we use derivative instruments to balance the cost and risk of such expenses. We do not use 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 lock agreements described below were designated as cash flow hedges. The changes in fair value of our 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.



CASH FLOW HEDGES



During 2007, we entered into fifteen forward starting interest rate locks on $1,500,000,000 of future debt issuances to hedge the risk of higher interest rates. Upon the 2007 and 2008 issuances of the related fixed-rate debt, underlying interest rates were lower than the rate locks and we terminated and settled these forward starting locks for cash payments of $89,777,000. This amount was booked to AOCI and is 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:







For the 12-month period ending March 31, 2018, we estimate that $2,224,000 of the pretax loss in AOCI will be reclassified to earnings.

 

 

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Note 7: Debt



Debt is detailed as follows:













Our total long-term debt - book value is presented in the table above net of unamortized discounts from par and unamortized deferred debt issuance costs. Discounts and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $1,065,000 of net interest expense for these items for the three months ended March 31, 2017.



The estimated fair value of our debt presented in the table above was determined by: (1) averaging several asking price quotes for the publicly traded notes and (2) 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 their respective balance sheet dates.





LINE OF CREDIT



In December 2016, among other favorable changes, we extended the maturity date of our unsecured $750,000,000 line of credit from June 2020 to December 2021 (incurring $1,876,000 of transaction fees together with the new term loan described below). The credit agreement contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility. The primary negative covenant limits our ability to incur secured debt. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5:1 (upon certain acquisitions, the maximum ratio can be 3.75:1 for three quarters), and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of March 31, 2017, we were in compliance with the line of credit covenants.



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Borrowings on our line of credit are classified as short-term debt if we intend to repay within twelve months and as long-term debt if we have the intent and ability to extend repayment beyond twelve months. Borrowings bear interest, at our option, at either LIBOR plus a credit margin ranging from 1.00% to 1.75%, or SunTrust Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.00% to 0.75%. The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. Standby letters of credit, which are issued under the line of credit and reduce availability, are charged a fee equal to the credit margin for LIBOR borrowings plus 0.175%. We also pay a commitment fee on the daily average unused amount of the line of credit that ranges from 0.10% to 0.25% determined by our credit ratings. As of March 31, 2017, the credit margin for LIBOR borrowings was 1.25%, the credit margin for base rate borrowings was 0.25%, and the commitment fee for the unused amount was 0.15%.



As of March 31, 2017, our available borrowing capacity was $471,462,000. Utilization of the borrowing capacity was as follows:







TERM DEBT



All of our term debt is unsecured. $2,118,700,000 of such debt is governed by two essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in both indentures limits the amount of secured debt we may incur without ratably securing such debt. As of March 31, 2017, we were in compliance with all of the term debt covenants.



In March 2017, we issued $350,000,000 of 3.90% senior notes due April 2027 for proceeds of $345,450,000 (net of original issue discounts, underwriter fees and other transaction costs). The proceeds will be used for general corporate purposes.



In December 2016, we entered into an unsecured $250,000,000 delayed draw term loan (incurring, together with the line of credit extension mentioned previously, $1,876,000 of transaction costs). The term loan is provided by the same group of banks that provides our line of credit, and is governed by the same credit agreement as the line of credit. As such, it is subject to the same affirmative, negative, and financial covenants.



The 2016 term loan may be funded in up to three draws through June 21, 2017, after which any undrawn amount expires. Borrowings bear interest in the same manner as the line of credit. The term loan principal will be repaid quarterly beginning March 2018 as follows: quarters 5 - 8 @ 0.625%; quarters 9 - 12 @ 1.25%; quarters 13 - 19 @ 1.875% and quarter 20 @ 79.375%. The term loan may be prepaid at any time without penalty. As of March 31, 2017, no draws have been made under this term loan.





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 $750,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of March 31, 2017 are summarized by purpose in the table below:





 

 



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Note 8: Commitments and Contingencies



As summarized by purpose directly above in Note 7, our standby letters of credit totaled $43,538,000 as of March 31, 2017.



As described in Note 9, our asset retirement obligations totaled $226,012,000 as of March 31, 2017.



LITIGATION AND ENVIRONMENTAL MATTERS



We are subject to occasional governmental proceedings and orders pertaining to occupational safety and health or to protection of the environment, such as proceedings or orders relating to noise abatement, air emissions or water discharges. As part of our continuing program of stewardship in safety, health and environmental matters, we have been able to resolve such proceedings and to comply with such orders without any material adverse effects on our business.



We have received notices from the United States Environmental Protection Agency (EPA) or similar state or local agencies that we are considered a potentially responsible party (PRP) at a limited number of sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state and local environmental laws. Generally, we share the cost of remediation at these sites with other PRPs or alleged PRPs in accordance with negotiated or prescribed allocations. There is inherent uncertainty in determining the potential cost of remediating a given site and in determining any individual party's share in that cost. As a result, estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, remediation methods, other PRPs and their probable level of involvement, and actions by or against governmental agencies or private parties.



We have reviewed the nature and extent of our involvement at each Superfund site, as well as potential obligations arising under other federal, state and local environmental laws. While ultimate resolution and financial liability is uncertain at a number of the sites, in our opinion based on information currently available, the ultimate resolution of claims and assessments related to these sites will not have a material effect on our consolidated results of operations, financial position or cash flows, although amounts recorded in a given period could be material to our results of operations or cash flows for that period.



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, other material legal proceedings are more specifically described below:





Efforts to remediate the River have been underway for many years and have involved hundreds of entities that have had operations on or near the River at some point during the past several decades. We formerly owned a chemicals operation near the mouth of the River, which was sold in 1974. The major risk drivers in the River have been identified as dioxins, PCBs, DDx and mercury. We did not manufacture any of these risk drivers and have no evidence that any of these were discharged into the River by Vulcan.



The AOC does not obligate us to fund or perform the remedial action contemplated by either the draft RI/FS or the ROD. Furthermore, the parties who will participate in funding the remediation and their respective allocations, have not been determined. We do not agree that a bank-to-bank remedy is warranted, and we are not obligated to fund any of the remedial action at this time; nevertheless, we previously estimated the cost to be incurred by us as a potential participant in a bank-to-bank dredging remedy and recorded an immaterial loss for this matter in 2015.



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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.  We have 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 physical damages to oil pipelines, to business interruption claims. In addition to the plaintiffs’ claims, we have also been sued for contractual indemnity and comparative fault by both Texas Brine and Occidental.  The total amount of damages claimed is in excess of $500 million. It is alleged that the sinkhole was caused, in whole or in part, by our negligent actions or failure to act. It is also alleged that we breached the salt lease, as well as an operating agreement and a drilling agreement with Texas Brine; that we are strictly liable for certain property damages in our capacity as a former assignee of the salt lease; and that we violated certain covenants and conditions in the agreement under which we sold our Chemicals Division in 2005. We have made claims for contractual indemnity and comparative fault against Texas Brine, as well as claims for contractual indemnity and comparative fault against Occidental. Discovery is ongoing and no trials are currently set.



In December 2016, we settled with the plaintiffs in one of these cases involving property damages.  In  the first quarter of 2017, we offered to settle with the plaintiffs in the cases involving physical damages to oil pipelines and settled with one such plaintiff. The insurers who have coverage of these settlement amounts agreed that the cases were covered by our policy and have funded the settled cases in excess of our self-insured retention amount. Except for these cases, at this time we cannot reasonably estimate a range of liability pertaining to this matter.





We are also engaged in an ongoing dialogue with the EPA, the Los Angeles Department of Water and Power, and other stakeholders regarding the potential contribution of the Hewitt Landfill to groundwater contamination in the North Hollywood Operable Unit (NHOU) of the San Fernando Valley Superfund Site. We are gathering and analyzing data and developing technical information to determine the extent of possible contribution by the Hewitt Landfill to the groundwater contamination in the area. This work is also intended to assist in identification of other PRPs that may have contributed to groundwater contamination in the area.



In July 2016, the EPA sent us a letter requesting that we enter into an AOC for remedial design work at the NHOU including, but not limited to, the design of two or more groundwater extraction wells to be located between the Hewitt Landfill and public drinking water wells. In February 2017, the EPA provided us with a draft AOC, and we are currently engaged in negotiations.



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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.

 

 

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:







 

 

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Note 10: Benefit Plans



We sponsor three qualified, noncontributory defined benefit pension plans. These plans cover substantially all employees hired before July 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 2007, we amended our defined benefit pension plans to no longer accept new participants. Effective December 2013, we amended our defined benefit pension plans so that future service accruals for salaried pension participants ceased to be considered in their benefit calculation.



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





The contributions to pension plans for the three months ended March 31, 2017 and 2016, as reflected on the Condensed Consolidated Statements of Cash Flows, pertain to benefit payments under nonqualified plans. While we do not expect to be required to make contributions to the qualified plans during 2017, we do expect to make a discretionary qualified plan contribution of approximately $9,500,000.



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, certain of our hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain service requirements. Generally, Company-provided healthcare benefits end 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 other postretirement benefit cost:





 

 

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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, 2017 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.



Changes in total equity are summarized below:







There were no shares held in treasury as of March 31, 2017, December 31, 2016 and March  31, 2016.



Our common stock purchases (all of which were open market purchases) were as follows:





As of March 31, 2017,  9,583,109 shares may be purchased 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 used in the production of asphalt mix and ready-mixed concrete. 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, 2017 and 2016.



We have four reportable segments organized around our principal product lines: Aggregates, Asphalt Mix, Concrete and Calcium. Changes in the carrying amount of goodwill by reportable segment from December 31, 2016 to March 31, 2017 are 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



BUSINESS ACQUISITIONS



Through the three months ended March 31, 2017, we purchased the following for $185,067,000 of cash consideration:







The 2017 acquisitions listed above are reported in our condensed consolidated financial statements as of their respective acquisition dates. None of these acquisitions were 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 their estimated fair values at their acquisition dates), are summarized below:









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



As a result of these acquisitions, we recognized $62,885,000 of amortizable intangible assets (primarily contractual rights in place). The contractual rights in place noted above will be amortized against earnings ($62,824,000 – straight-line over a weighted-average 18.8 years) and deductible for income tax purposes over 15 years. The goodwill noted above will be deductible for income tax purposes over 15 years.



For the full year 2016, we purchased the following for total consideration of $33,287,000 ($32,537,000 cash and $750,000 payable):





None of the 2016 acquisitions listed above were material to our results of operations or financial position either individually or collectively. As a result of these 2016 acquisitions, we recognized $16,670,000 of amortizable intangible assets ($15,213,000 contractual rights in place and $1,457,000 noncompetition agreement). The contractual rights in place are amortized against earnings ($6,798,000 – straight-line over 20 years and $8,415,000 units of production over an estimated 20 years) and deductible for income tax purposes over 15 years.





DIVESTITURES AND PENDING DIVESTITURES



No assets met the criteria for held for sale at March 31, 2017, December 31, 2016 or March 31, 2016.



 

 

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Note 17: New Accounting Standards



ACCOUNTING STANDARDS RECENTLY ADOPTED



INVENTORY MEASUREMENT  For the interim period ended March 31, 2017, we adopted Accounting Standards Update (ASU) 2015-11, “Simplifying the Measurement of Inventory.”  This ASU changed the measurement principle for inventory from the lower of cost or market principle to the lower of cost prospectively and net realizable value principle. The guidance applied to inventories measured by the first-in, first-out (FIFO) or average cost method, but did not apply to inventories measured by the last-in, first-out (LIFO) or retail inventory method. We used the LIFO method for approximately 66% of our inventory (based on the December 31, 2016 balances); therefore, this ASU did not apply to the majority of our inventory. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.



DEFINITION OF A BUSINESS  For the interim period ended March 31, 2017, we early adopted ASU 2017-01, “Clarifying the Definition of a Business.” This ASU changed the definition of a business for, among other purposes, determining whether to account for a transaction as an asset acquisition or a business combination. Under the new guidance, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, it is not a business combination. If it is not met, the entity then evaluates whether the acquired assets and activities meet the requirements that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. This change in definition did not impact any of our transactions during the current period.



ACCOUNTING STANDARDS PENDING ADOPTION



PRESENTATION OF NET PERIODIC BENEFIT PLANS  In March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs. The other components of net benefit cost will be included in nonoperating expense. Additionally, only the service cost component of net benefit cost is eligible for capitalization. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Retrospective application of the change in income statement presentation is required, while the change in capitalized benefit cost is to be applied prospectively. A practical expedient is provided that permits entities to use the components of cost disclosed in prior years as a basis for the retrospective application of the new income statement presentation. We will adopt ASU 2017-07 in the first quarter of 2018. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements; service cost for 2017 is estimated to be $7,782,000 while all other components are estimated to be a benefit of $8,083,000.



GOODWILL IMPAIRMENT TESTING    In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill (Step 2) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We will early adopt this standard as of our November 1, 2017 annual impairment test. The results of our November 1, 2016 annual impairment test indicated that the fair value of all our reporting units substantially exceeded their carrying values. As a result, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



INTRA-ENTITY ASSET TRANSFERS  In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which requires the tax effects of intercompany transactions other than inventory to be recognized currently. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. We will adopt this standard in the first quarter of 2018. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



CASH FLOW CLASSIFICATION  In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which amends guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU adds or clarifies guidance on eight specific cash flow issues. Additionally, guidance on the presentation of restricted cash is addressed in ASU 2016-18 which was issued in November 2016. Both of these standards are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. 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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CREDIT LOSSES  In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which amends guidance on the impairment of financial instruments. The new guidance estimates credit losses based on expected losses, modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within those annual reporting periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2018.  While we are still evaluating the impact of ASU 2016-13, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



LEASE ACCOUNTING  In February 2016, the FASB issued ASU 2016-02, “Leases,” which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flow in the statement of cash flows.  This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and modified retrospective application is required. We will adopt this standard in the first quarter of 2019. We are currently evaluating the impact that the adoption of this standard will have on our consolidated financial statements and related disclosures.



CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS  In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends certain aspects of current guidance on the recognition, measurement and disclosure of financial instruments. Among other changes, this ASU requires most equity investments be measured at fair value. Additionally, the ASU eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value for instruments not recognized at fair value in our financial statements. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitted. 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. In March 2016, the FASB issued ASU 2016-08, “Revenue From Contracts With Customers: Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” which amends the principal versus agent guidance in ASU 2014-09. The amendments in ASU 2016-08 provide guidance on recording revenue on a gross basis versus a net basis based on the determination of whether an entity is a principal or an agent when another party is involved in providing goods or services to a customer. These ASUs are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further, in applying these ASUs an entity is permitted to use either the full retrospective or cumulative effect transition approach. While we are currently evaluating the impact of adoption of these standards on our consolidated financial statements, we expect to identify similar performance obligations under ASU 2014-09 compared with the deliverables and separate units of account we have identified under existing accounting standards. As a result, we expect the timing of our revenues to remain generally the same. We will adopt these standards using the cumulative effect transition approach.

 

 

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ITEM 2

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





GENERAL COMMENTS



Overview



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



Demand for our products is dependent on construction activity and correlates positively with changes in population growth, household formation and employment.  End uses include public construction (e.g., highways, bridges, buildings, airports, schools, prisons, sewer and waste disposal systems, water supply systems, dams and reservoirs), 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; railroads and electric utilities; and to a smaller extent state, county and municipal governments.



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 produced 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 with our fleet of 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.



No material part of our business depends upon any single customer whose loss would have a significant adverse effect on our business. In 2016, our five largest customers accounted for 8.1% of our total revenues (excluding internal sales), and no single customer accounted for more than 3.0% of our total revenues. Our products typically are sold to private industry and not directly to governmental entities. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly funded construction, such as highways, airports and government buildings, relatively insignificant sales are made directly to federal, state, county or municipal governments/agencies. Therefore, although reductions in state and federal funding can curtail publicly funded construction, our business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.



While aggregates is our focus and primary business, we believe vertical integration between aggregates and downstream products, such as asphalt mix and ready-mixed concrete, can be managed effectively in certain markets to generate attractive financial returns. We produce and sell asphalt mix and/or ready-mixed concrete primarily in our mid-Atlantic, Georgia, Southwestern, Tennessee and Western markets. Aggregates comprise approximately 95% of asphalt mix by weight and 80% of ready-mixed concrete by weight. In both 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 sale 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, demographic and population fluctuations, and particularly to cyclical swings in construction spending, primarily in the private sector.

 

 

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EXECUTIVE SUMMARY



Financial highlights for First Quarter 2017

 

Compared to first quarter 2016:



Our first quarter results reflect solid price growth in our Aggregates segment, the continuing recovery in construction materials demand, and strong profitability in our Concrete and Asphalt segments. Aggregates shipments declined 2%, but effectively matched last year’s very strong first quarter pace when excluding the impact of weather disruptions on our shipments in California. Aggregates pricing increased 5%, consistent with full year expectations, and a good indication of the market’s visibility to further demand recovery. The aggregates pricing environment remains favorable, with growth across the vast majority of our markets. Net earnings were $44.9 million (12% higher than the prior year’s first quarter) and Adjusted EBITDA was $149.3 million (4% lower than the prior year).



Our first quarter results mark a good start to the year. Solid operational execution by our management teams led to record trailing-twelve-month unit profitability for a first quarter and helped offset $14.4 million of timing-related incremental costs which included the effects of higher unit cost of diesel fuel, increased stripping expense in anticipation of growing demand, and incremental costs related to flooding in California. Trailing-twelve-month (TTM) Aggregates segment cash gross profit is more than $6 per ton (46% growth so far in this recovery — $6.11 per ton TTM 1Q 2017 versus $4.19 per ton TTM 2Q 2013) with additional improvement to come. We are committed to continuous improvement in safety, customer service, and operational efficiencies and remain focused on the execution details that add up to outstanding results.



Our first quarter results were in line with our full year plans, and we reaffirm our expectation for full year Adjusted EBITDA of between $1.125 and $1.225 billion. This expectation is driven by a continuing recovery in shipments, with higher levels of publicly funded construction activity beginning to join the ongoing recovery in private demand. For the full year we expect strong year-over-year growth in earnings. Other management expectations (e.g., aggregates price and volume, gross profit growth and SAG expense) remain as outlined in our most recent Annual Report on Form 10-K. We remain focused on continuous, compounding improvements in profitability and cash flows, and expect them to continue in 2017 and for years to come.



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We actively pursue bolt-on acquisitions and other value-creating growth investments. In the first quarter, we closed three acquisitions totaling $185.1 million. These acquisitions complement our leading aggregates positions in certain California and Tennessee markets. Our unmatched asset base and industry-leading core profitability in aggregates position us well for the balance of 2017 and beyond.



Capital expenditures were $133.0 million, including both core capital expenditures and internal growth capital investments. Internal growth capital investments were $35.1 million, which included the acquisition of additional reserves in Texas and investment in the purchase of two replacement ships to transport aggregates. Core capital expenditures to replace existing property, plant and equipment made up the balance of the capital expenditures. Our overall rate of reinvestment in the business ties to our confidence in both improving market conditions and the quality of our internal execution. 



In March, we issued $350.0 million of 10-year debt with a coupon of 3.9%. During the quarter, we returned $82.4 million to shareholders (up from $50.2 in the first quarter of 2016) through dividends and share repurchases. We increased our dividends by 25% (to $0.25 per share) and repurchased 416,891 shares at an average price of $118.07 per share.



At the end of the first quarter, total debt outstanding was $2.3 billion. The quarter-end cash balance was $287.0 million.

 

 

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 our competitors and 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  margin 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 consistent with our competitors and 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  “cash gross profit”  and it should not be considered as an alternative to earnings measures defined by GAAP. We present this metric 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. We and the investment community use  this metric to assess the operating performance of our business. Additionally, we present this metric as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. Aggregates segment cash gross profit per ton is computed by dividing Aggregates segment cash gross profit by tons shipped. Reconciliation of this metric to its nearest GAAP measure is presented below:



cash gross profit









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GAAP does not define  “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) and it should not be considered as an alternative to earnings measures defined by GAAP. We present this metric 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. We use  this metric to assess the operating performance of our business and for a basis of strategic planning and forecasting as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. We adjust EBITDA for certain items to provide a more consistent comparison of earnings performance from period to period.  Reconciliation of this metric to its nearest GAAP measure is presented below:



EBITDA and adjusted ebitda









Adjusted EBITDA for 2016 has been revised to conform with the 2017 presentation which no longer includes an adjustment for charges associated with business development. We no longer exclude charges associated with business development as they are deemed to represent normal recurring operating expenses.



2017 projected ebitda



The following reconciliation to the mid-point of the range of 2017 Projected EBITDA excludes adjustments for the future outcome of legal proceedings, charges associated with divested operations, asset impairment and other unusual gains and losses. Due to the difficulty of forecasting the timing or amount of items that have not yet occurred, are out of our control, or cannot be reasonably predicted, we are unable to estimate the significance of this unavailable information.



 

 

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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





 

  



first quarter 2017 Compared to first Quarter 2016



First quarter 2017 total revenues were $787.3 million, up 4% from the first quarter of 2016. Shipments decreased in aggregates (-2%)  while they were up in asphalt mix (+5%) and ready-mixed concrete (+22%). Gross profit declined in the Aggregates (-$8.2 million or -6%) and Asphalt Mix (-$3.6 million or -29%) segments while it was up in the Concrete segment (+$7.0 million or +200%). Diesel fuel costs were up $5.7 million as a result of a 35% increase in the unit cost of diesel fuel, with most ($5.0 million) of this increased cost reflected in the Aggregates segment.



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Net earnings for the first quarter of 2017 were $44.9 million, or $0.33 per diluted share, compared to $40.2 million, or $0.30 per diluted share, in the first quarter of 2016. 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 2017 versus the first quarter of 2016 are summarized below:



earnings from continuing operations before income taxes







Aggregates segment sales were $650.3 million, up 2%, from the prior year’s first quarter while aggregates freight-adjusted revenues were $496.8 million, up 2%. First quarter aggregates shipments decreased 2%, or 1.0 million tons, compared to the first quarter of 2016  resulting primarily from California. Excluding California markets adversely affected by record rainfall, overall shipments approximated the prior year’s exceptionally strong first quarter. California’s wet weather and flooding halted construction activity and impaired shipments in January and February. Daily shipping rates for aggregates in each of these two months declined more than 20% versus the prior year. In March, as job site conditions improved, California daily shipping rates recovered accordingly. California’s passage of a long-term transportation bill resolved Caltrans’ funding uncertainty and should, along with other factors, support sustained shipping rate improvements. Demand continues to recover across our Mid-Atlantic and Southeastern markets, with most operations experiencing solid shipment growth even against last year’s strong comparison.



Trailing-twelve-month construction start activity, both public and private, has steadily improved since July 2016. The backlog of construction projects in development continues to grow across our key states. In addition, state and local governments continue to pass measures to significantly increase public infrastructure investment, and a number of projects supported by FAST Act funding have moved further toward the active construction stage. We continue to expect full year shipment growth of between 5% and 8%, with the ultimate result dependent on the timing of shipments to new, larger public transportation projects.



For the quarter, freight-adjusted average sales price for aggregates increased 5%, or $0.57 per ton, versus the prior year despite a modest negative mix impact. The overall pricing climate remains favorable as visibility to a sustained recovery improves and as construction materials producers stay focused on earning adequate returns on capital. California and Georgia each experienced price growth of more than 10%, again supported by clear and improving visibility to sustained demand growth. Substantially all of our markets realized price growth in the first quarter.



First quarter Aggregates segment gross profit declined $8.2 million (6%) to $140.2 million ($3.66 per ton). Segment results in the quarter were negatively impacted by the aforementioned 35% increase in the unit cost of diesel fuel, flood-related costs in California, increased stripping expenses and costs related to the transition to two new, more efficient ships to transport aggregates from our quarry in Mexico. In total, these items negatively impacted our first quarter Aggregates segment gross profit by $14.4 million in comparison to the prior year.  Despite the timing of these costs, trailing-twelve-month Aggregates segment cash gross profit reached a record level ($6.11 per ton) for the first quarter.



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Asphalt Mix segment gross profit was $8.6 million in the first quarter of 2017 versus $12.2 million in the prior year. Shipments increased 5% as incremental shipments from acquisitions offset weather-related decreases in California, our largest asphalt mix market. However, segment profits declined due to modestly lower material margins and acquisition–related costs.



Concrete segment gross profit was $10.5 million compared to  $3.5 million in the prior year period.  Solid demand growth in our northern Virginia market led to strong growth in concrete shipments and segment gross profit. Shipments increased 22% versus the prior year as volumes increased in each of our concrete markets, particularly Virginia, our largest concrete market. Material margins in concrete also improved versus the prior year period.



Our Calcium segment reported gross profit of $0.7 million in the first quarter of 2017,  an increase versus $0.6 million in the first quarter of 2016.



On a trailing-twelve-month basis, total gross profit in our non-aggregates segments was $131.2 million, a 21% increase from the prior year’s comparable period.



SAG expenses were $82.1 million versus $76.5 million in the prior year’s first quarter. This increase was due primarily to higher severance costs and business development expenses. Trailing-twelve-month SAG expenses were approximately $320 million, in line with full year expectations, which remain unchanged.



Gain on sale of property, plant & equipment and businesses was $0.4  million in the first quarter of 2017 compared to $0.6 million in the first quarter of 2016.



During the first quarter of 2016, we terminated a nonstrategic aggregates site lease we no longer intended to develop resulting in a $9.6 million charge for impairment of long-lived assets (See Note 5 to the condensed consolidated financial statements). There were no impairment charges during the first quarter of 2017.



Other operating expense, generally consisting of various cost items not included in cost of revenues, was $5.8 million in the first quarter of 2017 versus $14.2 million in the first quarter of 2016. This account includes the aforementioned discrete charges associated with divested operations of $1.4 million and $11.9 million for the three months ended March 31, 2017 and 2016, respectively. These charges were composed of the following: 2017 — environmental liability accrual associated with previously divested properties ($1.4 million) and 2016 — charges associated with office space no longer needed and vacated ($5.2 million), the write-off of a prepaid royalty asset resulting from a change in long-term mining plans ($3.6 million), a property litigation settlement ($1.9 million) and environmental liability accruals associated with previously divested properties ($1.2 million).



Net interest expense was $34.1 million in the first quarter of 2017 compared to $33.7 million in 2016. The higher interest expense was the result of interest incurred on the $350.0 million 10-year notes issued March 14, 2017, partially offset by lower interest expense on our line of credit.



Income tax benefit from continuing operations was  $3.2 million in the first quarter of 2017 compared to an income tax benefit of $11.5 million in the first quarter of 2016.  With our adoption of ASU 2016-09 (refer to Note 1 to the condensed consolidated financial statements, under the caption Share-based Compensation – Accounting Standards Update), excess tax benefits from stock-based compensation are reflected in the income tax provision rather than shareholders’ equity. Excess tax benefits in the first quarter of this year were $15.5 million, contributing to a net tax benefit for the quarter of $3.2 million. In the first quarter of 2016, the excess tax benefit was $21.2 million. Expectations for our full year 2017 effective tax rate continue to be 28%.



Earnings from continuing operations were $0.32 per diluted share in the first quarter of 2017 compared to $0.31 per diluted share in the first quarter of 2016.



Discontinued Operations — First quarter pretax earnings from discontinued operations was $2.1 million in 2017 compared with a $3.0 million loss in 2016. Our discontinued operations include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The current year results also include insurance recoveries from previously incurred general liability costs. 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 and a substantial, committed bank line of credit. Additional sources of capital include access to the capital markets, the sale of reclaimed and surplus real estate, and dispositions of nonstrategic operating assets. We believe these financial resources are sufficient to fund our business requirements for 2017, including:





Our balanced approach to capital deployment remains unchanged. We intend to balance reinvestment in our business, growth through acquisitions and return of capital to shareholders, while sustaining financial strength and flexibility. We expect to increase the return of capital through dividends and share repurchases as earnings grow.



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, 2017 cash and cash equivalents balance of $287.0 million is $59.2 million of cash held at our foreign subsidiaries. All of this $59.2 million of cash relates to earnings that are indefinitely reinvested offshore. Use of this cash is currently limited to our foreign operations.



cash from operating activities















Net cash provided by operating activities was $94.2 million during the three months ended March 31, 2017, a $5.5 million increase compared to the same period of 2016. The increase was due to higher net earnings and DDA&A,  partially offset by higher working capital requirements.



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cash from investing activities



Net cash used for investing activities was $307.8 million during the first three months of 2017, a $201.7 million increase compared to the same period of 2016. We invested $133.0 million in our existing operations in the first three months of 2017, a $24.7 million increase compared to the prior year. Of this $133.0 million, $35.1 million was invested in shipping capacity replacement, new site developments and other growth opportunities. During the first three months of 2017, we acquired the following for $185.1 million of cash consideration: California — ready-mixed concrete facilities, a marine aggregates distribution yard and building materials yards; and Tennessee — an aggregates facility, asphalt mix operations, an asphalt paving business and a rail-served aggregates operation. There were no significant acquisitions in the first three months of 2016.



cash from financing activities



Net cash provided by financing activities in the first three months of 2017 was $241.6 million, an increase of $316.4 million compared with the cash used during the same period of 2016. This increase was primarily attributable to the first quarter 2017 term debt issuance (as described in the section below) which generated net proceeds of $345.5 million. We increased the return of capital to our shareholders by $32.2 million via  increased dividends ($0.25 per share compared to $0.20 per share)  and increased share repurchases  (416,891 shares @ $118.07 per share compared to 257,000 shares @ $103.49 per share). Finally, cash paid for shares withheld to satisfy statutory income tax withholding obligations of $21.4 million decreased $3.2 million from the first three months of 2016 (See Note 1 to the condensed consolidated financial statements, caption Share-based Compensation – Accounting Standards Update).

 

 

                                                                                                                                                                                                       

debt



Certain debt measures are outlined below:













Line of credit



In  December 2016, among other favorable changes, we extended the maturity date of our unsecured $750.0 million line of credit from June 2020 to December 2021 (incurring $1.9 million of transaction fees together with the new term loan described below).



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The  credit agreement contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5:1 (upon certain acquisitions, the maximum ratio can be 3.75:1 for three quarters), and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of March 31, 2017, we were in compliance with the line of credit covenants. 



Borrowings and other cost ranges and details are described in Note 7 to the condensed consolidated financial statements. As of March 31, 2017, the credit margin for London Interbank Offered Rate (LIBOR) borrowings was 1.25%, the credit margin for base rate borrowings was 0.25%, and the commitment fee for the unused amount was 0.15%.



As of March 31, 2017, our available borrowing capacity under the line of credit was $471.5 million. Utilization of the borrowing capacity was as follows:





TERM DEBT



All of our  term debt is unsecured.  $2,118.7 million of such debt is governed by two essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in both indentures limits the amount of secured debt we may incur without ratably securing such debt.  As of March 31, 2017, we were in compliance with all of the term debt covenants.



In March 2017, we issued $350.0 million of 3.90% senior notes due April 2027 for proceeds of $345.5 million (net of original issue discounts, underwriter fees and other transaction costs). The proceeds will be used for general corporate purposes.



In December 2016, we entered into an unsecured $250.0 million delayed draw term loan (incurring, together with the line of credit extension mentioned previously, $1.9 million of transaction costs). The term loan is provided by the same group of banks that provides our line of credit, and is governed by the same credit agreement as the line of credit. As such, it is subject to the same affirmative, negative, and financial covenants.



The 2016 term loan may be funded in up to three draws through June 21, 2017, after which any undrawn amount expires. Borrowings bear interest in the same manner as the line of credit. The term loan principal will be repaid quarterly beginning March 2018 as follows: quarters 5 - 8 @ 0.625%; quarters 9 - 12 @ 1.25%; quarters 13 - 19 @ 1.875% and quarter 20 @ 79.375%. The term loan may be prepaid at any time without penalty. As of March 31, 2017, no draws have been made under this term loan.





CURRENT MATURITIES of long-term debt



The  $0.1 million of current maturities of long-term debt as of March 31, 2017 includes all long-term debt  that we intend to pay within twelve months, and is due as follows:









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debt ratings



Our debt ratings and outlooks as of March 31, 2017 are as follows:









 

 

Equity



Our common stock issuances and purchases are as follows:









On February 10, 2006, our Board of Directors authorized us to purchase up to 10,000,000 shares of our common stock. On February 10, 2017, there were 1,756,757 shares remaining under this authorization and our Board of Directors authorized us to purchase an additional 8,243,243 shares to refresh the number of shares we were authorized to purchase to 10,000,000. As of March 31, 2017, there were 9,583,109 shares remaining under the authorization. Depending upon market, business, legal and other conditions, we may make share purchases from time to time through open market (including plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934) and/or privately negotiated transactions. The authorization has no time limit, does not obligate us to purchase any specific number of shares, and may be suspended or discontinued at any time.



Our common stock purchases (all of which were open market purchases) for the year-to-date periods ended are detailed below:







There were no shares held in treasury as of March 31, 2017, December 31, 2016 and March 31, 2016.

 

 

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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 7 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 2017 debt issuance as described in Note 7 to the condensed consolidated financial statements, our obligations to make future payments under contracts increased 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, 2016 (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. These estimates form the basis for 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, 2017.







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new Accounting standards



For a discussion of the accounting standards recently adopted or pending adoption and the effect 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, except to the extent required by law. 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 (SEC) 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:





Our website also includes 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., General Counsel and 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 Charters of the Audit, Compensation and Governance Committees 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., General Counsel and Secretary, Vulcan Materials Company, 1200 Urban Center Drive, Birmingham, Alabama 35242.



Information included on our website is not incorporated into, or otherwise made a part of, this report.



 

 

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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. To manage these market risks, we may use derivative financial instruments. We do not enter into derivative financial instruments for speculative or trading purposes.



As discussed in the Liquidity and Financial Resources section of Part I, Item 2, we actively manage our capital structure and resources to balance the cost of capital and risk of financial stress. Such activity includes balancing the cost and risk of interest expense. In addition to floating-rate borrowings under our bank funded credit facilities, we at times use interest rate swaps to manage the mix of fixed-rate and floating-rate debt.



While floating-rate debt exposes us to rising interest rates, it is typically cheaper than issuing fixed-rate debt at any point in time but can become more expensive than previously issued fixed-rate debt. However, a rising interest rate environment is not necessarily harmful to our financial results. Since 2002, our EBITDA and Operating income are positively correlated to floating interest rates (as measured by 3-month LIBOR). As such, our business serves as a natural hedge to rising interest rates, and floating-rate debt serves as a natural hedge against weaker operating results due to general economic weakness.



At March 31, 2017, the estimated fair value of our long-term debt including current maturities was $2,605.5 million compared to a book value of $2,329.4 million. The estimated fair value 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 estimate is based on information available as of the balance sheet date. The effect of a decline in interest rates of one percentage point would increase the fair value of our debt by approximately $134.6 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 and the expected return on plan assets. 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 Exchange Act of 1934 Rules 13a - 15(e) or 15d - 15(e)), include, without limitation, controls and procedures designed to ensure that such 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, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2017.



No material changes were made during the first quarter of 2017 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, 2016. 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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.





ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Purchases of our equity securities during the quarter ended March 31, 2017 are summarized below.







We did not have any unregistered sales of equity securities during the first quarter of 2017.





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









Our SEC file number for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 001-33841.

 

 

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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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