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Vulcan Materials CO - Quarter Report: 2020 September (Form 10-Q)

vmc-20200930x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

þ

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


For the quarterly period ended September 30, 2020

 


OR

o

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


For the transition period from                 to


Commission File Number 001-33841


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


 New Jersey 
(State or other jurisdiction of incorporation)


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


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


35242
(zip code)


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


Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:


Title of each class


Trading Symbol

Name of each exchange on
which registered

 Common Stock, $1 par value 

VMC

 New York Stock Exchange 


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

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

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


Large accelerated filer þ


Accelerated filer o


Smaller reporting company o


Non-accelerated filer o


Emerging growth company o


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o


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


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


                    Class                    

Shares outstanding
      at October 22, 2020      

Common Stock, $1 Par Value

132,511,361

 


VULCAN MATERIALS COMPANY

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2020

Contents

Page

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Comprehensive Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

 2

 3

 4

 5

Item 2.

Management’s Discussion and Analysis of Financial

   Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

48

Item 4.

Controls and Procedures

48

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

49

Item 1A.

Risk Factors

49

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 4.

Mine Safety Disclosures

50

Item 6.

Exhibits

51

Signatures

52

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

 

 


1


part I financial information

  ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

September 30

December 31

September 30

in thousands

2020

2019

2019

Assets

Cash and cash equivalents

$    1,084,100 

$       271,589 

$         90,411 

Restricted cash

630 

2,917 

691 

Accounts and notes receivable

Accounts and notes receivable, gross

647,362 

573,241 

727,900 

Allowance for doubtful accounts

(3,155)

(3,125)

(2,960)

Accounts and notes receivable, net

644,207 

570,116 

724,940 

Inventories

Finished products

384,575 

391,666 

364,164 

Raw materials

34,562 

31,318 

31,250 

Products in process

5,098 

5,604 

6,062 

Operating supplies and other

31,226 

29,720 

28,184 

Inventories

455,461 

458,308 

429,660 

Other current assets

80,935 

76,396 

78,540 

Total current assets

2,265,333 

1,379,326 

1,324,242 

Investments and long-term receivables

41,778 

60,709 

57,059 

Property, plant & equipment

Property, plant & equipment, cost

8,958,342 

8,749,217 

8,657,731 

Allowances for depreciation, depletion & amortization

(4,614,543)

(4,433,179)

(4,370,386)

Property, plant & equipment, net

4,343,799 

4,316,038 

4,287,345 

Operating lease right-of-use assets, net

431,227 

408,189 

410,833 

Goodwill

3,172,112 

3,167,061 

3,167,061 

Other intangible assets, net

1,107,091 

1,091,475 

1,071,330 

Other noncurrent assets

229,193 

225,995 

221,803 

Total assets

$  11,590,533 

$  10,648,793 

$  10,539,673 

Liabilities

Current maturities of long-term debt

509,435 

25 

24 

Trade payables and accruals

263,296 

265,159 

265,012 

Other current liabilities

297,162 

270,379 

270,248 

Total current liabilities

1,069,893 

535,563 

535,284 

Long-term debt

2,777,072 

2,784,315 

2,783,068 

Deferred income taxes, net

685,520 

633,039 

628,726 

Deferred revenue

174,488 

179,880 

180,541 

Operating lease liabilities

407,336 

388,042 

391,079 

Other noncurrent liabilities

547,872 

506,097 

478,736 

Total liabilities

$    5,662,181 

$    5,026,936 

$    4,997,434 

Other commitments and contingencies (Note 8)

 

 

 

Equity

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

Outstanding 132,454, 132,371 and 132,350 shares, respectively

132,454 

132,371 

132,350 

Capital in excess of par value

2,797,222 

2,791,353 

2,785,245 

Retained earnings

3,204,671 

2,895,871 

2,795,834 

Accumulated other comprehensive loss

(205,995)

(197,738)

(171,190)

Total equity

$    5,928,352 

$    5,621,857 

$    5,542,239 

Total liabilities and equity

$  11,590,533 

$  10,648,793 

$  10,539,673 

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


2


VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

Three Months Ended

Nine Months Ended

Unaudited

September 30

September 30

in thousands, except per share data

2020

2019

2020

2019

Total revenues

$    1,309,890 

$    1,418,758 

$    3,681,707 

$    3,742,951 

Cost of revenues

929,392 

1,018,115 

2,702,967 

2,780,131 

Gross profit

380,498 

400,643 

978,740 

962,820 

Selling, administrative and general expenses

83,511 

88,789 

261,146 

274,747 

Gain on sale of property, plant & equipment

and businesses

1,576 

234 

2,317 

10,982 

Other operating expense, net

(10,459)

(8,712)

(20,610)

(15,173)

Operating earnings

288,104 

303,376 

699,301 

683,882 

Other nonoperating income, net

5,787 

359 

3,818 

5,954 

Interest expense, net

35,782 

32,197 

100,509 

98,165 

Earnings from continuing operations

before income taxes

258,109 

271,538 

602,610 

591,671 

Income tax expense

56,984 

53,472 

130,530 

111,764 

Earnings from continuing operations

201,125 

218,066 

472,080 

479,907 

Loss on discontinued operations, net of tax

(1,337)

(2,353)

(2,118)

(3,338)

Net earnings

$       199,788 

$       215,713 

$       469,962 

$       476,569 

Other comprehensive income (loss), net of tax

Deferred loss on interest rate derivative

0 

0 

(14,679)

0 

Amortization of prior interest rate derivative loss

350 

57 

1,338 

169 

Amortization of actuarial loss and prior service

cost for benefit plans

1,695 

286 

5,085 

856 

Other comprehensive income (loss)

2,045 

343 

(8,256)

1,025 

Comprehensive income

$       201,833 

$       216,056 

$       461,706 

$       477,594 

Basic earnings (loss) per share

Continuing operations

$             1.52 

$             1.65 

$             3.56 

$             3.63 

Discontinued operations

(0.01)

(0.02)

(0.01)

(0.03)

Net earnings

$             1.51 

$             1.63 

$             3.55 

$             3.60 

Diluted earnings (loss) per share

Continuing operations

$             1.51 

$             1.63 

$             3.54 

$             3.60 

Discontinued operations

(0.01)

(0.01)

(0.01)

(0.02)

Net earnings

$             1.50 

$             1.62 

$             3.53 

$             3.58 

Weighted-average common shares outstanding

Basic

132,573 

132,414 

132,564 

132,244 

Assuming dilution

133,268 

133,375 

133,192 

133,273 

Depreciation, depletion, accretion and amortization

$       100,962 

$         96,247 

$       295,912 

$       278,925 

Effective tax rate from continuing operations

22.1%

19.7%

21.7%

18.9%

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


3


VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended

Unaudited

September 30

in thousands

2020

2019

Operating Activities

Net earnings

$       469,962 

$       476,569 

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

Depreciation, depletion, accretion and amortization

295,912 

278,925 

Noncash operating lease expense

27,820 

26,349 

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

(2,317)

(10,982)

Contributions to pension plans

(6,540)

(6,767)

Share-based compensation expense

23,239 

24,815 

Deferred tax expense (benefit)

50,346 

62,232 

Changes in assets and liabilities before initial

effects of business acquisitions and dispositions

(76,545)

(221,001)

Other, net

(3,951)

15,989 

Net cash provided by operating activities

$       777,926 

$       646,129 

Investing Activities

Purchases of property, plant & equipment

(268,989)

(306,893)

Proceeds from sale of property, plant & equipment

9,440 

12,112 

Proceeds from sale of businesses

651 

1,744 

Payment for businesses acquired, net of acquired cash

(5,668)

1,122 

Other, net

10,819 

(11,342)

Net cash used for investing activities

$     (253,747)

$     (303,257)

Financing Activities

Proceeds from short-term debt

0 

366,900 

Payment of short-term debt

0 

(499,900)

Payment of current maturities and long-term debt

(250,018)

(17)

Proceeds from issuance of long-term debt

750,000 

0 

Debt issuance and exchange costs

(15,394)

0 

Settlements of interest rate derivatives

(19,863)

0 

Purchases of common stock

(26,132)

(2,602)

Dividends paid

(135,161)

(122,943)

Share-based compensation, shares withheld for taxes

(16,303)

(37,598)

Other, net

(1,084)

(14)

Net cash provided by (used for) financing activities

$       286,045 

$     (296,174)

Net increase in cash and cash equivalents and restricted cash

810,224 

46,698 

Cash and cash equivalents and restricted cash at beginning of year

274,506 

44,404 

Cash and cash equivalents and restricted cash at end of period

$    1,084,730 

$         91,102 

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

4


notes to condensed consolidated financial statements

Note 1: summary of significant accounting policies

NATURE OF OPERATIONS

Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation's largest 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. 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 Alabama, Arizona, California, Maryland, New Mexico, Tennessee, Texas, Virginia and Washington D.C. 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 (GAAP) for complete financial statements. We prepared the accompanying condensed consolidated financial statements on the same basis as our annual financial statements, except for the adoption of new accounting standards as described in Note 17. Our Condensed Consolidated Balance Sheet as of December 31, 2019 was derived from the audited financial statement, but it does not include all disclosures required by GAAP. 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. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K. Operating results for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, particularly in light of the uncertainty over the economic and operational impacts of the current novel coronavirus (COVID-19) pandemic.

While we continue to operate as an essential business, the COVID-19 pandemic has impacted our industry and the economy and it may have far-reaching impacts on many aspects of our operations, directly and indirectly, including with respect to its impacts on customer behaviors, business and manufacturing operations, our employees, and the market generally. Our condensed consolidated financial statements reflect estimates and assumptions made by management that affect the reported amounts of assets, liabilities, revenues and expenses. Such estimates and assumptions affect, among other things, our goodwill and long-lived asset valuations; inventory valuation; assessment of the annual effective tax rate; valuation of deferred income taxes; allowance for doubtful accounts; measurement of cash bonus plans; and pension plan assumptions. Events and changes in circumstances arising after September 30, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.

Due to the 2005 sale of our Chemicals business as described within this Note under the caption Discontinued Operations, the 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 and cash reserved by other contractual agreements (such as asset purchase agreements) for a specified purpose and therefore is not available for use for other purposes. The escrow accounts are administered by an intermediary. Cash restricted pursuant to like-kind exchange agreements remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Restricted cash is included with cash and cash equivalents in the accompanying Condensed Consolidated Statements of Cash Flows.

5


LEASES

Our nonmineral leases with initial terms in excess of one year are recognized on the balance sheet as right-of-use (ROU) assets and lease liabilities. Mineral leases are exempt from balance sheet recognition.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The lease term only includes options to extend or terminate the lease when it is reasonably certain that we will exercise that option. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. ROU assets are adjusted for any prepaid lease payments and lease incentives. Except for equipment with monthly monitoring service where the service component accounts for a majority of the lease cost, the non-lease components of our lease agreements are not separated from the lease components.

For additional information about leases see 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. Results from discontinued operations are as follows:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Discontinued Operations

Pretax loss

$       (1,810)

$       (3,167)

$       (2,868)

$       (4,506)

Income tax benefit

473 

814 

750 

1,168 

Loss on discontinued operations,

net of tax

$       (1,337)

$       (2,353)

$       (2,118)

$       (3,338)

Our discontinued operations include charges/credits related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business (including certain matters as discussed in Note 8). There were no revenues from discontinued operations for the periods presented.

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:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Weighted-average common shares

outstanding

132,573 

132,414 

132,564 

132,244 

Dilutive effect of

Stock-Only Stock Appreciation Rights

314 

525 

307 

662 

Other stock compensation plans

381 

436 

321 

367 

Weighted-average common shares

outstanding, assuming dilution

133,268 

133,375 

133,192 

133,273 

All dilutive common stock equivalents are reflected 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 would be excluded.

6


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

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Antidilutive common stock equivalents

146 

71 

269 

161 

 

RECLASSIFICATIONS

Certain items previously reported in specific financial statement captions have been reclassified to conform to the 2020 presentation.

 

Note 2: Leases

Our portfolio of nonmineral leases is composed almost entirely of operating leases (we do not have any material finance leases) for real estate (including office buildings, aggregates sales yards, and concrete and asphalt sites) and equipment (including railcars and rail track, barges, office equipment and plant equipment).

Operating lease ROU assets and liabilities and the weighted-average lease term and discount rate are as follows:

September 30

December 31

September 30

in thousands

Classification on the Balance Sheet

2020

2019

2019

Assets

Operating lease ROU assets

$     483,659 

$     441,656 

$     435,986 

Accumulated amortization

(52,432)

(33,467)

(25,153)

Total lease assets

Operating lease right-of-use assets, net

$     431,227 

$     408,189 

$     410,833 

Liabilities

Current

Operating

Other current liabilities

$       36,434 

$       29,971 

$       30,282 

Noncurrent

Operating

Operating lease liabilities

407,336 

388,042 

391,079 

Total lease liabilities

$     443,770 

$     418,013 

$     421,361 

Lease Term and Discount Rate

Weighted-average remaining lease term (years)

Operating leases

10.1 

9.9 

9.6 

Weighted-average discount rate

Operating leases

3.9%

4.3%

4.4%

Our lease agreements do not contain residual value guarantees, restrictive covenants or early termination options that we deem material. We have not sought or been granted any material lease concessions as a result of the COVID-19 pandemic.

Lease expense for operating leases is recognized on a straight-line basis over the lease term. The components of operating lease expense are as follows:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Lease Cost

Operating lease cost

$       14,837 

$       14,057 

$       43,177 

$       42,352 

Short-term lease cost 1

8,263 

8,756 

25,704 

25,378 

Variable lease cost

3,236 

3,637 

10,141 

10,194 

Sublease income

(677)

(774)

(2,133)

(2,192)

Total lease cost

$       25,659 

$       25,676 

$       76,889 

$       75,732 

1

Our short-term lease cost includes the cost of leases with an initial term of one month or less.

7


Cash paid for operating leases was $40,456,000 and $39,326,000 for the nine months ended September 30, 2020 and 2019, respectively, and was reflected as reductions to operating cash flows.

 

 

Note 3: Income Taxes

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law on March 27, 2020. The CARES Act provides numerous tax relief provisions and stimulus measures. A temporary favorable change to the prior year and current year limitations on interest deductions and a temporary suspension of certain payment requirements for the employer portion of Social Security taxes are the relief provisions that are expected to provide us the greatest benefit. In the first quarter of 2020 (i.e., the period of enactment), an expected cash tax benefit of $13,301,000 was recorded to account for the favorable change to the prior year limitation on interest deductions.

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 third quarter of 2020, we recorded income tax expense from continuing operations of $56,984,000 compared to $53,472,000 in the third quarter of 2019. The increase in tax expense was primarily related to a decrease in share-based compensation excess tax benefits as compared to the same quarter in 2019.

For the first nine months of 2020, we recorded income tax expense from continuing operations of $130,530,000 compared to $111,764,000 for the first nine months of 2019. The increase in tax expense was primarily related to a decrease in share-based compensation excess tax benefits as compared to the same period in 2019.

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. A summary of our deferred tax assets and liabilities is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Each quarter we analyze the likelihood that our deferred tax assets will be realized. 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. 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. We project Alabama state net operating loss (NOL) carryforward deferred tax assets at December 31, 2020 of $63,267,000 against which we have a valuation allowance of $29,236,000. All but a de minimis portion of the Alabama NOL carryforward, if not utilized, would expire between 2023 and 2032.

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.

 

 

8


Note 4: revenueS

Revenues are measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect are excluded from revenues. Costs to obtain and fulfill contracts (primarily asphalt construction paving contracts) are immaterial and are expensed as incurred when the expected amortization period is one year or less.

Our segment total revenues by geographic market for the three and nine month periods ended September 30, 2020 and 2019 are disaggregated as follows:

Three Months Ended September 30, 2020

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Total Revenues by Geographic Market 1

East

$     360,985 

$     46,212 

$     73,181 

$              0 

$      480,378 

Gulf Coast

535,215 

55,894 

18,889 

1,354 

611,352 

West

152,762 

133,095 

10,737 

0 

296,594 

Segment sales

$  1,048,962 

$   235,201 

$   102,807 

$       1,354 

$   1,388,324 

Intersegment sales

(78,434)

0 

0 

0 

(78,434)

Total revenues

$     970,528 

$   235,201 

$   102,807 

$       1,354 

$   1,309,890 

Three Months Ended September 30, 2019

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Total Revenues by Geographic Market 1

East

$     387,291 

$     59,156 

$     74,446 

$              0 

$      520,893 

Gulf Coast

565,607 

63,803 

18,338 

2,119 

649,867 

West

180,187 

147,278 

20,180 

0 

347,645 

Segment sales

$  1,133,085 

$   270,237 

$   112,964 

$       2,119 

$   1,518,405 

Intersegment sales

(99,647)

0 

0 

0 

(99,647)

Total revenues

$  1,033,438 

$   270,237 

$   112,964 

$       2,119 

$   1,418,758 

Nine Months Ended September 30, 2020

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Total Revenues by Geographic Market 1

East

$     951,090 

$    102,053 

$    206,954 

$               0 

$    1,260,097 

Gulf Coast

1,596,321 

140,253 

53,801 

5,269 

1,795,644 

West

440,373 

355,634 

37,500 

0 

833,507 

Segment sales

$  2,987,784 

$    597,940 

$    298,255 

$        5,269 

$    3,889,248 

Intersegment sales

(207,541)

0 

0 

0 

(207,541)

Total revenues

$  2,780,243 

$    597,940 

$    298,255 

$        5,269 

$    3,681,707 

Nine Months Ended September 30, 2019

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Total Revenues by Geographic Market 1

East

$     951,543 

$    123,764 

$    200,033 

$               0 

$    1,275,340 

Gulf Coast

1,615,987 

157,581 

49,709 

6,073 

1,829,350 

West

462,581 

368,145 

50,627 

0 

881,353 

Segment sales

$  3,030,111 

$    649,490 

$    300,369 

$        6,073 

$    3,986,043 

Intersegment sales

(243,092)

0 

0 

0 

(243,092)

Total revenues

$  2,787,019 

$    649,490 

$    300,369 

$        6,073 

$    3,742,951 

1

The geographic markets are defined by states/countries as follows:

East market — Arkansas, Delaware, Illinois, Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and Washington D.C.

Gulf Coast marketAlabama, Florida, Georgia, Louisiana, Mexico, Mississippi, Oklahoma, South Carolina and Texas

West market — Arizona, California and New Mexico

9


Total revenues are primarily derived from our product sales of aggregates (crushed stone, sand and gravel, sand and other aggregates), asphalt mix and ready-mixed concrete, and include freight & delivery costs that we pass along to our customers to deliver these products. We also generate service revenues from our asphalt construction paving business and service revenues related to our aggregates business, such as landfill tipping fees. Our total service revenues were $63,347,000 and $75,508,000 for the three months ended September 30, 2020 and 2019, respectively, and $160,285,000 and $175,280,000 for the nine months ended September 30, 2020 and 2019, respectively.

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, the vast majority of our aggregates business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.

PRODUCT REVENUES

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs at a point in time when our aggregates, asphalt mix and ready-mixed concrete are shipped/delivered and control passes to the customer. Revenue for our products is recorded at the fixed invoice amount and payment is due by the 15th day of the following monthwe do not offer discounts for early payment.

Freight & delivery generally represents pass-through transportation we incur (including our administrative costs) and pay to third-party carriers to deliver our products to customers and are accounted for as a fulfillment activity. Likewise, the costs related to freight & delivery are included in cost of revenues.

Freight & delivery revenues are as follows:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Freight & Delivery Revenues

Total revenues

$  1,309,890 

$  1,418,758 

$  3,681,707 

$  3,742,951 

Freight & delivery revenues 1

(187,562)

(206,929)

(566,785)

(566,330)

Total revenues excluding freight & delivery

$  1,122,328 

$  1,211,829 

$  3,114,922 

$  3,176,621 

1

Includes freight & delivery to remote distribution sites.

CONSTRUCTION PAVING SERVICE REVENUES

Revenue from our asphalt construction paving business is recognized over time using the percentage-of-completion method under the cost approach. The percentage of completion is determined by costs incurred to date as a percentage of total costs estimated for the project. Under this approach, recognized contract revenue equals the total estimated contract revenue multiplied by the percentage of completion. Our construction contracts are unit priced, and an account receivable is recorded for amounts invoiced based on actual units produced. Contract assets for estimated earnings in excess of billings, contract assets related to retainage provisions and contract liabilities for billings in excess of costs are immaterial. Variable consideration in our construction paving contracts is immaterial and consists of incentives and penalties based on the quality of work performed. Our construction paving contracts may contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from nine months to one year after project completion. Due to the nature of our construction paving projects, including contract owner inspections of the work during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties.

10


VOLUMETRIC PRODUCTION PAYMENT DEFERRED REVENUES

In 2013 and 2012, we sold a percentage interest in certain future aggregates production for net cash proceeds of $226,926,000. These transactions, structured as volumetric production payments (VPPs):

relate to eight quarries in Georgia and South Carolina

provide the purchaser solely with a nonoperating percentage interest in the subject quarries’ future aggregates production

contain no minimum annual or cumulative guarantees by us for production or sales volume, nor minimum sales price

are both volume and time limited (we expect the transactions will last approximately 25 years, limited by volume rather than time)

We are the exclusive sales agent for, and transmit quarterly to the purchaser the proceeds from the sale of, the purchaser’s share of aggregates production. Our consolidated total revenues exclude the revenue from the sale of the purchaser’s share of aggregates.

The proceeds we received from the sale of the percentage interest were recorded as deferred revenue on the balance sheet. We recognize revenue on a unit-of-sales basis (as we sell the purchaser’s share of production) relative to the volume limitations of the transactions. Given the nature of the risks and potential rewards assumed by the buyer, the transactions do not reflect financing activities.

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

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Deferred Revenue

Balance at beginning of period

$     181,963 

$     189,052 

$     185,339 

$     192,783 

Revenue recognized from deferred revenue

(2,046)

(2,125)

(5,422)

(5,856)

Balance at end of period

$     179,917 

$     186,927 

$     179,917 

$     186,927 

Based on expected sales from the specified quarries, we expect to recognize $7,500,000 of VPP deferred revenue as income during the 12-month period ending September 30, 2021 (reflected in other current liabilities in our September 30, 2020 Condensed Consolidated Balance Sheet).

 

 

11


Note 5: Fair Value Measurements

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

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

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

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

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

Level 1 Fair Value

September 30

December 31

September 30

in thousands

2020

2019

2019

Fair Value Recurring

Rabbi Trust

Mutual funds

$       24,447 

$       22,883 

$       22,667 

Total

$       24,447 

$       22,883 

$       22,667 

Level 2 Fair Value

September 30

December 31

September 30

in thousands

2020

2019

2019

Fair Value Recurring

Rabbi Trust

Money market mutual fund

$        1,581 

$        1,340 

$           190 

Total

$        1,581 

$        1,340 

$           190 

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 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 $1,352,000 and $2,843,000 for the nine months ended September 30, 2020 and 2019, respectively. The portions of the net gains related to investments still held by the Rabbi Trusts at September 30, 2020 and 2019 were $1,360,000 and $2,879,000, respectively.

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

 

 

12


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 exposures. 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. Changes in the fair value of 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. We may also enter into contracts that qualify for the normal purchases and normal sale (NPNS) exception. When a contract meets the criteria to qualify as NPNS, we apply such exception. Income recognition and realization related to NPNS contracts generally coincide with the physical delivery of the commodity. For contracts qualifying for the NPNS exception, no recognition of the contract’s fair value in the consolidated financial statements is required until settlement of the contract as long as the transaction remains probable of occurring.

In February 2020, we entered into interest rate locks of a future debt issuance to hedge the risk of higher interest rates. These interest rate locks were designated as cash flow hedges. Consistent with their terms, we settled the interest rate locks in March 2020 for a cash payment of $19,863,000. Given that the related debt issuance at the end of the first quarter: a) was not executed, b) remained probable in the near term and c) had uncertain timing, 1/20th of the hedge was deemed ineffective and $993,000 of the settlement was recorded to interest expense in the first quarter. The remainder of the settlement was deferred and recorded in AOCI. In May 2020, we issued the related debt in the form of $750,000,000 of 3.50% 10-year notes. The deferred hedge settlement amount in AOCI is amortized to interest expense over the term of the related debt.

In 2007 and 2018, we entered into interest rate locks of future debt issuances to hedge the risk of higher interest rates. These interest rate locks were designated as cash flow hedges. The gain/loss upon settlement of these interest rate hedges is deferred (recorded in AOCI) and amortized to interest expense over the term of the related debt.

This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:

Three Months Ended

Nine Months Ended

Location on

September 30

September 30

in thousands

Statement

2020

2019

2020

2019

Interest Rate Hedges

Loss reclassified from AOCI

Interest

(effective portion)

expense

$          (473)

$            (78)

$       (1,810)

$          (229)

For the 12-month period ending September 30, 2021, we estimate that $1,937,000 of the $24,294,000 net of tax loss in AOCI will be reclassified to interest expense.

 

 

13


Note 7: Debt

Debt is detailed as follows:

Effective

September 30

December 31

September 30

in thousands

Interest Rates

2020

2019

2019

Short-term Debt

Bank line of credit expires 2025 1

$                  0 

$                0 

$                0 

Total short-term debt

$                  0 

$                0 

$                0 

Long-term Debt

Bank line of credit expires 2025 1

$                  0 

$                0 

$                0 

Floating-rate notes due 2020

0 

250,000 

250,000 

Floating-rate notes due 2021

1.10%

500,000 

500,000 

500,000 

8.85% notes due 2021

8.88%

6,000 

6,000 

6,000 

4.50% notes due 2025

4.65%

400,000 

400,000 

400,000 

3.90% notes due 2027

4.00%

400,000 

400,000 

400,000 

3.50% notes due 2030

3.94%

750,000 

0 

0 

7.15% notes due 2037

8.05%

129,239 

129,239 

129,239 

4.50% notes due 2047

4.59%

700,000 

700,000 

700,000 

4.70% notes due 2048

5.42%

460,949 

460,949 

460,948 

Other notes

0.86%

11,718 

185 

191 

Total long-term debt - face value

$    3,357,906 

$  2,846,373 

$  2,846,378 

Unamortized discounts and debt issuance costs

(71,399)

(62,033)

(63,286)

Total long-term debt - book value

$    3,286,507 

$  2,784,340 

$  2,783,092 

Less current maturities

509,435 

25 

24 

Total long-term debt - reported value

$    2,777,072 

$  2,784,315 

$  2,783,068 

Estimated fair value of long-term debt

$    3,341,097 

$  3,073,693 

$  3,036,337 

1

Borrowings on the bank line of credit are classified as short-term if we intend to repay within twelve months and as long-term if we have the intent and ability to extend payment beyond twelve months.

Discounts and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $6,028,000 and $3,730,000 of net interest expense for these items for the nine months ended September 30, 2020 and 2019, respectively.

LINE OF CREDIT

In September 2020, we executed a new five-year unsecured line of credit of $1,000,000,000, incurring $4,632,000 of transaction costs. The line of credit contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility. There are two primary negative covenants: 1) a limit on our ability to incur secured debt, and 2) a maximum ratio of debt to EBITDA of 3.50:1 (upon certain acquisitions, the maximum ratio can be 3.75:1 for four quarters). As of September 30, 2020, we were in compliance with the line of credit covenants.

Borrowings on our line of credit are classified as short-term if we intend to repay within twelve months and as long-term 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 1.125% to 1.875%, or Truist Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.125% to 0.875%. 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 0.125% to 0.275% determined by our credit ratings. As of September 30, 2020, the credit margin for LIBOR borrowings was 1.375%, the credit margin for base rate borrowings was 0.375%, and the commitment fee for the unused amount was 0.175%.

14


In conjunction with the September 2020 line of credit execution, we terminated our $750,000,000 364-day delayed draw term loan executed in April 2020. During the second quarter, we had borrowed and repaid $250,000,000 on this delayed draw term loan leaving $500,000,000 available for future borrowings prior to its termination.

As of September 30, 2020, our available borrowing capacity under the line of credit was $943,371,000. Utilization of the borrowing capacity was as follows:

none was borrowed

$56,629,000 was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our $3,357,906,000 (face value) of term debt is unsecured. $3,346,188,000 of such debt is governed by three essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in all three indentures limits the amount of secured debt we may incur without ratably securing such debt. As of September 30, 2020, we were in compliance with all term debt covenants.

In May 2020, we issued $750,000,000 of 3.50% senior notes due 2030. Total proceeds were $741,417,000 (net of discounts and transaction costs). $250,000,000 of the proceeds were used to retire the $250,000,000 floating rate notes due June 2020. The remainder of the proceeds, together with cash on hand, will be used to retire the $500,000,000 floating rate notes due March 2021.

STANDBY LETTERS OF CREDIT

We provide, in the normal course of business, certain third-party beneficiaries with 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 canceled with the approval of the beneficiary. All of our standby letters of credit are issued by banks that participate in our $1,000,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of September 30, 2020 are summarized by purpose in the table below:

in thousands

Standby Letters of Credit

Risk management insurance

$       49,531 

Reclamation/restoration requirements

7,098 

Total

$       56,629 

 

 

15


Note 8: Commitments and Contingencies

Certain of our aggregates reserves are burdened by volumetric production payments (nonoperating interest) as described in Note 4. As the holder of the working interest, we have responsibility to bear the cost of mining and producing the reserves attributable to this nonoperating interest.

As stated in Note 2, our present value of future minimum (nonmineral) lease payments totaled $443,770,000 as of September 30, 2020.

As summarized by purpose in Note 7, our standby letters of credit totaled $56,629,000 as of September 30, 2020.

As described in Note 9, our asset retirement obligations totaled $258,948,000 as of September 30, 2020.

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. Amounts accrued for environmental matters (measured on an undiscounted basis) are presented below:

September 30

December 31

September 30

in thousands

2020

2019

2019

Accrued Environmental Remediation Costs

Continuing operations

$        26,094 

$        30,429 

$        33,706 

Retained from former Chemicals business

10,900 

10,972 

10,825 

Total

$        36,994 

$        41,401 

$        44,531 

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 Study Area (DISCONTINUED OPERATIONS and superfund site) — The Lower Passaic River Study Area is part of the Diamond Shamrock Superfund Site in New Jersey. Vulcan and approximately 70 other companies are parties (collectively the Cooperating Parties Group, CPG) to a May 2007 Administrative Order on Consent (AOC) with the EPA to perform a Remedial Investigation/Feasibility Study (draft RI/FS) of the lower 17 miles of the Passaic River (River). The draft RI/FS was submitted recommending a targeted hot spot remedy; however, the EPA issued a record of decision (ROD) in March 2016 that calls for a bank-to-bank dredging remedy for the lower 8 miles of the River. The EPA estimates that the cost of implementing this proposal is $1.38 billion. In September 2016, the EPA entered into an Administrative Settlement Agreement and Order on Consent with Occidental Chemical Corporation (Occidental) in which Occidental agreed to undertake the remedial design for this bank-to-bank dredging remedy and to reimburse the United States for certain response costs.

16


In August 2017, the EPA informed certain members of the CPG, including Vulcan, that it planned to use the services of a third-party allocator with the expectation of offering cash-out settlements to some parties in connection with the bank-to-bank remedy. This voluntary allocation process is intended to establish an impartial third-party expert recommendation that may be considered by the government and the participants as the basis of possible settlements. We are a participant in the voluntary allocation process, which is likely to extend beyond 2020.

In July 2018, Vulcan, along with more than one hundred other defendants, was sued by Occidental in United States District Court for the District of New Jersey, Newark Vicinage. Occidental is seeking cost recovery and contribution under CERCLA. It is unknown at this time whether the filing of the Occidental lawsuit will impact the EPA allocation process.

In October 2018, the EPA ordered the CPG to prepare a streamlined feasibility study specifically for the upper 9 miles of the River. This directive is focused on dioxin and covers the remaining portion of the River not included in the EPA’s March 2016 ROD.

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.

TEXAS BRINE MATTER (DISCONTINUED OPERATIONS) — During the operation of its former Chemicals Division, Vulcan secured the right to mine salt out of an underground salt dome formation in Assumption Parish, Louisiana from 1976 - 2005. Throughout that period and for all times thereafter, the Texas Brine Company (Texas Brine) was the operator contracted by Vulcan (and later Occidental) to mine and deliver the salt. We sold our Chemicals Division in 2005 and transferred our rights and interests related to the salt and mining operations to the purchaser, a subsidiary of Occidental, and we have had no association with the leased premises or Texas Brine since that time. In August 2012, a sinkhole developed in the vicinity of the Texas Brine mining operations, and numerous lawsuits were filed in state court in Assumption Parish, Louisiana. Other lawsuits, including class action litigation, were also filed in federal court before the Eastern District of Louisiana in New Orleans.

There are numerous defendants, including Texas Brine and Occidental, 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. Damage categories encompassed within the litigation include individual plaintiffs’ claims for property damage, a claim by the state of Louisiana for response costs and civil penalties, claims by Texas Brine for response costs and lost profits, claims for physical damages to nearby oil and gas pipelines and storage facilities (pipelines), and business interruption claims.

In addition to the plaintiffs’ claims, we were also sued for contractual indemnity and comparative fault by both Texas Brine and Occidental. 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 with Occidental, as well as an operating agreement and related contracts with Texas Brine; that we are strictly liable for certain property damages in our capacity as a former lessee of the salt lease; and that we violated certain covenants and conditions in the agreement under which we sold our Chemicals Division to Occidental. We likewise made claims for contractual indemnity and on a basis of comparative fault against Texas Brine and Occidental. Vulcan and Occidental have since dismissed all of their claims against one another. Texas Brine has claims that remain pending against Vulcan and against Occidental.

A bench trial (judge only) began in September 2017 and ended in October 2017 in the pipeline cases. The trial was limited in scope to the allocation of comparative fault or liability for causing the sinkhole, with a damages phase of the trial to be held at a later date. In December 2017, the judge issued a ruling on the allocation of fault among the three defendants as follows: Occidental 50%, Texas Brine 35% and Vulcan 15%. This ruling has been appealed by the parties.

17


We have settled all except two outstanding cases, and our insurers to date have funded these settlements in excess of our self-insured retention amount. The remaining cases involve Texas Brine and the state of Louisiana. Discovery remains ongoing and we cannot reasonably estimate a range of liability pertaining to these open cases at this time.

NEW YORK WATER DISTRICT CASES (DISCONTINUED OPERATIONS) — During the operation of our former Chemicals Division, which was divested to Occidental in 2005, Vulcan manufactured a chlorinated solvent known as 1,1,1-trichloroethane. We are a defendant in 27 cases allegedly involving 1,1,1-trichloroethane. All of the cases are filed in the United States District Court for the Eastern District of New York. According to the various complaints, the plaintiffs are public drinking water providers who serve customers in seven New York counties (Nassau, Orange, Putnam, Sullivan, Ulster, Washington and Westchester). It is alleged that our 1,1,1-trichloroethane was stabilized with 1,4-dioxane and that various water wells of the plaintiffs are contaminated with 1,4-dioxane. The plaintiffs are seeking unspecified compensatory and punitive damages. We will vigorously defend the cases. At this time we cannot determine the likelihood or reasonably estimate a range of loss, if any, pertaining to the cases.

HEWITT LANDFILL MATTER (SUPERFUND SITE) — In September 2015, the Los Angeles Regional Water Quality Control Board (RWQCB) issued a Cleanup and Abatement Order directing Vulcan to assess, monitor, cleanup and abate wastes that have been discharged to soil, soil vapor, and/or groundwater at the former Hewitt Landfill in Los Angeles.

Following an onsite and offsite investigation and pilot scale testing, the RWQCB approved a corrective action that includes leachate recovery, storm water capture and conveyance improvements, and a groundwater pump, treat and reinjection system. Certain on-site source control measures have been implemented and the groundwater treatment system is expected to be operating in late-2020. The currently-anticipated costs of these on-site source control activities have been fully accrued.

We are also engaged in an ongoing dialogue with the EPA, Honeywell, and the Los Angeles Department of Water and Power (LADWP) 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.

The EPA and Vulcan entered into an AOC and Statement of Work having an effective date of September 2017 for the design of two extraction wells south of the Hewitt Landfill to protect the North Hollywood West (NHW) well field located within the NHOU. In November 2017, we submitted a Pre-Design Investigation (PDI) Work Plan to the EPA, which sets forth the activities and schedule for collection of data in support of our evaluation of the need for an offsite remedy. In addition, this evaluation was expanded as part of the PDI to include the evaluation of a remedy in light of a new project by LADWP at the Rinaldi-Toluca (RT) wellfield. PDI investigative activities were completed between the first and third quarters of 2018, and in December 2018 we submitted a PDI Evaluation Report to the EPA. The PDI Evaluation Report summarizes data collection activities conducted pursuant to the PDI Work Plan and provides model updates and evaluation of remediation alternatives. EPA provided an initial set of comments on the PDI Evaluation Report in May 2019 and a final set of comments in October 2020. The final set of comments includes a request for Vulcan to revise the PDI Evaluation Report in response to EPA’s comments and to provide a Supplemental PDI Report to provide additional modeling of Hewitt Landfill groundwater impacts. The final comments further provide, if Vulcan agrees, a proposal for an alternative design plan to modify the remedy in the 2009 ROD as it relates to the Hewitt Landfill. Until the EPA’s review of the final version of the revised PDI Evaluation Report and any Supplemental Report on remedial alternative(s) is complete and an effective remedy has been agreed upon, we cannot identify an appropriate remedial action that will be required under the AOC. Given the various stakeholders involved and the uncertainties relating to remediation alternatives, we cannot reasonably estimate a loss pertaining to Vulcan’s responsibility for future remedial action required by the EPA.

In December 2019, Honeywell agreed with LADWP to build a water treatment system (often referred to as the Cooperative Containment Concept or CCC or the second interim remedy) that will provide treated groundwater in the NHOU to LADWP for public water supply purposes. Honeywell contends that some of the contamination to be remediated by the system it will build originated from the Hewitt Landfill, and that Vulcan should fund some portion of the costs that Honeywell has incurred and will incur in developing the second interim remedy. During the third quarter 2020, Vulcan recorded an immaterial accrual related to Honeywell’s contribution claim for certain types of cost incurred. We are also 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. At this time, we cannot reasonably estimate a range of an additional loss to Vulcan pertaining to this contribution claim.

18


Further, LADWP has announced plans to install new treatment capabilities at two City wellfields located near the Hewitt Landfillthe NHW wellfield and the RT wellfield. LADWP has alleged that the Hewitt Landfill is one of the primary PRPs for the contamination at the NHW wellfield and is one of many PRPs for the contamination at the RT wellfield. 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, consistent with the parallel request by the EPA. This work is also intended to assist in identification of other PRPs that may have contributed to groundwater contamination in the area. Vulcan is also seeking access to LADWP’s list of PRPs. At this time, we cannot reasonably estimate a range of a loss to Vulcan pertaining to this contribution claim.

NAFTA ARBITRATION — In September 2018, our subsidiary Legacy Vulcan, LLC (Legacy Vulcan), on its own behalf, and on behalf of our Mexican subsidiary Calizas Industriales del Carmen, S.A. de C.V. (Calica), served the United Mexican States (Mexico) a Notice of Intent to Submit a Claim to Arbitration under Chapter 11 of the North American Free Trade Agreement (NAFTA). Our NAFTA claim relates to the treatment of a portion of our quarrying operations in Playa del Carmen (Cancun), Mexico, arising from, among other measures, Mexico’s failure to comply with a legally binding zoning agreement and relates to other unfair, arbitrary and capricious actions by Mexico’s environmental enforcement agency. We assert that these actions are in breach of Mexico’s international obligations under NAFTA and international law.

As required by Article 1118 of NAFTA, we sought to settle this dispute with Mexico through consultations. Notwithstanding our good faith efforts to resolve the dispute amicably, we were unable to do so and filed a Request for Arbitration, which we filed with the International Centre for Settlement of Investment Disputes (ICSID) in December 2018. In January 2019, ICSID registered our Request for Arbitration.

We expect that the NAFTA arbitration will take at least two years to be concluded. At this time, there can be no assurance whether we will be successful in our NAFTA claim, and we cannot quantify the amount we may recover, if any, under this arbitration proceeding if we were successful.

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.

 

 

19


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. These AROs relate to our underlying land parcels, including both owned properties and mineral leases. ARO operating costs related to accretion of the liabilities and depreciation of the assets are as follows:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

ARO Operating Costs

Accretion

$        3,115 

$        2,744 

$        9,270 

$        8,194 

Depreciation

2,123 

1,720 

6,022 

5,361 

Total

$        5,238 

$        4,464 

$      15,292 

$      13,555 

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

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

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Asset Retirement Obligations

Balance at beginning of period

$     263,748 

$     223,497 

$     210,323 

$     225,726 

Liabilities incurred

353 

0 

353 

263 

Liabilities settled

(2,459)

(2,684)

(11,047)

(9,650)

Accretion expense

3,115 

2,744 

9,270 

8,194 

Revisions, net

(5,809)

510 

50,049 

(466)

Balance at end of period

$     258,948 

$     224,067 

$     258,948 

$     224,067 

ARO liabilities settled during the first nine months of 2020 and 2019 include $2,358,000 and $2,403,000, respectively, of reclamation activities required under a development agreement and conditional use permits at two adjacent aggregates sites on owned property in Southern California. The reclamation required under the development agreement will result in the restoration of 90 acres of previously mined property to conditions suitable for retail and commercial development.

ARO revisions during the first nine months of 2020 primarily include increases in estimated costs at three aggregates locations, including reclamation activities required under a development agreement at an aggregates site on owned property in Southern California. The reclamation required under the development agreement will result in the restoration of previously mined property to conditions suitable for retail and commercial development.

 

 

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Note 10: Benefit Plans

PENSION 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.

In 2005, benefit accruals for our Chemicals Hourly Plan participants ceased upon the sale of our Chemicals business. Effective July 2007, we amended our defined benefit pension plans to no longer accept new participants with the exception of two unions that continue to add new participants. Future benefit accruals for participants in our salaried defined benefit pension plans ceased on December 31, 2013, while salaried participants’ earnings considered for benefit calculations were frozen on December 31, 2015.

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

PENSION BENEFITS

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Components of Net Periodic Benefit Cost

Service cost

$        1,331 

$        1,248 

$        3,993 

$        3,746 

Interest cost

7,531 

9,410 

22,593 

28,230 

Expected return on plan assets

(12,485)

(11,938)

(37,454)

(35,813)

Amortization of prior service cost

335 

335 

1,005 

1,005 

Amortization of actuarial loss

3,140 

1,358 

9,419 

4,074 

Net periodic pension benefit cost (credit)

$          (148)

$           413 

$          (444)

$        1,242 

Pretax reclassifications from AOCI included in

net periodic pension benefit cost

$        3,475 

$        1,693 

$      10,424 

$        5,079 

The contributions to pension plans for the nine months ended September 30, 2020 and 2019, as reflected on the Condensed Consolidated Statements of Cash Flows, pertain to benefit payments under nonqualified plans for both periods.

POSTRETIREMENT PLANS

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:

OTHER POSTRETIREMENT BENEFITS

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Components of Net Periodic Benefit Cost

Service cost

$           380 

$           329 

$        1,140 

$           988 

Interest cost

242 

347 

727 

1,041 

Amortization of prior service credit

(980)

(980)

(2,939)

(2,939)

Amortization of actuarial gain

(201)

(327)

(604)

(981)

Net periodic postretirement benefit credit

$          (559)

$          (631)

$       (1,676)

$       (1,891)

Pretax reclassifications from AOCI included in

net periodic postretirement benefit credit

$       (1,181)

$       (1,307)

$       (3,543)

$       (3,920)

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DEFINED CONTRIBUTION PLANS

In addition to our pension and postretirement plans, we sponsor two defined contribution plans. Substantially all salaried and nonunion hourly employees are eligible to be covered by one of these plans. Under these plans, we match employees’ eligible contributions at established rates. Expense recognized in connection with these matching obligations totaled $13,707,000 and $13,646,000 for the three months ended September 30, 2020 and 2019, respectively, and totaled $37,574,000 and $41,246,000 for the nine months ended September 30, 2020 and 2019, respectively.

 

 

Note 11: other Comprehensive Income

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

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

September 30

December 31

September 30

in thousands

2020

2019

2019

AOCI

Interest rate hedges

$       (24,294)

$       (10,953)

$       (11,011)

Pension and postretirement plans

(181,701)

(186,785)

(160,179)

Total

$     (205,995)

$     (197,738)

$     (171,190)

Changes in AOCI, net of tax, for the nine months ended September 30, 2020 are as follows:

Pension and

Interest Rate

Postretirement

in thousands

Hedges

Benefit Plans

Total

AOCI

Balances as of December 31, 2019

$       (10,953)

$     (186,785)

$     (197,738)

Other comprehensive income (loss)

before reclassifications

(14,679)

0 

(14,679)

Amounts reclassified from AOCI

1,338 

5,084 

6,422 

Net current period OCI changes

(13,341)

5,084 

(8,257)

Balances as of September 30, 2020

$       (24,294)

$     (181,701)

$     (205,995)

Amounts reclassified from AOCI to earnings, are as follows:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Amortization of Interest Rate Hedge Losses

Interest expense

$            473 

$              78 

$         1,810 

$            229 

Benefit from income taxes

(123)

(21)

(472)

(60)

Total

$            350 

$              57 

$         1,338 

$            169 

Amortization of Pension and Postretirement

Plan Actuarial Loss and Prior Service Cost

Other nonoperating expense

$         2,294 

$            386 

$         6,881 

$         1,159 

Benefit from income taxes

(599)

(100)

(1,796)

(303)

Total

$         1,695 

$            286 

$         5,085 

$            856 

Total reclassifications from AOCI to earnings

$         2,045 

$            343 

$         6,423 

$         1,025 

 

 

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Note 12: Equity

Our capital stock consists solely of common stock, par value $1.00 per share, of which 480,000,000 shares may be issued. Holders of our common stock are entitled to one vote per share. We may also issue 5,000,000 shares of preferred stock, but 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.

There were no shares held in treasury as of September 30, 2020, December 31, 2019 and September 30, 2019.

Our common stock purchases (all of which were open market purchases) and subsequent retirements for the year-to-date periods ended are as follows:

September 30

December 31

September 30

in thousands, except average cost

2020

2019

2019

Shares Purchased and Retired

Number

214 

19 

19 

Total purchase price

$        26,132 

$          2,602 

$          2,602 

Average cost per share

$        121.92 

$        139.90 

$        139.90 

As of September 30, 2020, 8,064,851 shares may be purchased under the current authorization of our Board of Directors.

Changes in total equity are summarized below:

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands, except per share data

2020

2019

2020

2019

Total Equity

Balance at beginning of period

$    5,764,151 

$    5,371,447 

$    5,621,857 

$    5,202,903 

Net earnings

199,788 

215,713 

469,962 

476,569 

Common stock issued

Share-based compensation plans, net of shares

withheld for taxes

(617)

(12,091)

(17,157)

(37,528)

Purchase and retirement of common stock

0 

(2,602)

(26,132)

(2,602)

Share-based compensation expense

8,019 

10,445 

23,239 

24,815 

Cash dividends on common stock

($0.34/$0.31/$1.02/$0.93 per share, respectively)

(45,034)

(41,016)

(135,161)

(122,943)

Other comprehensive income (expense)

2,045 

343 

(8,256)

1,025 

Balance at end of period

$    5,928,352 

$    5,542,239 

$    5,928,352 

$    5,542,239 

 

 

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Note 13: Segment Reporting

We have four operating (and reportable) segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. The vast majority of our activities are domestic. We sell a relatively small amount of construction aggregates outside the United States. Our Asphalt and Concrete segments are primarily supplied with their aggregates requirements from our Aggregates segment. These 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

Three Months Ended

Nine Months Ended

September 30

September 30

in thousands

2020

2019

2020

2019

Total Revenues

Aggregates 1

$      1,048,962 

$    1,133,085 

$      2,987,784 

$    3,030,111 

Asphalt 2

235,201 

270,237 

597,940 

649,490 

Concrete

102,807 

112,964 

298,255 

300,369 

Calcium

1,354 

2,119 

5,269 

6,073 

Segment sales

$      1,388,324 

$    1,518,405 

$      3,889,248 

$    3,986,043 

Aggregates intersegment sales

(78,434)

(99,647)

(207,541)

(243,092)

Total revenues

$      1,309,890 

$    1,418,758 

$      3,681,707 

$    3,742,951 

Gross Profit

Aggregates

$         337,891 

$       357,202 

$         883,184 

$       872,133 

Asphalt

30,217 

27,639 

58,246 

51,950 

Concrete

12,157 

15,037 

35,597 

36,487 

Calcium

233 

765 

1,713 

2,250 

Total

$         380,498 

$       400,643 

$         978,740 

$       962,820 

Depreciation, Depletion, Accretion

and Amortization (DDA&A)

Aggregates

$           82,487 

$         78,978 

$         240,370 

$       227,259 

Asphalt

8,644 

8,909 

26,046 

26,343 

Concrete

3,987 

3,371 

12,070 

9,662 

Calcium

49 

59 

146 

177 

Other

5,795 

4,930 

17,280 

15,484 

Total

$         100,962 

$         96,247 

$         295,912 

$       278,925 

Identifiable Assets 3

Aggregates

$      9,497,041 

$    9,403,342 

Asphalt

559,416 

601,059 

Concrete

315,349 

302,003 

Calcium

3,611 

3,990 

Total identifiable assets

$    10,375,417 

$  10,310,394 

General corporate assets

130,386 

138,177 

Cash and cash equivalents and restricted cash

1,084,730 

91,102 

Total assets

$    11,590,533 

$  10,539,673 

1

Includes product sales (crushed stone, sand and gravel, sand, and other aggregates), as well as freight & delivery costs that we pass along to our customers, and service revenues (see Note 4) related to aggregates.

2

Includes product sales, as well as service revenues (see Note 4) from our asphalt construction paving business.

3

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

 

 

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Note 14: Supplemental Cash Flow Information

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

Nine Months Ended

September 30

in thousands

2020

2019

Cash Payments

Interest (exclusive of amount capitalized)

$       75,058 

$       85,140 

Income taxes

72,544 

46,955 

Noncash Investing and Financing Activities

Accrued liabilities for purchases of property, plant & equipment

$       16,765 

$       28,828 

Recognition of new asset retirement obligations

353 

263 

Right-of-use assets obtained in exchange for new operating lease liabilities 1

43,665 

438,517 

Amounts referable to business acquisitions

Liabilities assumed

5,637 

3,525 

Consideration payable to seller

8,980 

0 

Fair value of noncash assets and liabilities exchanged

21,214 

0 

Debt issued for purchases of property, plant & equipment

2,571 

0 

1

The 2019 amount includes the initial right-of-use assets resulting from our adoption of ASU 2016-02, “Leases.”

 

 

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 nine month periods ended September 30, 2020 and 2019. Accumulated goodwill impairment losses amount to $252,664,000 in the Calcium segment.

We have four reportable segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. Changes in the carrying amount of goodwill by reportable segment from December 31, 2019 to September 30, 2020 are shown below:

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Goodwill

Totals at December 31, 2019

$    3,075,428 

$     91,633 

$              0 

$              0 

$    3,167,061 

Goodwill of acquired businesses 1

5,051 

0 

0 

0 

5,051 

Totals at September 30, 2020

$    3,080,479 

$     91,633 

$              0 

$              0 

$    3,172,112 

1

See Note 16 for a summary of recent acquisitions.

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.

 

 

25


Note 16: Acquisitions and Divestitures

BUSINESS ACQUISITIONS

2020 BUSINESS ACQUISITIONS — Through the nine months ended September 30, 2020, we purchased businesses that support our aggregates operations for total consideration of $35,862,000.

The 2020 acquisitions are reported in our consolidated financial statements as of the acquisition dates and are not material to our results of operations or financial position.

As a result of these 2020 acquisitions, we recognized $39,779,000 of amortizable intangible assets and $5,051,000 of goodwill. The amortizable intangible assets will be amortized against earnings on a straight-line basis over a weighted-average 20 years and will not be deductible for income tax purposes. The goodwill represents the balance of deferred tax liabilities generated from carrying over the tax basis in the assets acquired and is not deductible for income tax purposes.

2019 BUSINESS ACQUISITIONSFor the full year 2019, we purchased the following operations, none of which were material to our results of operations or financial position either individually or collectively, for total cash consideration of $45,273,000:

Tennessee — aggregates operations

Virginia — ready-mixed concrete operations

The 2019 acquisitions listed above are reported in our consolidated financial statements as of their respective acquisition dates.

As a result of the 2019 acquisitions, we recognized $25,443,000 of amortizable intangible assets (contractual rights in place). The contractual rights in place will be amortized against earnings on a straight-line basis over a weighted-average 19.5 years and will be deductible for income tax purposes over 15 years.

DIVESTITURES AND PENDING DIVESTITURES

In 2020, we sold:

Second quarter — exited our New Mexico ready-mixed concrete business, resulting in an immaterial gain. We retained the concrete plants and mobile fleet and are leasing these assets to the buyer. Additionally, we obtained a 20-year aggregates supply agreement

In 2019, we sold:

First quarter — two aggregates operations in Georgia and reversed a contingent payable related to the fourth quarter 2017 Department of Justice required divestiture of former Aggregates USA operations, resulting in a pretax gain of $4,064,000

No assets met the criteria for held for sale at September 30, 2020, December 31, 2019 or September 30, 2019.

 

 

26


Note 17: New Accounting Standards

ACCOUNTING STANDARDS RECENTLY ADOPTED

CREDIT LOSSES During the first quarter of 2020, we adopted Accounting Standards Update (ASU) 2016-13, “Measurement of Credit Losses on Financial Instruments” on a retrospective basis. This ASU amended prior 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. The adoption of this standard did not materially impact our consolidated financial statements.

LIBOR TRANSITION In March 2020, the Financial Accounting Standards Board (FASB) issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provided optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued. The ASU was effective immediately for all entities and applies through December 31, 2022. For additional information, see our LIBOR transition disclosure in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under "Liquidity and Financial Resources - Debt." We continue to evaluate the effect that discontinuance of LIBOR will have on our contracts.

ACCOUNTING STANDARDS PENDING ADOPTION

InCOME tAXES In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which adds new guidance to simplify the accounting for income taxes and changes the accounting for certain income tax transactions. The new standard is effective as of January 1, 2021. We do not expect this standard to have a material impact on our consolidated financial statements.

defined benefit plans In August 2018, the FASB issued ASU 2018-14, “Changes to the Disclosure Requirements for Defined Benefit Plans,” which adds, removes and clarifies the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and is to be applied retrospectively. The adoption of this standard will have a minor impact on the notes to our consolidated financial statements, specifically, our benefit plans note.

  

 

27


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 maintain and 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 strategy and competitive advantage are based on our strength in aggregates which are used in most types of construction 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, reservoirs and other public construction projects), private nonresidential construction (e.g., manufacturing, retail, offices, industrial and institutional) and private residential construction (e.g., single-family houses, duplexes, apartment buildings and condominiums).

Aggregates have a very 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 cost-effective 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 limited substitutes for quality aggregates. Due to zoning and permitting regulation and 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 2019, our five largest customers accounted for 7.7% of our total revenues (excluding internal sales), and no single customer accounted for more than 1.9% of our total revenues. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly-funded construction, such as highways, airports and government buildings, a relatively small portion of our 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, the vast majority of our business is not directly subject to renegotiation of profits or termination of contracts with local, state or federal governments. In addition, our sales to government entities span several hundred entities coast-to-coast, ensuring that negative changes to various government budgets would have a muted impact across such a diversified set of government customers.

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 and enhance financial returns in our core Aggregates segment. We produce and sell asphalt mix and/or ready-mixed concrete primarily in our Alabama, Arizona, California, Maryland, New Mexico, Tennessee, Texas, Virginia and Washington D.C. 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 operations.

Seasonality and cyclical nature of our business

Almost all of our products are produced and consumed outdoors. Seasonal changes and other weather-related conditions can affect the production and sales volume 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 Third Quarter 2020

Compared to third quarter of 2019:

Total revenues decreased $108.9 million, or 8%, to $1,309.9 million

Gross profit decreased $20.1 million, or 5%, to $380.5 million

Aggregates segment sales decreased $84.1 million, or 7%, to $1,049.0 million

Aggregates segment freight-adjusted revenues decreased $50.9 million, or 6%, to $807.6 million

Shipments declined 8%, or 5.0 million tons, to 55.9 million tons

Freight-adjusted sales price increased 2.4%, or $0.34 per ton

Segment gross profit declined $19.3 million, or 5%, to $337.9 million

Asphalt, Concrete and Calcium segment gross profit declined $0.8 million, or 2%, to $42.6 million, collectively

Selling, administrative and general (SAG) expenses decreased $5.3 million and increased 0.1 percentage points (10 basis points) as a percentage of total revenues

Operating earnings declined $15.3 million, or 5%, to $288.1 million

Earnings from continuing operations were $201.1 million, or $1.51 per diluted share, compared to $218.1 million, or $1.63 per diluted share

Adjusted earnings from continuing operations were $1.56 per diluted share, compared to $1.68 per diluted share

Net earnings were $199.8 million, a decrease of $15.9 million, or 7%

Adjusted EBITDA was $403.5 million, a decrease of $3.4 million, or 1%

Returned capital to shareholders via dividends ($45.0 million @ $0.34 per share versus $41.0 million @ $0.31 per share)

Net earnings were $199.8 million compared to $215.7 million in the prior year’s comparable quarter. Third quarter Adjusted EBITDA was $403.5 million versus $406.8 million in the prior year. Adjusted EBITDA margins expanded by 2.1 percentage points (210 basis points) despite an 8% decline in total revenues. This margin expansion was driven by effective cost control throughout the organization and price growth in each major product line.

Building on strong performance from the first half of the year, our operational execution produced another quarter of unit margin expansion in the third quarter. Unit profitability gains were widespread across our footprint, and our team remained focused on driving those improvements. The continued impact of the COVID-19 pandemic on construction activity, along with severe wet weather, led to lower shipment levels in the quarter. However, our resilient and best-in-class aggregates business overcame these disruptive conditions, which enabled us to expand cash gross profit per ton, drive higher cash flows, and improve returns on invested capital.

Year-to-date, our aggregates gross profit per ton has increased by 6% (cash gross profit per ton increased 7%) despite a 4% decline in shipments. The flexibility of our operating plans and our aggregates-focused business model have enabled us to continue to perform at a high level while also positioning us for earnings growth in the future as demand recovers. The pricing environment remains supportive, and we are encouraged by the sequential improvement in demand visibility. Residential construction has rebounded quickly which should bode well for private nonresidential construction as it has been the weakest end market since the pandemic began. State transportation revenues continue to recover to pre-pandemic levels, and the one-year extension of federal highway funding will support future highway construction. Continued recovery in these fundamentals would point to construction activity stabilizing over the course of 2021.

Capital expenditures in the third quarter were $52.0 million ($228.9 million year-to-date). We expect to spend between $300 million and $350 million on capital this year, most of which is for core operating and maintenance projects. We will continue to review our plans and will adjust as needed, while being thoughtful about preserving liquidity.

Year-to-date September 30, we returned $135.2 million to shareholders through dividends, a 10% increase versus the prior year. Year-to-date, we have repurchased $26.1 million in common stock.

At quarter-end, total debt to trailing-twelve month Adjusted EBITDA was 2.5 times or 1.7 times on a net debt basis reflecting $1.1 billion of cash on hand — of which approximately $500 million will be used to pay off maturities due March 2021. Our weighted-average debt maturity was 14 years, and the effective weighted-average interest rate was 4.1%.

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OuTLOOK

Going into 2020, we expected shipment growth; however, in March, that trajectory was disrupted by COVID-19 and the resulting shelter-in-place ordinances. Since then, the economic uncertainty and evolving nature of the pandemic have continued to weigh on construction activity. We are encouraged by the recent sequential improvement in leading indicators that foreshadow future construction activity, and now believe that we have sufficient near-term visibility to provide full-year guidance. We expect full-year 2020 Adjusted EBITDA of $1.285 billion to $1.315 billion. This full-year outlook reflects year-over-year earnings growth despite lower shipments. It assumes no major changes in COVID shelter-in-place restrictions and also assumes a normal weather pattern for the balance of the year. As we look ahead to 2021, the pricing environment remains positive and we continue to work hard to add value for our customers. We expect to provide full-year guidance when we report fourth quarter earnings in February.

While demand is subject to market fluctuations outside of our control, we remain focused on the factors we can control, such as our pricing and cost actions, both of which help to compound our unit margins. Our year-to-date results demonstrate our capabilities to drive continued improvement in challenging circumstances. Actions taken across our more than 360 locations have ensured an effective response to the economic disruption resulting from COVID-19. Our operating plans are underpinned by our four strategic disciplines (Commercial and Operational Excellence, Logistics Innovation and Strategic Sourcing), a healthy balance sheet, strong liquidity, and the engagement of our people.

Additionally, we currently do not anticipate any material impairment charges, increases in allowances for credit losses, increases in deferred tax asset valuation allowances, restructuring charges or other expenses, violations of debt covenants, or changes in accounting judgments that are reasonably likely to have a material impact on our financial statements.

For support functions, we previously implemented remote work arrangements and restricted business travel effective mid-March. To date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures.

 

 

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RESULTS OF OPERATIONS

Total revenues are primarily derived from our product sales of aggregates, asphalt mix and ready-mixed concrete, and include freight & delivery costs that we pass along to our customers to deliver these products. We also generate service revenues from our asphalt construction paving business and services related to our aggregates business. We present 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 ResultS highlights

Three Months Ended

Nine Months Ended

September 30

September 30

in millions, except unit and per unit data

2020

2019

2020

2019

Total revenues

$      1,309.9 

$      1,418.8 

$      3,681.7 

$      3,743.0 

Cost of revenues

929.4 

1,018.2 

2,703.0 

2,780.2 

Gross profit

$         380.5 

$         400.6 

$         978.7 

$         962.8 

Gross profit margin

29.0%

28.2%

26.6%

25.7%

Selling, administrative and general (SAG)

$           83.5 

$           88.8 

$         261.1 

$         274.7 

SAG as a percentage of total revenues

6.4%

6.3%

7.1%

7.3%

Operating earnings

$         288.1 

$         303.4 

$         699.3 

$         683.9 

Interest expense, net

$           35.8 

$           32.2 

$         100.5 

$           98.2 

Earnings from continuing operations

before income taxes

$         258.1 

$         271.5 

$         602.6 

$         591.7 

Income tax expense

$           57.0 

$           53.5 

$         130.5 

$         111.8 

Effective tax rate from continuing operations

22.1%

19.7%

21.7%

18.9%

Earnings from continuing operations

$         201.1 

$         218.1 

$         472.1 

$         479.9 

Loss on discontinued operations,

net of income taxes

(1.3)

(2.4)

(2.1)

(3.3)

Net earnings

$         199.8 

$         215.7 

$         470.0 

$         476.6 

Diluted earnings (loss) per share

Continuing operations

$           1.51 

$           1.63 

$           3.54 

$           3.60 

Discontinued operations

(0.01)

(0.01)

(0.01)

(0.02)

Diluted net earnings per share

$           1.50 

$           1.62 

$           3.53 

$           3.58 

EBITDA 1

$         394.9 

$         400.0 

$         999.0 

$         968.8 

Adjusted EBITDA 1

$         403.5 

$         406.8 

$      1,012.3 

$         971.6 

Average Sales Price and Unit Shipments

Aggregates

Tons (thousands)

55,920 

60,898 

157,163 

163,845 

Freight-adjusted sales price

$         14.44 

$         14.10 

$         14.45 

$         14.00 

Asphalt Mix

Tons (thousands)

3,493 

4,007 

8,953 

9,624 

Average sales price

$         58.36 

$         58.20 

$         58.05 

$         57.76 

Ready-mixed concrete

Cubic yards (thousands)

775 

875 

2,295 

2,359 

Average sales price

$       131.51 

$       127.99 

$       128.93 

$       126.19 

Calcium

Tons (thousands)

49 

75 

193 

216 

Average sales price

$         27.51 

$         28.33 

$         27.18 

$         28.04 

1

Non-GAAP measures are defined and reconciled within this Item 2 under the caption Reconciliation of Non-GAAP Measures.

 

 

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THIRD quarter 2020 Compared to THIRD Quarter 2019

Third quarter 2020 total revenues were $1,309.9 million, down 8% from the third quarter of 2019. Shipments declined in all major products: aggregates (-8%), asphalt mix (-13%) and ready-mixed concrete (-11%). Gross profit declined in the Aggregates (-$19.3 million or -5%) and Concrete (-$2.9 million or -19%) segments while increasing in the Asphalt (+$2.6 million or +9%) segment due primarily to favorable liquid asphalt costs. A 31% decline in the unit cost of diesel fuel decreased costs by $10.2 million from the prior year’s third quarter with most ($8.7 million) of this cost decline reflected in the Aggregates segment.

Net earnings for the third quarter of 2020 were $199.8 million, or $1.50 per diluted share, compared to $215.7 million, or $1.62 per diluted share, in the third quarter of 2019. Each period’s results were impacted by discrete items, as follows:

Net earnings for the third quarter of 2020 include:

pretax charges of $5.9 million associated with divested operations

pretax charges of $0.3 million associated with non-routine business development

pretax charges of $2.4 million for COVID-19 pandemic direct incremental costs

Net earnings for the third quarter of 2019 include:

pretax charges of $0.4 million associated with non-routine business development

pretax charges of $6.5 million for managerial restructuring

Adjusted for these discrete items, earnings from continuing operations (Adjusted Diluted EPS) was $1.56 per diluted share for the third quarter of 2020 compared to $1.68 per diluted share in the third quarter of 2019.

Continuing Operations — Changes in earnings from continuing operations before income taxes for the third quarter of 2020 versus the third quarter of 2019 are summarized below:

earnings from continuing operations before income taxes

in millions

Third quarter 2019

$     271.5 

Lower aggregates gross profit

(19.3)

Higher asphalt gross profit

2.6 

Lower concrete gross profit

(2.9)

Lower calcium gross profit

(0.5)

Lower selling, administrative and general expenses

5.3 

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

1.3 

Higher interest expense, net

(3.6)

Lower foreign currency translation losses

1.3 

All other

2.4 

Third quarter 2020

$     258.1 

Third quarter Aggregates segment gross profit margin expanded 0.7 percentage points (70 basis points) despite a 7% decrease in segment sales. Gross profit was $337.9 million compared to $357.2 million in the prior year. Unit profitability increased 3% to $6.04 per ton due to widespread growth in pricing and effective cost control.

Third quarter aggregates shipments were 8% lower than the prior year’s third quarter due to economic uncertainty caused by the pandemic, severe wet weather and wildfires in key markets. Last year’s third quarter included very few severe weather events, helping drive strong volume growth. Despite lower shipments in most markets, virtually all of our markets improved their respective unit profitability compared to the prior year’s third quarter. Shipments declined in most of our markets reflecting weaker demand resulting from the pandemic. Shipments along the Atlantic Coast, in the Southeast and Texas were impacted by severe weather. Shipments in California were impacted by wildfires and resulting power outages which interrupted the supply of cement for ready-mix concrete production and limited construction activity.

On a mix-adjusted basis, most of our markets reported year-over-year price growth. For the quarter, mix-adjusted average sales price increased 2.9% (reported freight-adjusted sales price increased 2.4%).

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Freight-adjusted unit cost of sales increased 2%, and cash costs were up slightly versus the prior year’s third quarter. Effective operating efficiencies and lower diesel fuel costs helped mitigate the cost impact of lower sales volumes. The Aggregates segment earnings impact from lower diesel fuel was $8.7 million in the quarter.

Asphalt segment gross profit was $30.2 million for the third quarter, an increase of $2.6 million from the prior year. The year-over-year improvement was driven by higher material margins (sales price less unit cost of raw materials). Compared to the prior year’s third quarter, the average unit cost for liquid asphalt was 20% lower and asphalt mix unit material margins increased 13%. Although asphalt volumes in the third quarter declined 13% compared to the prior year, results benefited from slightly higher prices and effective cost containment, including lower liquid asphalt costs. Shipments in the current year’s quarter were impacted by wildfires in California, our largest asphalt market, and the completion of certain large projects last year in the Tennessee market.

Concrete segment gross profit was $12.2 million, 19% lower than the prior year’s third quarter. Ready-mixed concrete shipments of 0.8 million cubic yards decreased 11%. The average sales price increased 3% while ready-mixed concrete unit material margins increased 1%. Third quarter shipments were impacted by wet weather in Virginia, our largest concrete market, and wildfires in Northern California.

Calcium segment gross profit was $0.2 million, down $0.5 million compared to the prior year’s quarter.

SAG expenses declined 6% to $83.5 million in the quarter due mostly to continued execution of cost reduction initiatives and general cost control. However, due to the 8% drop in total revenues, this decline in SAG expense resulted in a 0.1 percentage point (10 basis points) increase as a percentage of total revenues to 6.4%. We remain focused on further leveraging our overhead cost structure.

Gain on sale of property, plant & equipment and businesses was $1.6 million in the third quarter of 2020 versus a gain of $0.2 million in the third quarter of 2019.

Other operating expense, which has an approximate run-rate of $12 million a year (exclusive of discrete items), is composed primarily of idle facilities expense, environmental remediation costs, property abandonments and gain (loss) on settlement of AROs. Total other operating expense and significant items included in the total were:

$10.5 million in third quarter 2020includes discrete items as follows:

$5.9 million of charges associated with divested operations

$0.3 million of charges associated with non-routine business development

$2.4 million for COVID-19 pandemic direct incremental costs

$8.7 million in third quarter 2019includes discrete items as follows:

$0.4 million of non-routine business development charges

$6.5 million of managerial restructuring charges

Other nonoperating income of $5.8 million for the third quarter of 2020 was favorable by $5.4 million from the third quarter of 2019. This favorable variance resulted primarily from two items: 1) $0.7 million of foreign currency translation gain resulting from a partial recovery of the first quarter 2020’s rapid devaluation of the Mexican peso versus a $0.6 million loss in the prior year’s quarter, and 2) the mark-to-market gain on our Rabbi Trust investments of $2.4 million due to a recovery in equity market values from the first quarter declines versus no gain in the prior year’s quarter.

Net interest expense was $35.8 million in the third quarter of 2020 compared to $32.2 million in the third quarter of 2019.

Income tax expense from continuing operations was $57.0 million in the third quarter of 2020 compared to $53.5 million in the third quarter of 2019. The increase in tax expense was primarily related to a decrease in share-based compensation excess tax benefits as compared to the same quarter in 2019.

Earnings from continuing operations were $1.51 per diluted share in the third quarter of 2020 compared to $1.63 per diluted share in the third quarter of 2019.

Discontinued Operations — Third quarter pretax loss from discontinued operations was $1.8 million in 2020 compared with a loss of $3.2 million in 2019. Both periods include charges/credits 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 1 to the condensed consolidated financial statements under the caption Discontinued Operations.

 

 

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year-to-date September 30, 2020 Compared to year-to-date September 30, 2019

Total revenues for the first nine months of 2020 were $3,681.7 million, down 2% from the first nine months of 2019. Shipments declined in all major products: aggregates (-4%), asphalt mix (-7%) and ready-mixed concrete (-3%). Gross profit increased in the Aggregates (+$11.1 million or +1%) and Asphalt (+$6.3 million or +12%) segments while it decreased in the Concrete (-$0.9 million or -2%) segment. A 30% decline in the unit cost of diesel fuel decreased costs by $29.2 million from the first nine months of 2019 with most ($25.7 million) of this cost decline reflected in the Aggregates segment.

Net earnings for the first nine months of 2020 were $470.0 million, or $3.53 per diluted share, compared to $476.6 million, or $3.58 per diluted share, in the first nine months of 2019. Each period’s results were impacted by discrete items, as follows:

Net earnings for the first nine months of 2020 include:

pretax charges of $6.7 million associated with divested operations

pretax gains of $2.1 million associated with non-routine business development

pretax charges of $7.4 million for COVID-19 pandemic direct incremental costs

pretax charges of $1.3 million for restructuring

Net earnings for the first nine months of 2019 include:

pretax gains of $4.1 million related to the sale of businesses (see Note 16 to the condensed consolidated financial statements)

pretax charges of $0.4 million associated with non-routine business development

pretax charges of $6.5 million for managerial restructuring

Adjusted for these discrete items, earnings from continuing operations (Adjusted Diluted EPS) was $3.62 per diluted share for the first nine months of 2020, consistent with $3.62 per diluted share in the first nine months of 2019.

Continuing Operations — Changes in earnings from continuing operations before income taxes for year-to-date September 30, 2020 versus year-to-date September 30, 2019 are summarized below:

earnings from continuing operations before income taxes

in millions

Year-to-date September 30, 2019

$     591.7 

Higher aggregates gross profit

11.1 

Higher asphalt gross profit

6.3 

Lower concrete gross profit

(0.9)

Lower calcium gross profit

(0.5)

Lower selling, administrative and general expenses

13.6 

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

(8.7)

Higher interest expense, net

(2.3)

Higher foreign currency translation losses

(4.9)

All other

(2.8)

Year-to-date September 30, 2020

$     602.6 

Aggregates segment sales for the first nine months of 2020 were $2,987.8 million (down 1%) while aggregates shipments declined 4%, or 6.7 million tons, compared to the prior year. Freight-adjusted average sales price for aggregates increased 3.2%, or $0.45 per ton, versus the first nine months of 2019. Excluding mix impact, aggregates price increased 3.5%.

Aggregates segment gross profit was $883.2 million ($5.62 per ton) versus $872.1 million ($5.32 per ton) in the first nine months of 2019. As a percentage of segment sales excluding freight & delivery, gross profit margin increased 0.7 percentage points (70 basis points). First nine months 2020 freight-adjusted unit cost of sales increased 2%, or $0.15 per ton, versus the prior year. Cash gross profit per ton increased 7% from the prior year’s first nine months to $7.15 per ton. The average unit cost of diesel fuel decreased 30% versus the first nine months of 2019, increasing Aggregates segment gross profit by $25.7 million or $0.16 per ton.

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Asphalt segment gross profit of $58.2 million was up $6.3 million from the first nine months of 2019. Asphalt mix shipments declined 7% while selling prices increased less than 1%, or $0.29 per ton. Compared to the prior year’s first nine months, the average unit cost for liquid asphalt was down 16%a significant factor in the 12% increase in our asphalt mix unit material margins.

Concrete segment gross profit was $35.6 million for the first nine months of 2020, a decrease of $0.9 million from the prior year period. Ready-mixed concrete shipments declined 3% and average sales price increased 2% resulting in a 3% increase in unit material margins.

Our Calcium segment’s gross profit of $1.7 million was down $0.5 million compared to the first nine months of 2019.

SAG expenses were $261.1 million versus $274.7 million in the prior year’s first nine months reflecting a 0.2 percentage point (20 basis point) decrease as a percentage of total revenues. On a trailing-twelve month basis, SAG expenses as a percentage of total revenues stands at 7.3%, or a 0.1 percentage point (10 basis points) decrease as a percentage of total revenues.

Gain on sale of property, plant & equipment and businesses was $2.3 million in the first nine months of 2020 versus $11.0 million in the first nine months of 2019. The 2019 amount includes the aforementioned pretax gains of $4.1 million related to the sale of businesses.

Other operating expense, which has an approximate run-rate of $12 million a year (exclusive of discrete items), is composed primarily of idle facilities expense, environmental remediation costs, property abandonments and gain (loss) on settlement of AROs. Total other operating expense and significant items included in the total were:

$20.6 million in first nine months of 2020includes discrete items as follows:

$6.7 million of charges associated with divested operations

$2.1 million of net gain associated with non-routine business development

$7.4 million for COVID-19 pandemic direct incremental costs

$1.3 million of managerial restructuring charges

$15.2 million in first nine months of 2019includes discrete items as follows:

$0.4 million of non-routine business development

$6.5 million of managerial restructuring charges

Other nonoperating income of $3.8 million for the first nine months of 2020 was unfavorable by $2.1 million from the first nine months of 2019. This unfavorable variance included the following two items: 1) $5.2 million of foreign currency translation losses resulting from the rapid devaluation of the Mexican peso in the current year versus a $0.2 million loss in the prior year’s first nine months, and 2) $1.4 million of mark-to-market gain on our Rabbi Trust investments versus a gain of $2.8 million in the prior year’s first nine months (see Note 5 to the condensed consolidated financial statements).

Net interest expense was $100.5 million in the first nine months of 2020 compared to $98.2 million in the first nine months of 2019. The current year’s interest expense includes $1.0 million related to the ineffective portion of a cash flow hedge loss.

Income tax expense from continuing operations was $130.5 million in the first nine months of 2020 compared to $111.8 million in the first nine months of 2019. The increase in tax expense was primarily related to a decrease in share-based compensation excess tax benefits as compared to the same period in 2019.

Earnings from continuing operations were $3.54 per diluted share in the first nine months of 2020 compared to $3.60 per diluted share in the first nine months of 2019.

Discontinued Operations — Year-to-date September pretax loss from discontinued operations was $2.9 million in 2020 compared with a pretax loss of $4.5 million in 2019. Both periods include charges/credits 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 1 to the condensed consolidated financial statements under the caption Discontinued Operations.

 

 

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

SAME-STORE

We have provided certain information on a same-store basis. When discussing our financial results in comparison to prior periods, we may exclude the operating results of recently acquired/divested businesses that do not have comparable results in the periods being discussed. These recently acquired/divested businesses are disclosed in Note 16 “Acquisitions and Divestitures.” This approach allows us to evaluate the performance of our operations on a comparable basis. We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our operations are performing period over period without the effects of acquisition and divestiture activity. Our same-store information may not be comparable to similar measures used by other companies.

AGGREGATES SEGMENT FREIGHT-ADJUSTED REVENUES

Aggregates segment freight-adjusted 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. We believe that this presentation is consistent with our competitors and meaningful to our investors as it excludes revenues associated with freight & delivery, 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. Additionally, we use this metric as the basis for calculating the average sales price of our aggregates products. Reconciliation of this metric to its nearest GAAP measure is presented below:

Three Months Ended

Nine Months Ended

September 30

September 30

in millions, except per ton data

2020

2019

2020

2019

Aggregates segment

Segment sales

$      1,049.0 

$      1,133.1 

$      2,987.8 

$      3,030.1 

Less

Freight & delivery revenues 1

225.4 

259.4 

672.0 

695.9 

Other revenues

16.0 

15.2 

45.5 

40.6 

Freight-adjusted revenues

$         807.6 

$         858.5 

$      2,270.3 

$      2,293.6 

Unit shipments - tons

55.9 

60.9 

157.2 

163.8 

Freight-adjusted sales price

$         14.44 

$         14.10 

$         14.45 

$         14.00 

1

At the segment level, freight & delivery revenues include intersegment freight & delivery (which are eliminated at the consolidated level) and freight to remote distribution sites.

36


Aggregates segment incremental gross profit

Aggregates segment incremental gross profit flow-through rate is not a GAAP measure and represents the year-over-year change in gross profit divided by the year-over-year change in segment sales excluding freight & delivery (revenues and costs). We evaluate this metric on a trailing-twelve month basis as quarterly gross profit flow-through rates can vary widely from quarter to quarter. 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 revenues associated with freight & delivery, which are pass-through activities. Reconciliation of this metric to its nearest GAAP measure is presented below:

margin in accordance with gaap

Three Months Ended

Trailing-Twelve Months

September 30

September 30

dollars in millions

2020

2019

2020

2019

Aggregates segment

Gross profit

$        337.9 

$        357.2 

$     1,157.7 

$     1,128.5 

Segment sales

$     1,049.0 

$     1,133.1 

$     3,947.9 

$     3,904.1 

Gross profit margin

32.2%

31.5%

29.3%

28.9%

Incremental gross profit margin

N/A

66.6%

FLOW-THROUGH RATE (non-gaap)

Three Months Ended

Trailing-Twelve Months

September 30

September 30

dollars in millions

2020

2019

2020

2019

Aggregates segment

Gross profit

$        337.9 

$        357.2 

$     1,157.7 

$     1,128.5 

Less: Contribution from acquisitions (same-store)

0.0 

0.0 

0.5 

0.3 

Same-store gross profit

$        337.9 

$        357.2 

$     1,157.2 

$     1,128.2 

Segment sales

$     1,049.0 

$     1,133.1 

$     3,947.9 

$     3,904.1 

Less: Freight & delivery revenues 1

225.4 

259.4 

897.1 

899.4 

Segment sales excluding freight & delivery

$        823.6 

$        873.7 

$     3,050.8 

$     3,004.7 

Less: Contribution from acquisitions (same-store)

0.4 

0.0 

7.9 

1.2 

Same-store segment sales excluding freight & delivery

$        823.2 

$        873.7 

$     3,042.9 

$     3,003.5 

Gross profit margin excluding freight & delivery

41.0%

40.9%

37.9%

37.6%

Same-store gross profit margin excluding

freight & delivery

41.0%

40.9%

38.0%

37.6%

Incremental gross profit flow-through rate

N/A

63.2%

Same-store incremental gross profit flow-through rate

N/A

73.7%

1

At the segment level, freight & delivery revenues include intersegment freight & delivery (which are eliminated at the consolidated level) and freight to remote distribution sites.

37


cash gross profit

GAAP does not define “cash gross profit” and it should not be considered as an alternative to earnings measures defined by GAAP. 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. Cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization to gross profit. 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:

Three Months Ended

Nine Months Ended

September 30

September 30

in millions, except per ton data

2020

2019

2020

2019

Aggregates segment

Gross profit

$        337.9 

$        357.2 

$        883.2 

$        872.1 

Depreciation, depletion, accretion and amortization

82.5 

79.0 

240.4 

227.3 

Aggregates segment cash gross profit

$        420.4 

$        436.2 

$     1,123.6 

$     1,099.4 

Unit shipments - tons

55.9 

60.9 

157.2 

163.8 

Aggregates segment gross profit per ton

$          6.04 

$          5.87 

$          5.62 

$          5.32 

Aggregates segment cash gross profit per ton

$          7.52 

$          7.16 

$          7.15 

$          6.71 

Asphalt segment

Gross profit

$          30.2 

$          27.6 

$          58.2 

$          52.0 

Depreciation, depletion, accretion and amortization

8.6 

8.9 

26.0 

26.3 

Asphalt segment cash gross profit

$          38.8 

$          36.5 

$          84.2 

$          78.3 

Concrete segment

Gross profit

$          12.2 

$          15.0 

$          35.6 

$          36.5 

Depreciation, depletion, accretion and amortization

4.0 

3.4 

12.1 

9.7 

Concrete segment cash gross profit

$          16.2 

$          18.4 

$          47.7 

$          46.2 

Calcium segment

Gross profit

$            0.2 

$            0.8 

$            1.7 

$            2.3 

Depreciation, depletion, accretion and amortization

0.0 

0.1 

0.1 

0.2 

Calcium segment cash gross profit

$            0.2 

$            0.9 

$            1.8 

$            2.5 


38


EBITDA and adjusted ebitda

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 use this metric to assess the operating performance of our business and as a basis for 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 (numbers may not foot due to rounding):

Three Months Ended

Nine Months Ended

September 30

September 30

in millions

2020

2019

2020

2019

Net earnings

$        199.8 

$        215.7 

$        470.0 

$        476.6 

Income tax expense

57.0 

53.5 

130.5 

111.8 

Interest expense, net of interest income

35.8 

32.2 

100.5 

98.2 

Loss on discontinued operations, net of tax

1.3 

2.4 

2.1 

3.3 

EBIT

293.9 

303.7 

703.1 

689.8 

Depreciation, depletion, accretion and amortization

101.0 

96.2 

295.9 

278.9 

EBITDA

$        394.9 

$        400.0 

$        999.0 

$        968.8 

Gain on sale of businesses

$            0.0 

$            0.0 

$            0.0 

$           (4.0)

Charges associated with divested operations

5.9 

0.0 

6.7 

0.0 

Business development 1

0.3 

0.4 

(2.1)

0.4 

COVID-19 direct incremental costs

2.4 

0.0 

7.4 

0.0 

Restructuring charges

0.0 

6.5 

1.3 

6.5 

Adjusted EBITDA

$        403.5 

$        406.8 

$     1,012.3 

$        971.6 

Depreciation, depletion, accretion and amortization

(101.0)

(96.2)

(295.9)

(278.9)

Adjusted EBIT

$        302.5 

$        310.6 

$        716.4 

$        692.6 

1

Represents non-routine charges or gains associated with acquisitions including the cost impact of purchase accounting inventory valuations.

Adjusted Diluted EPS from continuing Operations

Similar to our presentation of Adjusted EBITDA, we present Adjusted diluted earnings per share (EPS) from continuing operations to provide a more consistent comparison of earnings performance from period to period. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP. Reconciliation of this metric to its nearest GAAP measure is presented below:

Three Months Ended

Nine Months Ended

September 30

September 30

2020

2019

2020

2019

Diluted Earnings Per Share

Net earnings

$          1.50 

$          1.62 

$          3.53 

$          3.58 

Less: Discontinued operations loss

(0.01)

(0.01)

(0.01)

(0.02)

Diluted EPS from continuing operations

$          1.51 

$          1.63 

$          3.54 

$          3.60 

Items included in Adjusted EBITDA above

$          0.05 

$          0.05 

$          0.08 

$          0.02 

Adjusted diluted EPS from continuing operations

$          1.56 

$          1.68 

$          3.62 

$          3.62 

39


2020 projected ebitda

The following reconciliation to the mid-point of the range of 2020 Projected EBITDA excludes adjustments (as noted in Adjusted EBITDA above) as they are difficult to forecast (timing or amount). Due to the difficulty in forecasting such adjustments, we are unable to estimate their significance. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP. Reconciliation of this metric to its nearest GAAP measure is presented below:

2020 Projected

in millions

Mid-point

Net earnings

$           607 

Income tax expense

168 

Interest expense, net

135 

Discontinued operations, net of tax

Depreciation, depletion, accretion and amortization

390 

Projected EBITDA

$        1,300 

 

 

LIQUIDITY AND FINANCIAL RESOURCES

Our primary sources of liquidity are cash provided by our operating activities and a substantial, committed bank line of credit. In May 2020, we issued $750.0 million of 3.50% senior notes due 2030 to prefund: a) the $250.0 million due June 2020 and b) the $500.0 million due March 2021. In September 2020, we executed a new five-year unsecured bank line of credit of $1,000.0 million and terminated our April 2020 $750.0 million delayed draw term loan. Additional sources of capital include access to the capital markets, the sale of surplus real estate, and dispositions of nonstrategic operating assets. We believe these financial resources are sufficient to fund our business requirements for 2020, including:

contractual obligations

capital expenditures

debt service obligations

dividend payments

potential share repurchases

potential acquisitions

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

maintain substantial bank line of credit borrowing capacity

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

maintain an appropriate balance of fixed-rate and floating-rate debt

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

In an effort to strengthen our liquidity position while navigating the COVID-19 pandemic, we have taken a number of proactive steps since the first quarter as noted above. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess our liquidity sources and needs and take appropriate actions.

40


Cash

Included in our September 30, 2020 cash and cash equivalents and restricted cash balances of $1,084.7 million is $0.6 million of restricted cash as described in Note 1 under the caption Restricted Cash.

cash from operating activities

Nine Months Ended

September 30

in millions

2020

2019

Net earnings

$          470.0 

$          476.6 

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

295.9 

278.9 

Noncash operating lease expense

27.8 

26.3 

Contributions to pension plans

(6.5)

(6.8)

Other operating cash flows, net 1

(9.3)

(128.9)

Net cash provided by operating activities

$          777.9 

$          646.1 

1

Primarily reflects changes to working capital balances.

Net cash provided by operating activities was $777.9 million during the nine months ended September 30, 2020, a $131.8 million increase compared to the same period of 2019. This increase primarily resulted from favorable changes in working capital balances.

Days sales outstanding, a measurement of the time it takes to collect receivables, were 43.5 days at September 30, 2020 compared to 45.3 days at September 30, 2019. Additionally, our over 90 day balance of $18.1 million at September 30, 2020 was down 22% from $23.1 million at September 30, 2019. All customer accounts are actively managed and no losses in excess of amounts reserved are currently expected; attention is being paid to the potential negative impact of the COVID-19 pandemic on our customers’ ability to pay their amounts owed to us.

cash from investing activities

Net cash used for investing activities was $253.7 million during the first nine months of 2020, a $49.5 million decrease compared to the same period of 2019. During the first nine months of 2020, we invested $269.0 million in our existing operations compared to $306.9 million in the prior year period. Of this $269.0 million, $72.3 million was invested in internal growth projects to enhance our distribution capabilities, develop new production sites and enhance existing production facilities and other growth opportunities.

cash from financing activities

Net cash provided by financing activities in the first nine months of 2020 was $286.0 million, compared to the use of cash of $296.2 million in the same period of 2019. The current year includes: a) net cash proceeds of $734.6 million from the issuance of new debt, b) cash paid to retire the $250.0 million floating rate notes due 2020 and c) $19.9 million of cash paid to settle interest rate derivatives. The prior year includes a net $133.0 million payment on our bank line of credit.

Additionally, we increased the capital returned to our shareholders by $35.7 million via higher dividends of $12.2 million ($1.02 per share compared to $0.93 per share) and higher share repurchases of $23.5 million (214,338 shares repurchased @ $121.92 average price per share compared to 18,600 shares repurchased @ $139.90 average price per share).

 

 

41


debt

Certain debt measures are presented below:

September 30

December 31

September 30

dollars in millions

2020

2019

2019

Debt

Current maturities of long-term debt

$        509.4 

$            0.0 

$            0.0 

Short-term debt

0.0 

0.0 

0.0 

Long-term debt

2,777.1 

2,784.3 

2,783.1 

Total debt

$     3,286.5 

$     2,784.3 

$     2,783.1 

Capital

Total debt

$     3,286.5 

$     2,784.3 

$     2,783.1 

Equity

5,928.4 

5,621.9 

5,542.2 

Total capital

$     9,214.9 

$     8,406.2 

$     8,325.3 

Total Debt as a Percentage of Total Capital

35.7%

33.1%

33.4%

Weighted-average Effective Interest Rates

Line of credit 1

1.38%

1.25%

1.25%

Term debt

4.10%

4.36%

4.40%

Fixed versus Floating Interest Rate Debt

Fixed-rate debt

85.1%

73.7%

73.7%

Floating-rate debt

14.9%

26.3%

26.3%

1

Reflects the margin above LIBOR for LIBOR-based borrowings; we also paid upfront fees that are amortized to interest expense and pay fees for unused borrowing capacity and standby letters of credit.

line of credit

In September 2020, we executed a new five-year unsecured line of credit of $1,000.0 million, incurring $4.6 million of transaction costs. Covenants, borrowings, cost ranges and other details are described in Note 7 to the condensed consolidated financial statements. As of September 30, 2020, we were in compliance with the line of credit covenants, the credit margin for LIBOR borrowings was 1.375%, the credit margin for base rate borrowings was 0.375%, and the commitment fee for the unused amount was 0.175%.

In conjunction with the September 2020 line of credit execution, we terminated our $750.0 million 364-day delayed draw term loan executed in April 2020. During the second quarter, we had borrowed and repaid $250.0 million leaving $500.0 million available for future borrowings prior to its termination.

As of September 30, 2020, our available borrowing capacity under the line of credit was $943.4 million. Utilization of the borrowing capacity was as follows:

none was borrowed

$56.6 million was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our $3,357.9 million (face value) of term debt is unsecured. $3,346.2 million of such debt is governed by three essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in all three indentures limits the amount of secured debt we may incur without ratably securing such debt. As of September 30, 2020, we were in compliance with all term debt covenants.

In May 2020, we issued $750.0 million of 3.50% senior notes due 2030 for total proceeds of $741.4 million (net of discounts and transaction costs). $250.0 million of the proceeds were used to retire the $250.0 million floating rate notes due June 2020, and the remainder of the proceeds, together with cash on hand, will be used to retire the $500.0 million floating rate notes due March 2021.

42


CURRENT MATURITIES of long-term debt

The $509.4 million of current maturities of long-term debt as of September 30, 2020 includes all long-term debt that we intend to pay within twelve months, and is due as follows:

Current

in millions

Maturities

Fourth quarter 2020

$0.0

First quarter 2021

500.4

Second quarter 2021

0.0

Third quarter 2021

9.0

debt ratings

Our debt ratings and outlooks as of September 30, 2020 are as follows:

Rating/Outlook

Date

Description

Senior Unsecured Term Debt

Fitch

BBB-/stable

5/7/2020

outlook revised

Moody's

Baa3/stable

4/23/2020

outlook revised

Standard & Poor's

BBB+/stable

2/28/2020

rating revised

LIBOR TRANSITION

The London Interbank Offered Rate (LIBOR) is an indicative measure of the average rate at which major global banks could borrow from one another and is used extensively globally as a reference rate for financial contracts (e.g., corporate bonds and loans) and commercial contracts (e.g., real estate leases). The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced in July 2017 that it intends to cease requiring banks to submit LIBOR rates after 2021.

The expected discontinuation of LIBOR has led to the formation of working groups in the U.S. and elsewhere to recommend alternative reference rates. The U.S. working group is the Alternative Reference Rates Committee (ARRC) convened by the Federal Reserve Board and the Federal Reserve Bank of New York. The ARRC has selected the Secured Overnight Financing Rate (SOFR) as the preferred alternative to LIBOR.

As of September 30, 2020, we had two material debt instruments with LIBOR as a reference rate: 1) $500.0 million floating-rate notes due March 2021, and 2) $1,000.0 million line of credit (none outstanding at September 30, 2020) due September 2025. At this time, we cannot predict the future impact of a departure from LIBOR as a reference rate; however, if future rates based upon the successor reference rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, our interest expense would increase.

 

 

43


Equity

The number of our common stock issuances and purchases for the year-to-date periods ended are as follows:

September 30

December 31

September 30

in thousands

2020

2019

2019

Common stock shares at January 1,

issued and outstanding

132,371 

131,762 

131,762 

Common Stock Issuances

Share-based compensation plans

297 

628 

607 

Common Stock Purchases

Purchased and retired

(214)

(19)

(19)

Common stock shares at end of period,

issued and outstanding

132,454 

132,371 

132,350 

As of September 30, 2020, there were 8,064,851 shares remaining under the Board of Directors’ share purchase authorization. Depending upon market, business, legal and other conditions, we may purchase shares 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.

The detail of our common stock purchases (all of which were open market purchases) for the year-to-date periods ended are as follows:

September 30

December 31

September 30

in thousands, except average cost

2020

2019

2019

Shares Purchased and Retired

Number

214 

19 

19 

Total purchase price

$       26,132 

$         2,602 

$         2,602 

Average cost per share

$       121.92 

$       139.90 

$       139.90 

There were no shares held in treasury as of September 30, 2020, December 31, 2019 and September 30, 2019.

 

 

off-balance sheet arrangements

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

results of operations and financial position

capital expenditures

liquidity and capital resources

Standby Letters of Credit

For a discussion of our standby letters of credit, see Note 7 to the condensed consolidated financial statements.

44


Cash Contractual Obligations

Our obligation to make future payments under contracts is presented in our most recent Annual Report on Form 10-K. Changes resulting from our second quarter 2020 debt issuances as described in Note 7 to the condensed consolidated financial statements are outlined in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.

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, 2019 (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 consolidated 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 September 30, 2020.

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.

45


FORWARD-LOOKING STATEMENTS

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

general economic and business conditions

a pandemic, epidemic or other public health emergency, such as the recent outbreak of COVID-19

our dependence on the construction industry, which is subject to economic cycles

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

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

changes in our effective tax rate

the increasing reliance on information technology infrastructure, including the risks that the infrastructure does not work as intended, experiences technical difficulties or is subjected to cyber-attacks

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

the highly competitive nature of the construction industry

the impact of future regulatory or legislative actions, including those relating to climate change, wetlands, greenhouse gas emissions, the definition of minerals, tax policy or international trade

the outcome of pending legal proceedings

pricing of our products

weather and other natural phenomena, including the impact of climate change and availability of water

energy costs

costs of hydrocarbon-based raw materials

healthcare costs

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

changes in interest rates

the impact of a discontinuation of the London Interbank Offered Rate (LIBOR)

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

the impact of environmental cleanup costs and other liabilities relating to existing and/or divested businesses

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

our ability to manage and successfully integrate acquisitions

the effect of changes in tax laws, guidance and interpretations

significant downturn in the construction industry may result in the impairment of goodwill or long-lived assets

changes in technologies, which could disrupt the way we do business and how our products are distributed

other assumptions, risks and uncertainties detailed from time to time in our periodic reports filed with the SEC

All forward-looking statements are made as of the date of filing or publication. 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.

46


INVESTOR information

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

Annual Report on Form 10-K

Quarterly Reports on Form 10-Q

Current Reports on Form 8-K

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).

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 Denson N. Franklin III, Senior Vice President, General Counsel and Secretary, Vulcan Materials Company, 1200 Urban Center Drive, Birmingham, Alabama 35242.

We have a:

Business Conduct Policy applicable to all employees and directors

Code of Ethics for the CEO and Senior Financial Officers

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

Our Board of Directors has also adopted:

Corporate Governance Guidelines

Charters for its Audit, Compensation, Executive, Finance, Governance and Safety, Health & Environmental Affairs Committees

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” under the “Investor Relations” tab or you may request a copy of any of these documents by writing to Denson N. Franklin III, Senior Vice President, 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.

 

 


47


 

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 trading or speculative 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, we at times use interest rate swaps to manage the mix of fixed-rate and floating-rate debt. Over time, 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 September 30, 2020, the estimated fair value of our long-term debt including current maturities was $3,850.5 million compared to a book value of $3,286.5 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 $399.7 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 September 30, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2020.

Due to the COVID-19 pandemic, we have implemented remote work arrangements for support functions and restricted business travel effective mid-March. To date, these arrangements have not materially affected our ability to maintain our business operations, including the operation of financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. We are continually assessing the potential effects of the COVID-19 pandemic on the design and operating effectiveness of our internal control over financial reporting and, if necessary, will take appropriate actions.

No material changes were made during the third quarter of 2020 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, 2019 and in Note 8 to the condensed consolidated financial statements and Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020. 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

Other than the risk factor set forth below, there have been 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, 2019.

A pandemic, epidemic or other public health emergency, such as the recent outbreak of the current coronavirus (COVID-19) pandemic, could have a material adverse effect on our business, results of operations, financial condition and cash flowsOur operations expose us to risks associated with pandemics, epidemics or other public health emergencies, such as the COVID-19 pandemic. In March 2020, the World Health Organization characterized COVID-19 as a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The outbreak has resulted in governments around the world implementing or reimplementing strict measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. In addition, governments and central banks in several parts of the world have enacted fiscal and monetary stimulus measures to counteract the impacts of the COVID-19 pandemic, and may take further action as circumstances warrant.

Consistent with federal guidelines and with state and local orders to date, we currently continue to operate across our footprint as an essential business. Notwithstanding our continued operations and an economic environment that has shown signs of improvement, the COVID-19 pandemic has had and may have further negative impacts on our operations, supply chain, transportation networks and customers, which may lower our revenues and EBITDA, including as a result of preventative and precautionary measures that we, other businesses and governments are taking. The COVID-19 pandemic is a widespread public health crisis that is adversely affecting the economies and financial markets of many countries. Any resulting economic downturn could adversely affect demand for our products and contribute to volatile supply and demand conditions affecting prices and volumes in the markets for our products and services. The progression of this matter has and may continue to negatively impact our business or results of operations by affecting the health of our employees and through the temporary closure of our operating locations or those of our customers or suppliers. The extent to which the COVID-19 outbreak impacts our business, results of operations, financial condition or cash flows will depend on future developments, which remain highly uncertain and cannot be predicted, including, but not limited to, the duration and geographic spread of the outbreak, its severity, the actions to contain the virus or treat its impact including the reimplementation of restrictions on economic activity following new outbreaks, the long-term impacts of the virus on transportation revenues, government budgets and other funding priorities and the extent and pace at which normal economic and operating conditions can resume. There can be no assurance that we will not be impacted by adverse consequences that may be brought about by pandemics on global financial markets, which may reduce resources, share prices and financial liquidity and may severely limit the availability of financing capital.

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ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of our equity securities during the quarter ended September 30, 2020 are summarized below.

Total Number

Maximum

of Shares

Number of

Purchased as

Shares that

Total

Part of Publicly

May Yet Be

Number of

Average

Announced

Purchased

Shares

Price Paid

Plans or

Under the Plans

Period

Purchased

Per Share

Programs

or Programs 1

2020

July 1 - July 31

$          0.00 

8,064,851 

Aug 1 - Aug 31

$          0.00 

8,064,851 

Sept 1 - Sept 30

$          0.00 

8,064,851 

Total

$          0.00 

1

On February 10, 2017, our Board of Directors authorized us to purchase 8,243,243 shares of our common stock to refresh the number of shares we were authorized to purchase to 10,000,000. As of September 30, 2020, there were 8,064,851 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.

We did not have any unregistered sales of equity securities during the third quarter of 2020.

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

Exhibit 10.1

Credit Agreement, dated as of September 10, 2020, among Vulcan Materials Company, Truist Bank, as Administrative Agent, and the Lenders and other parties named therein, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 11, 2020 1

Exhibit 31(a)

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

Exhibit 31(b)

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

Exhibit 32(a)

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

Exhibit 32(b)

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

Exhibit 95

MSHA Citations and Litigation

Exhibit 101

The following unaudited financial information from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 are formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) the Notes to Condensed Consolidated Financial Statements.

Exhibit 104

Cover Page Interactive Data File – the cover page from this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 is formatted in iXBRL (contained in Exhibit 101).

1

Incorporated by reference.

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.

VULCAN MATERIALS COMPANY

 

 

 

Date       November 6, 2020

/s/ Randy L. Pigg

Randy L. Pigg

Vice President, Controller

(Principal Accounting Officer)

 

 

 

Date       November 6, 2020

/s/ Suzanne H. Wood

Suzanne H. Wood

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

52