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

vmc-20200331x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

(Mark One)

x

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


For the quarterly period ended March 31, 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 April 21, 2020      

Common Stock, $1 Par Value

132,434,322

 


VULCAN MATERIALS COMPANY

FORM 10-Q

QUARTER ENDED MARCH 31, 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

26

Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

44

Item 4.

Controls and Procedures

44

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 4.

Mine Safety Disclosures

46

Item 6.

Exhibits

47

Signatures

48

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

March 31

December 31

March 31

in thousands

2020

2019

2019

Assets

Cash and cash equivalents

$       120,041 

$       271,589 

$         30,838 

Restricted cash

232 

2,917 

270 

Accounts and notes receivable

Accounts and notes receivable, gross

601,182 

573,241 

563,084 

Allowance for doubtful accounts

(3,517)

(3,125)

(2,554)

Accounts and notes receivable, net

597,665 

570,116 

560,530 

Inventories

Finished products

403,612 

391,666 

369,743 

Raw materials

33,676 

31,318 

27,951 

Products in process

5,010 

5,604 

4,976 

Operating supplies and other

28,449 

29,720 

26,727 

Inventories

470,747 

458,308 

429,397 

Other current assets

88,095 

76,396 

62,816 

Total current assets

1,276,780 

1,379,326 

1,083,851 

Investments and long-term receivables

57,987 

60,709 

50,952 

Property, plant & equipment

Property, plant & equipment, cost

8,907,788 

8,749,217 

8,559,549 

Allowances for depreciation, depletion & amortization

(4,506,700)

(4,433,179)

(4,284,211)

Property, plant & equipment, net

4,401,088 

4,316,038 

4,275,338 

Operating lease right-of-use assets, net

420,930 

408,189 

426,381 

Goodwill

3,167,061 

3,167,061 

3,161,842 

Other intangible assets, net

1,083,515 

1,091,475 

1,085,398 

Other noncurrent assets

222,021 

225,995 

213,090 

Total assets

$  10,629,382 

$  10,648,793 

$  10,296,852 

Liabilities

Current maturities of long-term debt

25 

25 

24 

Short-term debt

0 

0 

178,500 

Trade payables and accruals

243,019 

265,159 

248,119 

Other current liabilities

232,632 

270,379 

232,964 

Total current liabilities

475,676 

535,563 

659,607 

Long-term debt

2,785,566 

2,784,315 

2,780,589 

Deferred income taxes, net

648,405 

633,039 

568,229 

Deferred revenue

178,568 

179,880 

184,744 

Operating lease liabilities

399,489 

388,042 

403,426 

Other noncurrent liabilities

551,352 

506,097 

483,048 

Total liabilities

$    5,039,056 

$    5,026,936 

$    5,079,643 

Other commitments and contingencies (Note 8)

 

 

 

Equity

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

Outstanding 132,433, 132,371 and 132,069 shares, respectively

132,433 

132,371 

132,069 

Capital in excess of par value

2,782,738 

2,791,353 

2,789,864 

Retained earnings

2,885,084 

2,895,871 

2,467,201 

Accumulated other comprehensive loss

(209,929)

(197,738)

(171,925)

Total equity

$    5,590,326 

$    5,621,857 

$    5,217,209 

Total liabilities and equity

$  10,629,382 

$  10,648,793 

$  10,296,852 

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

Unaudited

March 31

in thousands, except per share data

2020

2019

Total revenues

$    1,049,242 

$       996,511 

Cost of revenues

847,519 

804,836 

Gross profit

201,723 

191,675 

Selling, administrative and general expenses

86,430 

90,268 

Gain on sale of property, plant & equipment

and businesses

999 

7,297 

Other operating expense, net

(3,991)

(4,271)

Operating earnings

112,301 

104,433 

Other nonoperating income (expense), net

(9,336)

3,129 

Interest expense, net

30,773 

32,934 

Earnings from continuing operations

before income taxes

72,192 

74,628 

Income tax expense

12,194 

10,693 

Earnings from continuing operations

59,998 

63,935 

Earnings (loss) on discontinued operations, net of tax

260 

(636)

Net earnings

$         60,258 

$         63,299 

Other comprehensive income, net of tax

Deferred loss on interest rate derivative

(14,680)

0 

Amortization of prior interest rate derivative loss

794 

55 

Amortization of actuarial loss and prior service

cost for benefit plans

1,695 

235 

Other comprehensive income (loss)

(12,191)

290 

Comprehensive income

$         48,067 

$         63,589 

Basic earnings (loss) per share

Continuing operations

$             0.45 

$             0.48 

Discontinued operations

0.00 

0.00 

Net earnings

$             0.45 

$             0.48 

Diluted earnings (loss) per share

Continuing operations

$             0.45 

$             0.48 

Discontinued operations

0.00 

0.00 

Net earnings

$             0.45 

$             0.48 

Weighted-average common shares outstanding

Basic

132,567 

132,043 

Assuming dilution

133,259 

133,054 

Depreciation, depletion, accretion and amortization

$         95,480 

$         89,181 

Effective tax rate from continuing operations

16.9%

14.3%

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

Three Months Ended

Unaudited

March 31

in thousands

2020

2019

Operating Activities

Net earnings

$         60,258 

$         63,299 

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

Depreciation, depletion, accretion and amortization

95,480 

89,181 

Noncash operating lease expense

8,851 

8,717 

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

(999)

(7,297)

Contributions to pension plans

(2,144)

(2,320)

Share-based compensation expense

6,716 

5,724 

Deferred tax expense (benefit)

19,671 

774 

Changes in assets and liabilities before initial

effects of business acquisitions and dispositions

(99,597)

(47,733)

Other, net

(5,761)

5,819 

Net cash provided by operating activities

$         82,475 

$       116,164 

Investing Activities

Purchases of property, plant & equipment

(142,650)

(122,019)

Proceeds from sale of property, plant & equipment

2,536 

6,512 

Proceeds from sale of businesses

0 

1,744 

Payment for businesses acquired, net of acquired cash

0 

1,122 

Other, net

9,872 

(7,237)

Net cash used for investing activities

$     (130,242)

$     (119,878)

Financing Activities

Proceeds from short-term debt

0 

196,200 

Payment of short-term debt

0 

(150,700)

Payment of current maturities and long-term debt

(6)

(6)

Settlements of interest rate derivatives

(19,863)

0 

Purchases of common stock

(26,132)

0 

Dividends paid

(45,100)

(40,939)

Share-based compensation, shares withheld for taxes

(15,365)

(14,137)

Net cash used for financing activities

$     (106,466)

$         (9,582)

Net decrease in cash and cash equivalents and restricted cash

(154,233)

(13,296)

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

$       120,273 

$         31,108 

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 month period ended March 31, 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.

We are operating as an essential business and while the COVID-19 pandemic has not yet materially impacted our business, operations, or financial results, 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 March 31, 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. 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. 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

March 31

in thousands

2020

2019

Discontinued Operations

Pretax gain (loss)

$           354 

$          (638)

Income tax (expense) benefit

(94)

2 

Earnings (loss) on discontinued operations,

net of tax

$           260 

$          (636)

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

March 31

in thousands

2020

2019

Weighted-average common shares

outstanding

132,567 

132,043 

Dilutive effect of

Stock-Only Stock Appreciation Rights

345 

742 

Other stock compensation plans

347 

269 

Weighted-average common shares

outstanding, assuming dilution

133,259 

133,054 

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

March 31

in thousands

2020

2019

Antidilutive common stock equivalents

174 

220 

 

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:

March 31

December 31

March 31

in thousands

Classification on the Balance Sheet

2020

2019

2019

Assets

Operating lease ROU assets

$     461,712 

$     441,656 

$     434,970 

Accumulated amortization

(40,782)

(33,467)

(8,589)

Total lease assets

Operating lease right-of-use assets, net

$     420,930 

$     408,189 

$     426,381 

Liabilities

Current

Operating

Other current liabilities

$       32,045 

$       29,971 

$       31,255 

Noncurrent

Operating

Operating lease liabilities

399,489 

388,042 

403,426 

Total lease liabilities

$     431,534 

$     418,013 

$     434,681 

Lease Term and Discount Rate

Weighted-average remaining lease term (years)

Operating leases

10.1 

9.9 

10.3 

Weighted-average discount rate

Operating leases

4.2%

4.3%

4.4%

Our lease agreements do not contain residual value guarantees, restrictive covenants or early termination options that we deem material.

7


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

March 31

in thousands

2020

2019

Lease Cost

Operating lease cost

$       14,106 

$       14,127 

Short-term lease cost 1

9,385 

8,700 

Variable lease cost

3,132 

3,068 

Sublease income

(734)

(610)

Total lease cost

$       25,889 

$       25,285 

1

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

Cash paid for operating leases was $13,328,000 and $13,333,000 for the three months ended March 31, 2020 and 2019, respectively, and was reflected as reductions to operating cash flows.

Maturity analysis on an undiscounted basis of our operating lease liabilities as of March 31, 2020 is as follows:

Operating

in thousands

Leases

Maturity of Lease Liabilities

2020 (remainder)

$       39,045 

2021

49,240 

2022

44,481 

2023

39,295 

2024

35,634 

Thereafter

593,029 

Total minimum lease payments

$     800,724 

Less: Lease payments representing interest

369,190 

Present value of future minimum lease payments

$     431,534 

Less: Current obligations under leases

32,045 

Long-term lease obligations

$     399,489 

 

 

8


Note 3: Income Taxes

In response to COVID-19, 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 first quarter of 2020, we recorded income tax expense from continuing operations of $12,194,000 compared to income tax expense from continuing operations of $10,693,000 in the first quarter of 2019. The increase in tax expense was primarily related to lower excess tax benefits from share-based compensation quarter over quarter.

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. 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. At December 31, 2020, we project Alabama state net operating loss (NOL) carryforward deferred tax assets of $63,384,000 against which we project to have a valuation allowance of $29,183,000. At this time, we do not expect any future adjustment to this valuation allowance. 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.

 

 

9


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.

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 $39,564,000 and $34,515,000 for the three months ended March 31, 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.

Our segment total revenues by geographic market for the three month periods ended March 31, 2020 and 2019 are disaggregated as follows:

Three Months Ended March 31, 2020

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Total Revenues by Geographic Market 1

East

$     239,869 

$     17,883 

$     62,120 

$              0 

$      319,872 

Gulf Coast

493,297 

33,856 

16,965 

2,026 

546,144 

West

135,060 

88,050 

15,680 

0 

238,790 

Segment sales

$     868,226 

$   139,789 

$     94,765 

$       2,026 

$   1,104,806 

Intersegment sales

(55,564)

0 

0 

0 

(55,564)

Total revenues

$     812,662 

$   139,789 

$     94,765 

$       2,026 

$   1,049,242 

Three Months Ended March 31, 2019

in thousands

Aggregates

Asphalt

Concrete

Calcium

Total

Total Revenues by Geographic Market 1

East

$     224,902 

$     18,216 

$     54,716 

$              0 

$      297,834 

Gulf Coast

496,633 

37,053 

16,505 

1,951 

552,142 

West

113,430 

76,821 

12,416 

0 

202,667 

Segment sales

$     834,965 

$   132,090 

$     83,637 

$       1,951 

$   1,052,643 

Intersegment sales

(56,132)

0 

0 

0 

(56,132)

Total revenues

$     778,833 

$   132,090 

$     83,637 

$       1,951 

$      996,511 

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

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.

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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

March 31

in thousands

2020

2019

Freight & Delivery Revenues

Total revenues

$  1,049,242 

$     996,511 

Freight & delivery revenues 1

(113,961)

(162,605)

Total revenues excluding freight & delivery

$     935,281 

$     833,906 

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.

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’ 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.

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

Three Months Ended

March 31

in thousands

2020

2019

Deferred Revenue

Balance at beginning of year

$     185,339 

$     192,783 

Revenue recognized from deferred revenue

(1,342)

(1,652)

Balance at end of period

$     183,997 

$     191,131 

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 March 31, 2021 (reflected in other current liabilities in our March 31, 2020 Condensed Consolidated Balance Sheet).

 

 

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

March 31

December 31

March 31

in thousands

2020

2019

2019

Fair Value Recurring

Rabbi Trust

Mutual funds

$       19,001 

$       22,883 

$       20,953 

Total

$       19,001 

$       22,883 

$       20,953 

Level 2 Fair Value

March 31

December 31

March 31

in thousands

2020

2019

2019

Fair Value Recurring

Rabbi Trust

Money market mutual fund

$           520 

$        1,340 

$           490 

Total

$           520 

$        1,340 

$           490 

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 (losses) of the Rabbi Trust investments were $(5,060,000) and $1,863,000 for the three months ended March 31, 2020 and 2019, respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at March 31, 2020 and 2019 were $(5,060,000) and $1,905,000, 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.

 

 

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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 exposure. 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, designated as cash flow hedges on the related interest payments, totaling $300,000,000 to hedge the risk of higher interest rates prior to an anticipated debt issuance. We terminated and settled the interest rate locks in March 2020 for a cash payment of $19,863,000. While the related debt issuance remains probable of occurring in the near term, the timing is uncertain. As such, at least 1/20th of the hedge is deemed ineffective and $993,000 of the settlement has been recorded to interest expense in the first quarter. The remainder of the settlement was deferred and recorded in accumulated other comprehensive income (AOCI) and is anticipated to be 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

Location on

March 31

in thousands

Statement

2020

2019

Interest Rate Hedges

Loss reclassified from AOCI

Interest

(effective portion)

expense

$       (1,074)

$            (75)

For the 12-month period ending March 31, 2021, we estimate that $2,324,000 of the $24,839,000 net of tax loss in AOCI will be reclassified to interest expense.

 

 

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Note 7: Debt

Debt is detailed as follows:

Effective

March 31

December 31

March 31

in thousands

Interest Rates

2020

2019

2019

Short-term Debt

Bank line of credit expires 2021 1

$                  0 

$                0 

$     178,500 

Total short-term debt

$                  0 

$                0 

$     178,500 

Long-term Debt

Bank line of credit expires 2021 1

$                  0 

$                0 

$                0 

Floating-rate notes due 2020 2

2.13%

250,000 

250,000 

250,000 

Floating-rate notes due 2021 2

2.51%

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 

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 

460,949 

Other notes

6.46%

179 

185 

202 

Total long-term debt - face value

$    2,846,367 

$  2,846,373 

$  2,846,390 

Unamortized discounts and debt issuance costs

(60,776)

(62,033)

(65,777)

Total long-term debt - book value

$    2,785,591 

$  2,784,340 

$  2,780,613 

Less current maturities

25 

25 

24 

Total long-term debt - reported value

$    2,785,566 

$  2,784,315 

$  2,780,589 

Estimated fair value of long-term debt

$    2,926,140 

$  3,073,693 

$  2,775,511 

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.

2

This debt is classified as long-term since we intend to refinance it and have the ability to do so by borrowing on our $750,000,000 delayed draw term loan that closed April 10, 2020.

Discounts and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $1,258,000 and $1,239,000 of net interest expense for these items for the three months ended March 31, 2020 and 2019, respectively.

LINE OF CREDIT

Our unsecured $750,000,000 line of credit matures December 2021 and contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility. The primary negative covenant limits our ability to incur secured debt. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5:1 (upon certain acquisitions, the maximum ratio can be 3.75:1 for three quarters), and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of March 31, 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 1.00% to 1.75%, or Truist Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.00% to 0.75%. The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. Standby letters of credit, which are issued under the line of credit and reduce availability, are charged a fee equal to the credit margin for LIBOR borrowings plus 0.175%. We also pay a commitment fee on the daily average unused amount of the line of credit that ranges from 0.10% to 0.25% determined by our credit ratings. As of March 31, 2020, the credit margin for LIBOR borrowings was 1.25%, the credit margin for base rate borrowings was 0.25%, and the commitment fee for the unused amount was 0.15%.

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As of March 31, 2020, our available borrowing capacity was $695,871,000. Utilization of the borrowing capacity was as follows:

none was borrowed

$54,129,000 was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our $2,846,367,000 (face value) of term debt is unsecured. $2,846,188,000 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 March 31, 2020, we were in compliance with all term debt covenants.

SUBSEQUENT EVENT

Subsequent to quarter-end, we executed a $750,000,000 364-day delayed draw term loan with a subset of the banks that provide our line of credit. This facility provides for up to two draws through October 2020 and all borrowings are due April 2021. Borrowings may be repaid prior to maturity, but once repaid may not be borrowed again.

All terms and conditions of the delayed draw term loan are consistent with those of the line of credit except for the interest rate on borrowings and the commitment fee. Borrowings bear interest, at our option, at either LIBOR plus a credit margin ranging from 1.375% to 2.125%, or Truist Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.375% to 1.125%. The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. The commitment fee, paid on the unused amount of the daily average unused amount of the facility, ranges from 0.125% to 0.25% and is determined by our credit ratings.

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 $750,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of March 31, 2020 are summarized by purpose in the table below:

in thousands

Standby Letters of Credit

Risk management insurance

$       47,031 

Reclamation/restoration requirements

7,098 

Total

$       54,129 

 

 

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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 described in Note 2, our present value of future minimum (nonmineral) lease payments totaled $431,534,000 as of March 31, 2020.

As summarized by purpose in Note 7, our standby letters of credit totaled $54,129,000 as of March 31, 2020.

As described in Note 9, our asset retirement obligations totaled $263,445,000 as of March 31, 2020.

Amounts accrued for environmental remediation costs (measured on an undiscounted basis) were as follows:

March 31

December 31

March 31

in thousands

2020

2019

2019

Accrued Environmental Remediation Costs

Continuing operations

$        25,837 

$        30,429 

$        37,590 

Retained from former Chemicals business

10,982 

10,972 

10,814 

Total

$        36,819 

$        41,401 

$        48,404 

LITIGATION AND ENVIRONMENTAL MATTERS

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

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

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

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

In addition to these lawsuits in which we are involved in the ordinary course of business, 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.

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

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 Site 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 our evaluation of the need for a two-well remedy. These 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. In May 2019, the EPA provided an initial set of comments on the PDI Evaluation Report but has not yet provided additional, final comments. Until the EPA’s review of the PDI Evaluation Report is complete and an effective remedy can be agreed upon, we cannot identify an appropriate remedial action. Given the various stakeholders involved and the uncertainties relating to issues such as testing, monitoring, and remediation alternatives, we cannot reasonably estimate a loss pertaining to this matter.

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.

18


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

 

 

Note 9: Asset Retirement Obligations

Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the ARO is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement.

We record all AROs for which we have legal obligations for land reclamation at estimated fair value. 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

March 31

in thousands

2020

2019

ARO Operating Costs

Accretion

$        2,908 

$        2,733 

Depreciation

1,836 

1,841 

Total

$        4,744 

$        4,574 

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

March 31

in thousands

2020

2019

Asset Retirement Obligations

Balance at beginning of year

$     210,323 

$     225,726 

Liabilities incurred

0 

0 

Liabilities settled

(5,234)

(3,578)

Accretion expense

2,908 

2,733 

Revisions, net

55,448 

305 

Balance at end of period

$     263,445 

$     225,186 

ARO liabilities settled during the first three months of 2020 and 2019 include $722,000 and $1,266,000, 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 three 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

March 31

in thousands

2020

2019

Components of Net Periodic Benefit Cost

Service cost

$        1,331 

$        1,249 

Interest cost

7,531 

9,410 

Expected return on plan assets

(12,485)

(11,938)

Amortization of prior service cost

335 

335 

Amortization of actuarial loss

3,140 

1,358 

Net periodic pension benefit cost (credit)

$          (148)

$           414 

Pretax reclassifications from AOCI included in

net periodic pension benefit cost

$        3,475 

$        1,693 

The contributions to pension plans for the three months ended March 31, 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

March 31

in thousands

2020

2019

Components of Net Periodic Benefit Cost

Service cost

$           380 

$           329 

Interest cost

242 

347 

Amortization of prior service credit

(980)

(980)

Amortization of actuarial gain

(201)

(327)

Net periodic postretirement benefit credit

$          (559)

$          (631)

Pretax reclassifications from AOCI included in

net periodic postretirement benefit credit

$       (1,181)

$       (1,307)

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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 $11,057,000 and $13,919,000 for the three months ended March 31, 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:

March 31

December 31

March 31

in thousands

2020

2019

2019

AOCI

Interest rate hedges

$       (24,839)

$       (10,953)

$       (11,125)

Pension and postretirement plans

(185,090)

(186,785)

(160,800)

Total

$     (209,929)

$     (197,738)

$     (171,925)

Changes in AOCI, net of tax, for the three months ended March 31, 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

(14,680)

0 

(14,680)

Amounts reclassified from AOCI

794 

1,695 

2,489 

Net current period OCI changes

(13,886)

1,695 

(12,191)

Balances as of March 31, 2020

$       (24,839)

$     (185,090)

$     (209,929)

Amounts reclassified from AOCI to earnings, are as follows:

Three Months Ended

March 31

in thousands

2020

2019

Amortization of Interest Rate Hedge Losses

Interest expense

$          1,074 

$               75 

Benefit from income taxes

(280)

(20)

Total

$             794 

$               55 

Amortization of Pension and Postretirement

Plan Actuarial Loss and Prior Service Cost

Other nonoperating expense

$          2,294 

$             386 

Benefit from income taxes

(599)

(151)

Total

$          1,695 

$             235 

Total reclassifications from AOCI to earnings

$          2,489 

$             290 

 

 

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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 in accordance with our Certificate of Incorporation.

There were no shares held in treasury as of March 31, 2020, December 31, 2019 and March 31, 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:

March 31

December 31

March 31

in thousands, except average cost

2020

2019

2019

Shares Purchased and Retired

Number

214 

19 

0 

Total purchase price

$        26,132 

$          2,602 

$                 0 

Average cost per share

$        121.92 

$        139.90 

$            0.00 

As of March 31, 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

March 31

in thousands, except per share data

2020

2019

Total Equity

Balance at beginning of year

$    5,621,857 

$    5,202,903 

Net earnings

60,258 

63,299 

Common stock issued

Share-based compensation plans, net of shares

withheld for taxes

(15,082)

(14,068)

Purchase and retirement of common stock

(26,132)

0 

Share-based compensation expense

6,716 

5,724 

Cash dividends on common stock

($0.34/$0.31 per share, respectively)

(45,100)

(40,939)

Other comprehensive income

(12,191)

290 

Balance at end of period

$    5,590,326 

$    5,217,209 

 

 

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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

March 31

in thousands

2020

2019

Total Revenues

Aggregates 1

$        868,226 

$       834,965 

Asphalt 2

139,789 

132,090 

Concrete

94,765 

83,637 

Calcium

2,026 

1,951 

Segment sales

$     1,104,806 

$    1,052,643 

Aggregates intersegment sales

(55,564)

(56,132)

Total revenues

$     1,049,242 

$       996,511 

Gross Profit

Aggregates

$        194,131 

$       185,716 

Asphalt

(2,435)

(3,272)

Concrete

9,213 

8,563 

Calcium

814 

668 

Total

$        201,723 

$       191,675 

Depreciation, Depletion, Accretion

and Amortization (DDA&A)

Aggregates

$          77,136 

$         72,521 

Asphalt

8,734 

8,550 

Concrete

4,082 

2,964 

Calcium

49 

60 

Other

5,479 

5,086 

Total

$          95,480 

$         89,181 

Identifiable Assets 3

Aggregates

$     9,473,128 

$    9,275,593 

Asphalt

563,630 

564,103 

Concrete

322,044 

288,797 

Calcium

3,602 

3,905 

Total identifiable assets

$   10,362,404 

$  10,132,398 

General corporate assets

146,705 

133,346 

Cash and cash equivalents and restricted cash

120,273 

31,108 

Total assets

$   10,629,382 

$  10,296,852 

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:

Three Months Ended

March 31

in thousands

2020

2019

Cash Payments (Refunds)

Interest (exclusive of amount capitalized)

$       17,033 

$       19,798 

Income taxes

340 

(364)

Noncash Investing and Financing Activities

Accrued liabilities for purchases of property, plant & equipment

$       25,862 

$       34,360 

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

21,522 

435,192 

Amounts referable to business acquisitions

Liabilities assumed

0 

(2,720)

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 three month periods ended March 31, 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. There were no changes in the carrying amount of goodwill by reportable segment from December 31, 2019 to March 31, 2020 as 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 

Totals at March 31, 2020

$    3,075,428 

$     91,633 

$              0 

$              0 

$    3,167,061 

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.

 

 

Note 16: Acquisitions and Divestitures

BUSINESS ACQUISITIONS

2020 BUSINESS ACQUISITIONSWe had no acquisitions through the three months ended March 31, 2020.

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. Purchase price allocations have not been finalized due to pending appraisals for intangible assets and property, plant & equipment.

24


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

We had no divestitures through the three months ended March 31, 2020.

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 March 31, 2020, December 31, 2019 or March 31, 2019.

 

 

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.” 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.

ACCOUNTING STANDARDS PENDING ADOPTION

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 provides 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 is effective immediately for all entities and will apply 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.

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, and early adoption is permitted. 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.

  

 

25


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.

 

 


26


EXECUTIVE SUMMARY

Financial highlights for FIRST Quarter 2020

Compared to first quarter of 2019:

Total revenues increased $52.7 million, or 5%, to $1,049.2 million

Gross profit increased $10.0 million, or 5%, to $201.7 million

Aggregates segment sales increased $33.3 million, or 4%, to $868.2 million

Aggregates segment freight-adjusted revenues increased $19.4 million, or 3%, to $648.0 million

Shipments decreased 1.3%, or 0.6 million tons, to 45.0 million tons

Same-store shipments decreased 1.3%, or 0.6 million tons, to 45.0 million tons

Freight-adjusted sales price increased 4.5%, or $0.62 per ton

Same-store freight-adjusted sales price increased 4.4%, or $0.61 per ton

Segment gross profit increased $8.4 million, or 5%, to $194.1 million

Asphalt, Concrete and Calcium segment gross profit increased $1.6 million, or 27%, to $7.6 million, collectively

Selling, administrative and general (SAG) expenses decreased $3.8 million and decreased 0.8 percentage points (80 basis points) as a percentage of total revenues

Operating earnings increased $7.9 million, or 8%, to $112.3 million

Earnings from continuing operations were $60.0 million, or $0.45 per diluted share, compared to $63.9 million, or $0.48 per diluted share

Adjusted earnings from continuing operations were $0.47 per diluted share, compared to $0.46 per diluted share

Net earnings were $60.3 million, a decrease of $3.0 million, or 5%

Adjusted EBITDA was $201.0 million, an increase of $8.3 million, or 4%

Returned capital to shareholders via dividends ($45.1 million @ $0.34 per share versus $40.9 million @ $0.31 per share) and share repurchases ($26.1 million @ an average price of $121.92 per share versus none in first quarter 2019)

First quarter revenues were $1,049.2 million and net earnings were $60.3 million. Earnings from continuing operations were $0.45 per diluted share, and Adjusted EBITDA was $201.0 million. This year’s first quarter earnings included a pretax foreign currency translation loss of $6.4 million resulting from the rapid devaluation of the Mexican peso.

Segment revenues and gross profit improved versus the prior year in each of our product lines. Aggregates segment earnings benefited from continued price improvement and solid shipment growth in certain key markets. Asphalt and Concrete segment earnings reflected revenue growth and improved unit margins.

Our first quarter earnings improved across all segments and were in line with our expectations, despite wet weather in certain key markets in the Southeast and Southwest. These results demonstrated the strong long-term fundamental position of our aggregates-led businesses and our commitment to leading the industry in pricing and unit profitability.

We experienced minimal financial impact from the COVID-19 pandemic in the first quarter. Our main focus right now is ensuring the health and safety of our employees, maintaining our operational readiness, preserving liquidity and supporting the communities in which we operate. Our employees are engaged and ready to support one another, service our customers, and meet the challenges of today as we prepare for tomorrow.

From a position of strength, we are proactively planning for the potential impacts of the pandemic on construction activity. Our strengths are derived from the flexibility provided by our aggregates-focused business, our diverse geographic footprint, our balance sheet structure and recently enhanced liquidity, and our operational capabilities. Our leading market positions, built over more than 60 years, and our proven track record of strong operations also position us well. That said, we have undertaken a comprehensive review of our operating plans and have contingency plans in place to respond as efficiently as possible to demand shifts. Aggregates is far more adaptable to these demand shifts than any other construction materials, a characteristic that should serve us well during this period of disruption. As a result, we will be well-equipped to manage our business effectively and serve our customers reliably through these unprecedented times. Our execution capabilities are supported by our four strategic initiatives (Commercial and Operational Excellence, Logistics Innovation and Strategic Sourcing), which have been implemented over the last few years. These operating plans are underpinned by our healthy balance sheet and strong liquidity position, which we have further enhanced.

27


Capital expenditures in the first quarter were $109.0 million. This amount included both core operating and maintenance capital investments to improve or replace existing property, plant and equipment as well as internal growth projects already underway. Our full-year expectations for 2020 capital spending have been revised downward in response to the unknown impacts of the COVID-19 pandemic. We now expect to spend between $275 and $325 million (previously $475 million) on capital this year, most of which is for core operating and maintenance. Given that the economic outlook is evolving quickly, we will continue to review our plans and adjust as needed, being thoughtful about preserving liquidity. We will continue to take a disciplined approach to acquisitions, focusing on only those assets that are a strategic priority. During the quarter, there were no acquisitions.

During the quarter, we returned $45.1 million to shareholders through dividends, a 10% increase versus the prior year’s quarter. We also invested $26.1 million in share repurchases in the quarter.

At quarter-end, total debt to trailing-twelve month Adjusted EBITDA was 2.2 times (2.1 times on a net debt basis reflecting cash on hand). Our weighted-average debt maturity was 14 years, and the effective weighted-average interest rate was 4.2%.

In April, we entered into a $750.0 million 364-day delayed draw term loan, which further enhanced our already strong liquidity position. At March 31, 2020, there were no borrowings outstanding under the existing $750.0 million revolving credit facility.

OuTLOOK

The impact from the current novel coronavirus (COVID-19) pandemic continues to evolve quickly and it is too early to estimate accurately the full year impact on aggregates demand. We are operating as an essential business and shipment activity has remained relatively strong across many of our markets as customers execute on their backlog of projects. However, we expect some project timelines will be modified as every market adjusts to economic disruptions. While the COVID-19 pandemic has not yet materially impacted our business, operations, or financial results, 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 generallyand the scope and nature of these impacts continue to evolve each day. We will continue to assess the evolving impact of the COVID-19 pandemic and make adjustments to our responses accordingly.

Because of this uncertainty in aggregates demand, we are withdrawing our previous financial guidance for 2020. We will continue to closely monitor trends in construction activity and work with our customers to meet their needs in this challenging operating environment. We will provide updates as more information becomes available and our visibility improves. While we do not have the ability to control demand, our advantage is our ability to control many other aspects of our business. We remain confident in our ability to successfully navigate the changing environment. We will continue to operate from a position of strength supported by the resiliency of our aggregates business, progress on the four strategic initiatives 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 have 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

March 31

in millions, except unit and per unit data

2020

2019

Total revenues

$      1,049.2 

$         996.5 

Cost of revenues

847.5 

804.8 

Gross profit

$         201.7 

$         191.7 

Gross profit margin

19.2%

19.2%

Selling, administrative and general (SAG)

$           86.4 

$           90.3 

SAG as a percentage of total revenues

8.2%

9.1%

Operating earnings

$         112.3 

$         104.4 

Interest expense, net

$           30.8 

$           32.9 

Earnings from continuing operations

before income taxes

$           72.2 

$           74.6 

Income tax expense

$           12.2 

$           10.7 

Effective tax rate from continuing operations

16.9%

14.3%

Earnings from continuing operations

$           60.0 

$           63.9 

Earnings (loss) on discontinued operations,

net of income taxes

0.3 

(0.6)

Net earnings

$           60.3 

$           63.3 

Diluted earnings (loss) per share

Continuing operations

$           0.45 

$           0.48 

Discontinued operations

0.00 

0.00 

Diluted net earnings per share

$           0.45 

$           0.48 

EBITDA 1

$         198.4 

$         196.7 

Adjusted EBITDA 1

$         201.0 

$         192.7 

Average Sales Price and Unit Shipments

Aggregates

Tons (thousands)

45,048 

45,637 

Freight-adjusted sales price

$         14.39 

$         13.77 

Asphalt Mix

Tons (thousands)

2,057 

2,022 

Average sales price

$         58.51 

$         55.91 

Ready-mixed concrete

Cubic yards (thousands)

734 

670 

Average sales price

$       127.91 

$       123.94 

Calcium

Tons (thousands)

73 

68 

Average sales price

$         27.56 

$         28.32 

1

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

 

 

29


First quarter 2020 Compared to first Quarter 2019

First quarter 2020 total revenues were $1,049.2 million, up 5% from the first quarter of 2019. Shipments decreased slightly in aggregates (-1.3%) but were up in asphalt mix (+2%) and ready-mixed concrete (+10%). Gross profit increased in all segments: Aggregates (+$8.4 million or +5%), Asphalt (+$0.8 million) and Concrete (+$0.7 million or +8%). A decrease in the unit cost of diesel fuel decreased costs by $3.0 million from the prior year’s first quarter with most ($2.3 million) of this cost decline reflected in the Aggregates segment.

Net earnings for the first quarter of 2020 were $60.3 million, or $0.45 per diluted share, compared to $63.3 million, or $0.48 per diluted share, in the first quarter of 2019. Each period’s results were impacted by discrete items, as follows:

Net earnings for the first quarter of 2020 include:

pretax charges of $1.1 million associated with non-routine business development

pretax charges of $0.6 million for COVID-19 pandemic direct incremental costs

pretax charges of $0.9 million for restructuring

Net earnings for the first quarter of 2019 include:

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

Adjusted for these discrete items, earnings from continuing operations (Adjusted Diluted EPS) was $0.47 per diluted share for the first quarter of 2020 compared to $0.46 per diluted share in the first quarter of 2019.

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

earnings from continuing operations before income taxes

in millions

First quarter 2019

$       74.6 

Higher aggregates gross profit

8.4 

Higher asphalt gross profit

0.8 

Higher concrete gross profit

0.7 

Higher calcium gross profit

0.1 

Lower selling, administrative and general expenses

3.8 

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

(6.3)

Lower interest expense, net

2.2 

Higher foreign currency translation losses

(6.6)

All other

(5.5)

First quarter 2020

$       72.2 

First quarter Aggregates segment sales increased 4% to $868.2 million and gross profit increased 5% to $194.1 million. Unit margins increased $0.24 per ton, or 6%, to $4.31 per ton. These improvements resulted from growth in shipments in certain key markets and wide-spread growth in pricing.

First quarter aggregates shipments were 1.3% (1.3% same-store) lower than the prior year’s strong first quarter, when aggregates shipments increased 13% as a result of delayed shipments from the fourth quarter of 2018. Many markets in the Southeast and Southwest were negatively impacted by wet weather while shipments in California, Florida, Illinois and Virginia realized solid growth. On a mix-adjusted basis, all of our key markets reported year-over-year price growth. For the quarter, freight-adjusted average sale price increased 4.5% (4.8% on a mix-adjusted basis) versus the prior year’s quarter.

First quarter same-store unit cost of sales (freight-adjusted) increased 4% as compared to the prior year’s quarter as a result of the negative impacts of higher repairs, maintenance and stripping costs, which were incurred early in the quarter to take advantage of the seasonally low production volume. Wet weather inefficiencies also affected costs in certain markets. These were partially offset by the modestly lower unit cost of diesel fuel in the quarter. Cash gross profit per ton increased 6% from the prior year’s first quarter to $6.02 per ton. For the trailing-twelve months, cash gross profit was $6.82 per ton. Trailing-twelve month same-store incremental gross profit flow-through rate was 48.8%, below our long-term expectations of 60%. Quarterly gross profit flow-through rates can vary widely from quarter to quarter; therefore, we evaluate this metric on a trailing-twelve month basis.

30


Consistent with our expectations, Asphalt segment gross profit was a loss of $2.4 million for the seasonally slower first quarter, an improvement over last year’s first quarter loss of $3.3 million. Asphalt mix shipments increased 2% and selling prices increased 5%. California, our largest asphalt market, reported volume growth in the first quarter, more than offsetting lower volumes in Texas. In both markets, weather contributed to the year-over-year change. Compared to the prior year’s first quarter, the average unit cost for liquid asphalt was 6% lower and material margins increased 9%.

Concrete segment gross profit was $9.2 million, an 8% improvement from the prior year. Ready-mixed concrete shipments of 0.7 million cubic yards increased 10%, led by shipment growth in our two largest concrete markets, Northern Virginia and Northern California. The average sales price increased 3% while material margins increased 5%.

Calcium segment gross profit was $0.8 million, up $0.1 million compared to the prior year’s quarter.

SAG expenses were $86.4 million versus $90.3 million in the prior year’s first quarter. This year-over-year decline was due mostly to recently implemented cost reductions as well as adjustments to stock-based compensation to reflect a lower share price. As a percentage of total revenues, first quarter SAG expense decreased from 9.1% in 2019 to 8.2% in 2020. We remain focused on further leveraging our overhead structure.

Gain on sale of property, plant & equipment and businesses was $1.0 million in the first quarter of 2020 versus $7.3 million in the first quarter 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, gain (loss) on settlement of AROs and rental income. Total other operating expense and significant items included in the total were:

$4.0 million in first quarter 2020includes discrete items as follows:

$1.1 million of charges associated with non-routine business development

$0.6 million for COVID-19 pandemic direct incremental costs

$0.9 million of managerial restructuring charges

$4.3 million in first quarter 2019

Other nonoperating income (expense) was a net expense of $9.3 million for the first quarter of 2020, unfavorable by $12.5 million from the first quarter of 2019. This unfavorable variance resulted primarily from two items: 1) the $6.4 million of foreign currency translation losses versus a $0.8 million gain in the prior year’s quarter resulting from the rapid devaluation of the Mexican peso, and 2) the mark-to-market loss on our Rabbi Trust investments of $5.1 million versus a gain of $1.9 in the prior year’s quarter due to declines in equity market values (see Note 5 to the condensed consolidated financial statements).

Net interest expense was $30.8 million in the first quarter of 2020 compared to $32.9 million in the first quarter of 2019. The current quarter’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 $12.2 million in the first quarter of 2020 compared to $10.7 million in the first quarter of 2019. The increase in tax expense was primarily related to a decrease in excess tax benefits from share-based compensation quarter over quarter.

Earnings from continuing operations were $0.45 per diluted share in the first quarter of 2020 compared to $0.48 per diluted share in the first quarter of 2019.

Discontinued Operations — First quarter pretax gain from discontinued operations was $0.4 million in 2020 compared with a loss $0.6 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.

 

 

 

 

31


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

March 31

in millions, except per ton data

2020

2019

Aggregates segment

Segment sales

$        868.2 

$        835.0 

Less

Freight & delivery revenues 1

205.7 

195.2 

Other revenues

14.5 

11.2 

Freight-adjusted revenues

$        648.0 

$        628.6 

Unit shipments - tons

45.0 

45.6 

Freight-adjusted sales price

$        14.39 

$        13.77 

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.

32


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

March 31

March 31

dollars in millions

2020

2019

2020

2019

Aggregates segment

Gross profit

$        194.1 

$        185.7 

$     1,155.1 

$     1,029.4 

Segment sales

$        868.2 

$        835.0 

$     4,023.5 

$     3,649.0 

Gross profit margin

22.4%

22.2%

28.7%

28.2%

Incremental gross profit margin

25.3%

33.6%

FLOW-THROUGH RATE (non-gaap)

Three Months Ended

Trailing-Twelve Months

March 31

March 31

dollars in millions

2020

2019

2020

2019

Aggregates segment

Gross profit

$        194.1 

$        185.7 

$     1,155.1 

$     1,029.4 

Less: Contribution from acquisitions (same-store)

0.6 

0.3 

2.0 

0.5 

Same-store gross profit

$        193.5 

$        185.4 

$     1,153.1 

$     1,028.9 

Segment sales

$        868.2 

$        835.0 

$     4,023.5 

$     3,649.0 

Less: Freight & delivery revenues 1

205.7 

195.2 

931.7 

833.2 

Segment sales excluding freight & delivery

$        662.5 

$        639.8 

$     3,091.8 

$     2,815.8 

Less: Contribution from acquisitions (same-store)

1.5 

1.0 

23.5 

2.2 

Same-store segment sales excluding freight & delivery

$        661.0 

$        638.8 

$     3,068.3 

$     2,813.6 

Gross profit margin excluding freight & delivery

29.3%

29.0%

37.4%

36.6%

Same-store gross profit margin excluding

freight & delivery

29.3%

29.0%

37.6%

36.6%

Incremental gross profit flow-through rate

37.1%

45.5%

Same-store incremental gross profit flow-through rate

36.6%

48.8%

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.

33


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

March 31

in millions, except per ton data

2020

2019

Aggregates segment

Gross profit

$        194.1 

$        185.7 

Depreciation, depletion, accretion and amortization

77.1 

72.5 

Aggregates segment cash gross profit

$        271.2 

$        258.2 

Unit shipments - tons

45.0 

45.6 

Aggregates segment gross profit per ton

$          4.31 

$          4.07 

Aggregates segment cash gross profit per ton

$          6.02 

$          5.66 

Asphalt segment

Gross profit

$           (2.4)

$           (3.3)

Depreciation, depletion, accretion and amortization

8.7 

8.6 

Asphalt segment cash gross profit

$            6.3 

$            5.3 

Concrete segment

Gross profit

$            9.2 

$            8.6 

Depreciation, depletion, accretion and amortization

4.1 

3.0 

Concrete segment cash gross profit

$          13.3 

$          11.6 

Calcium segment

Gross profit

$            0.8 

$            0.7 

Depreciation, depletion, accretion and amortization

0.0 

0.1 

Calcium segment cash gross profit

$            0.8 

$            0.8 


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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

March 31

in millions

2020

2019

Net earnings

$          60.3 

$          63.3 

Income tax expense (benefit)

12.2 

10.7 

Interest expense, net of interest income

30.8 

32.9 

(Earnings) loss on discontinued operations, net of tax

(0.3)

0.6 

EBIT

103.0 

107.6 

Depreciation, depletion, accretion and amortization

95.5 

89.2 

EBITDA

$        198.4 

$        196.7 

Gain on sale of businesses

$            0.0 

$           (4.1)

Business development 1

1.1 

0.0 

COVID-19 direct incremental costs

0.6 

0.0 

Restructuring charges

0.9 

0.0 

Adjusted EBITDA

$        201.0 

$        192.7 

Depreciation, depletion, accretion and amortization

(95.5)

(89.2)

Adjusted EBIT

$        105.5 

$        103.5 

1

Represents non-routine charges 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

March 31

2020

2019

Diluted Earnings Per Share

Net earnings

$          0.45 

$          0.48 

Less: Discontinued operations (loss)

0.00 

0.00 

Diluted EPS from continuing operations

$          0.45 

$          0.48 

Items included in Adjusted EBITDA above

$          0.02 

$         (0.02)

Adjusted diluted EPS from continuing operations

$          0.47 

$          0.46 

 

 

35


LIQUIDITY AND FINANCIAL RESOURCES

Our primary sources of liquidity are cash provided by our operating activities and a substantial, committed bank line of credit. Subsequent to quarter-end, we entered into a $750.0 million delayed draw term loan to enhance our already strong liquidity and financial flexibility. 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

However, 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. A continued worldwide disruption could materially affect our future access to sources of liquidity. In the event of a sustained market deterioration, we may need additional liquidity, which would require us to evaluate available alternatives and take appropriate actions.

36


Cash

Included in our March 31, 2020 cash and cash equivalents and restricted cash balances of $120.3 million is $0.2 million of restricted cash as described in Note 1 under the caption Restricted Cash.

cash from operating activities

Three Months Ended

March 31

in millions

2020

2019

Net earnings

$           60.3 

$           63.3 

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

95.5 

89.2 

Noncash operating lease expense

8.9 

8.7 

Contributions to pension plans

(2.1)

(2.3)

Other operating cash flows, net 1

(80.1)

(42.7)

Net cash provided by operating activities

$           82.5 

$         116.2 

1

Primarily reflects changes to working capital balances.

Net cash provided by operating activities was $82.5 million during the three months ended March 31, 2020, a $33.7 million decrease compared to the same period of 2019. This decrease primarily resulted from increased net working capital balancescurrent receivables and inventories were up $27.5 million and $12.4 million, respectively, while current liabilities were down $59.9 million.

Days sales outstanding, a measurement of the time it takes to collect receivables, were 48 days at March 31, 2020, compared to 45 days at March 31, 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 $130.2 million during the first three months of 2020, a $10.4 million increase compared to the same period of 2019. During the first quarter of 2020, we invested $142.7 million in our existing operations compared to $122.0 million in the prior year period. Of this $142.7 million, $45.8 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 used for financing activities in the first quarter of 2020 was $106.5 million, compared to $9.6 million in the same period of 2019. The current year includes $19.9 million of cash paid to settle the interest rate locks as discussed in Note 6 to the condensed consolidated financial statements. The prior year includes a net $45.5 draw on our bank line of credit. Additionally, we increased the capital returned to our shareholders by $30.3 million via higher dividends of $4.2 million ($0.34 per share compared to $0.31 per share) and higher share repurchases of $26.1 million (214,338 shares repurchased @ $121.92 average price per share compared to none in first quarter of 2019).

 

 

37


debt

Certain debt measures are presented below:

March 31

December 31

March 31

dollars in millions

2020

2019

2019

Debt

Current maturities of long-term debt

$            0.0 

$            0.0 

$            0.0 

Short-term debt

0.0 

0.0 

178.5 

Long-term debt 1

2,785.6 

2,784.3 

2,780.6 

Total debt

$     2,785.6 

$     2,784.3 

$     2,959.1 

Capital

Total debt

$     2,785.6 

$     2,784.3 

$     2,959.1 

Equity

5,590.3 

5,621.9 

5,217.2 

Total capital

$     8,375.9 

$     8,406.2 

$     8,176.3 

Total Debt as a Percentage of Total Capital

33.3%

33.1%

36.2%

Weighted-average Effective Interest Rates

Line of credit 2

1.25%

1.25%

1.25%

Term debt

4.23%

4.36%

4.55%

Fixed versus Floating Interest Rate Debt

Fixed-rate debt

73.7%

73.7%

69.3%

Floating-rate debt

26.3%

26.3%

30.7%

1

Long-term debt includes the $250.0 million floating-rate notes due June 2020 and the $500.0 million floating-rate notes due March 2021 (see Note 7 to the condensed consolidated financial statements) as we intend to refinance these notes and have the ability to do so by borrowing on our $750.0 million delayed draw term loan that closed April 10, 2020.

2

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

Our unsecured $750.0 million line of credit matures December 2021. Covenants, borrowings, cost ranges and other details are described in Note 7 to the condensed consolidated financial statements. As of March 31, 2020, we were in compliance with the line of credit covenants, the credit margin for LIBOR borrowings was 1.25%, the credit margin for base rate borrowings was 0.25%, and the commitment fee for the unused amount was 0.15%.

As of March 31, 2020, our available borrowing capacity under the line of credit was $695.9 million. Utilization of the borrowing capacity was as follows:

none was borrowed

$54.1 million was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our $2,846.4 million (face value) of term debt is unsecured. $2,846.2 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 March 31, 2020, we were in compliance with all term debt covenants.

CURRENT MATURITIES of long-term debt

Current maturities of long-term debt as of March 31, 2020 were insignificant. Long-term debt includes the $250.0 million floating-rate notes due June 2020 and the $500.0 million floating-rate notes due March 2021 as we intend to refinance these notes and have the ability to do so by borrowing on our $750.0 million delayed draw term loan that closed April 10, 2020.

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DELAYED DRAW TERM LOAN

Subsequent to quarter-end, we executed a $750.0 million 364-day delayed draw term loan with a subset of the banks that provide our line of credit. This facility provides for up to two draws through October 2020 and all borrowings are due April 2021. Borrowings may be repaid prior to maturity, but once repaid may not be borrowed again.

All terms and conditions of the delayed draw term loan are consistent with those of the line of credit except for the interest rate on borrowings and the commitment fee. Borrowings bear interest, at our option, at either LIBOR plus a credit margin ranging from 1.375% to 2.125%, or Truist Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.375% to 1.125%. The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. The commitment fee, paid on the unused amount of the daily average unused amount of the facility, ranges from 0.125% to 0.25% and is determined by our credit ratings.

debt ratings

Our debt ratings and outlooks as of March 31, 2020 are as follows:

Rating/Outlook

Date

Description

Senior Unsecured Term Debt

Fitch

BBB-/positive

2/11/2020

outlook revised

Moody's 1

Baa3/positive

2/27/2020

outlook revised

Standard & Poor's

BBB+/stable

2/28/2020

rating revised

1

On April 23rd, Moody's revised its outlook to stable, while affirming its Baa3 senior unsecured rating.

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.

We are in the early stages of identifying, evaluating, and addressing the impacts to existing contracts of the discontinuation of LIBOR. As of March 31, 2020, we had three material debt instruments with LIBOR as a reference rate, each of which matures before the end of 2021: 1) $250.0 million floating-rate notes due 2020, 2) $500.0 million floating-rate notes due 2021, and 3) $750.0 million line of credit (none outstanding at March 31, 2020) due 2021. The $750.0 million delayed draw term loan we entered into subsequent to quarter-end also has LIBOR as a reference rate and matures before the end of 2021. 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, it may have a material adverse effect on our financial condition and results of operations.

 

 

39


Equity

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

March 31

December 31

March 31

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

276 

628 

307 

Common Stock Purchases

Purchased and retired

(214)

(19)

Common stock shares at end of period,

issued and outstanding

132,433 

132,371 

132,069 

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 March 31, 2020, there were 8,064,851 shares remaining under the 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:

March 31

December 31

March 31

in thousands, except average cost

2020

2019

2019

Shares Purchased and Retired

Number

214 

19 

Total purchase price

$       26,132 

$         2,602 

$                0 

Average cost per share

$       121.92 

$       139.90 

$           0.00 

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

40


Cash Contractual Obligations

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

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 March 31, 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.

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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.

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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,” 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.

 

 


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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. To manage these market risks, we may use derivative financial instruments. We do not enter into derivative financial instruments for 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 March 31, 2020, the estimated fair value of our long-term debt including current maturities was $2,926.2 million compared to a book value of $2,785.6 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 $272.6 million.

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

 

 

ITEM 4

controls and procedures

disclosure controls and procedures

We maintain a system of controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. These disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a - 15(e) or 15d - 15(e)), include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer, with the participation of other management officials, evaluated the effectiveness of the design and operation of the disclosure controls and procedures as of March 31, 2020. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 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.

Therefore, no material changes were made during the first 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. 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 which has spread from China to many other countries including the United States. 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 increasingly stringent 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.

We are operating as an essential business in the states we serve. Consistent with federal guidelines and with state and local orders to date, we currently continue to operate across our footprint. Notwithstanding our continued operations, the COVID-19 pandemic has begun to have 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 could also 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 are 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, and how quickly and to what extent 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 March 31, 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

Jan 1 - Jan 31

$          0.00 

8,279,189 

Feb 1 - Feb 29

92,000 

$      118.89 

92,000 

8,187,189 

Mar 1 - Mar 31

122,338 

$      124.20 

122,338 

8,064,851 

Total

214,338 

$      121.92 

214,338 

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 March 31, 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 first 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 3.1

Amended and Restated By-laws of Vulcan Materials Company (as amended through March 23, 2020), filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on March 25, 2020 1

Exhibit 10.1

Form of Performance Share Unit Award Agreement (2020) under the Vulcan Materials Company 2016 Omnibus Long-Term Incentive Plan 2

Exhibit 10.2

Form of Stock-Only Stock Appreciation Rights Award Agreement (2020) under the Vulcan Materials Company 2016 Omnibus Long-Term Incentive Plan 2

Exhibit 10.3

Form of Restricted Stock Unit Award Agreement (2020) under the Vulcan Materials Company 2016 Omnibus Long-Term Incentive Plan 2

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 March 31, 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 March 31, 2020 is formatted in iXBRL (contained in Exhibit 101).

1

Incorporated by reference.

2

Management contract or compensatory plan.

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       May 6, 2020

/s/ Randy L. Pigg

Randy L. Pigg

Vice President, Controller

(Principal Accounting Officer)

 

 

 

Date       May 6, 2020

/s/ Suzanne H. Wood

Suzanne H. Wood

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

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