10-K
Table of Contents
Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2012

Commission file number: 001-33841

VULCAN MATERIALS COMPANY

(Exact Name of Registrant as Specified in Its Charter)

 

New Jersey   20-8579133
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

1200 Urban Center Drive, Birmingham, Alabama 35242

(Address of Principal Executive Offices) (Zip Code)

(205) 298-3000

(Registrant’s telephone number, including area code)

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

 

Title of each class   Name of each exchange on which registered
Common Stock, $1 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  X   No      

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No    X .

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  X   No      

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  X   No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  X 

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

 

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

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

 

Aggregate market value of voting and non-voting common stock held by non-affiliates as of June 30, 2012:

   $ 5,118,918,572   

Number of shares of common stock, $1.00 par value, outstanding as of February 14, 2013:

     129,872,017   

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s annual proxy statement for the annual meeting of its shareholders to be held on May 10, 2013, are incorporated by reference into Part III of this Annual Report on Form 10-K.


Table of Contents
Index to Financial Statements

VULCAN MATERIALS COMPANY

ANNUAL REPORT ON FORM 10-K

FISCAL YEAR ENDED DECEMBER 31, 2012

CONTENTS

 

PART

   ITEM         PAGE   

I

   1     

Business

     3   
   1A   

Risk Factors

     19   
   1B   

Unresolved Staff Comments

     24   
   2     

Properties

     24   
   3     

Legal Proceedings

     27   
   4     

Mine Safety Disclosures

     27   

II

   5     

Market for the Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities

     28   
   6     

Selected Financial Data

     29   
   7     

Management’s Discussion and Analysis of Financial Condition
and Results of Operations

     30   
   7A   

Quantitative and Qualitative Disclosures about Market Risk

     55   
   8     

Financial Statements and Supplementary Data

     56   
   9     

Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

     109   
   9A   

Controls and Procedures

     109   
   9B   

Other Information

     111   
        

III

   10   

Directors, Executive Officers and Corporate Governance

     112   
   11   

Executive Compensation

     112   
   12   

Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters

     112   
   13   

Certain Relationships and Related Transactions, and Director Independence

     112   
   14   

Principal Accountant Fees and Services

     112   

IV

   15   

Exhibits and Financial Statement Schedules

     113   
     

Signatures

     114   

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.

 

Table of Contents    i


Table of Contents
Index to Financial Statements

PART I

“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES

LITIGATION REFORM ACT OF 1995

Certain of the matters and statements made herein or incorporated by reference into this report constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. All such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our intent, belief or current expectation. Often, forward-looking statements can be identified by the use of words such as “anticipate,” “may,” “believe,” “estimate,” “project,” “expect,” “intend” and words of similar import. In addition to the statements included in this report, we may from time to time make other oral or written forward-looking statements in other filings under the Securities Exchange Act of 1934 or in other public disclosures. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. All forward-looking statements involve certain assumptions, risks and uncertainties that could cause actual results to differ materially from those included in or contemplated by the statements. These assumptions, risks and uncertainties include, but are not limited to:

 

§ cost reductions, profit enhancements and asset sales, as well as streamlining and other strategic actions we adopted, will not be able to be realized to the desired degree or within the desired time period and that the results thereof will differ from those anticipated or desired

 

§ uncertainties as to the timing and valuations that may be realized or attainable with respect to planned asset sales

 

§ general economic and business conditions

 

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

 

§ changes in our effective tax rate that can adversely impact results

 

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

 

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

 

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

 

§ the highly competitive nature of the construction materials industry

 

§ the impact of future regulatory or legislative actions

 

§ the outcome of pending legal proceedings

 

§ pricing of our products

 

§ weather and other natural phenomena

 

§ energy costs

 

§ costs of hydrocarbon-based raw materials

 

§ healthcare costs

 

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

 

§ changes in interest rates

 

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

 

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

 

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

 

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

 

§ our ability to manage and successfully integrate acquisitions

 

§ the potential of goodwill or long-lived asset impairment

 

Part I    1


Table of Contents
Index to Financial Statements
§ the potential impact of future legislation or regulations relating to climate change, greenhouse gas emissions or the definition of minerals

 

§ the risks set forth in Item 1A “Risk Factors,” Item 3 “Legal Proceedings,” Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 12 “Other Commitments and Contingencies” to the consolidated financial statements in Item 8 “Financial Statements and Supplementary Data,” all as set forth in this report

 

§ other assumptions, risks and uncertainties detailed from time to time in our filings made with the Securities and Exchange Commission

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. Investors are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented in our filings, and are advised to consult any of our future disclosures in filings made with the Securities and Exchange Commission and our press releases with regard to our business and consolidated financial position, results of operations and cash flows.

 

Part I    2


Table of Contents
Index to Financial Statements
ITEM 1  

BUSINESS  

Vulcan Materials Company is a New Jersey corporation and the nation’s largest producer of construction aggregates: primarily crushed stone, sand, and gravel. We have 341 active aggregates facilities. We also are a major producer of asphalt mix and ready-mixed concrete as well as a leading producer of cement in Florida.

VULCAN’S VALUE PROPOSITION

We are the leading construction materials business in the country with superior aggregates operations. Our leading position is based upon:

 

§ being the largest aggregates producer in the U.S.

 

§ having a favorable geographic footprint that provides attractive long-term growth prospects

 

§ having the largest proven and probable reserve base

 

§ having operational expertise and pricing discipline which provides attractive unit profitability

STRATEGY FOR EXISTING AND NEW MARKETS

 

§ Our aggregates reserves are strategically located throughout the United States in high-growth areas that are projected to grow faster than the national average and that require large amounts of aggregates to meet construction demand. Vulcan-served states are estimated to generate 75% of the total growth in U.S. population and 70% of the total growth in U.S. household formations between 2010 and 2020. Our top ten revenue producing states in 2012 were Alabama, California, Florida, Georgia, Illinois, North Carolina, South Carolina, Tennessee, Texas and Virginia.

U.S. DEMOGRAPHIC GROWTH 2010 TO 2020, TOP 10 BY STATE

 

 

     POPULATION       HOUSEHOLDS       EMPLOYMENT
 

Rank

   State   

Share of Total

U.S. Growth

      State   

Share of Total

U.S. Growth

      State   

Share of Total

U.S. Growth

 

1

   Texas    16%       Texas    13%       Texas    14%
 

2

   California    14%       Florida    13%       California    10%
 

3

   Florida    13%       California    12%       Florida    8%
 

4

   North Carolina    6%       North Carolina    5%       New York    6%
 

5

   Georgia    6%       Arizona    5%       Georgia    4%
 

6

   Arizona    5%       Georgia    5%       North Carolina    4%
 

7

   Nevada    3%       Virginia    3%       Arizona    3%
 

8

   Virginia    3%       Washington    3%       Ohio    3%
 

9

   Washington    3%       Colorado    2%       Pennsylvania    3%
 

10

   Colorado    2%       Oregon    2%       Virginia    3%
   

Top10 Subtotal

   70%              62%              58%
 

Vulcan States in Top 10:

   62%          55%          49%
   

Al l States Served by Vulcan:

   75%              70%              63%

    Notes: Vulcan-served states shown in bolded blue text. Due to rounding, subtotals may not equal the sum of individual states.

    Source: Moody’s Analytics as of November 12, 2012

 

§ We take a disciplined approach to strengthening our footprint by increasing our presence in metropolitan areas that are expected to grow most rapidly and divesting assets that are no longer considered part of our long-term growth strategy.

 

§ Where practical, we have operations located close to our local markets because the cost of trucking materials long distances is prohibitive. Approximately 81% of our total aggregates shipments are delivered exclusively from the producing location to the customer by truck, and another 12% are delivered by truck after reaching a sales yard by rail or water.

 

Part I    3


Table of Contents
Index to Financial Statements

COMPETITORS

We operate in an industry that generally is fragmented with a large number of small, privately-held companies. We estimate that the ten largest aggregates producers account for approximately 30% to 35% of the total U.S. aggregates production. Despite being the industry leader, Vulcan’s total U.S. market share is less than 10%. Other publicly traded companies among the ten largest U.S. aggregates producers include the following:

 

§ Cemex S.A.B. de C.V.

 

§ CRH plc

 

§ HeidelbergCement AG

 

§ Holcim Ltd.

 

§ Lafarge

 

§ Martin Marietta Materials, Inc.

 

§ MDU Resources Group, Inc.

Because the U.S. aggregates industry is highly fragmented, with over 5,000 companies managing almost 10,000 operations, many opportunities for consolidation exist. Therefore, companies in the industry tend to grow by acquiring existing facilities to enter new markets or by enhancing their existing market positions.

 

Part I    4


Table of Contents
Index to Financial Statements

BUSINESS STRATEGY

Vulcan provides the basic materials for the infrastructure needed to expand the U.S. economy. Our strategy is based on our strength in aggregates. Aggregates are used in all types of construction and in the production of asphalt mix and ready-mixed concrete. Our materials are used to build the roads, tunnels, bridges, railroads and airports that connect us, and to build the hospitals, churches, shopping centers, and factories that are essential to our lives and the economy. The following graphs illustrate the relationship of our four operating segments to sales.

AGGREGATES-LED VALUE CREATION — 2012 NET SALES

 

LOGO

* Represents sales to external customers of our aggregates and our downstream products that use our aggregates.

Our business strategies include: 1) aggregates focus, 2) coast-to-coast footprint, 3) profitable growth, 4) tightly managed operational and overhead costs, and 5) effective land management.

1. AGGREGATES FOCUS

Aggregates are used in virtually all types of public and private construction projects and practically no substitutes for quality aggregates exist. Our focus on aggregates allows us to:

 

§ BUILD AND HOLD SUBSTANTIAL RESERVES: The locations of our reserves are critical to our long-term success because of barriers to entry created in many metropolitan markets by zoning and permitting regulations and high transportation costs. Our reserves are strategically located throughout the United States in high-growth areas that will require large amounts of aggregates to meet future construction demand. Aggregates operations have flexible production capabilities and, other than energy inputs required to process the materials, require virtually no other raw material other than aggregates reserves which we own or control by leases. Our downstream businesses (asphalt mix and concrete) use Vulcan-produced aggregates almost exclusively.

 

§ TAKE ADVANTAGE OF BEING THE LARGEST PRODUCER: Each aggregates operation is unique because of its location within a local market with particular geological characteristics. Every operation, however, uses a similar group of assets to produce saleable aggregates and provide customer service. Vulcan is the largest aggregates company in the U.S., whether measured by production or by revenues. Our 341 active aggregates facilities provide opportunities to standardize operating practices and procure equipment (fixed and mobile), parts, supplies and services in an efficient and cost-effective manner, both regionally and nationally. Additionally, we are able to share best practices across the organization and leverage our size for administrative support, customer service, accounting, accounts receivable and accounts payable, technical support and engineering.

 

Part I    5


Table of Contents
Index to Financial Statements

2. COAST-TO-COAST FOOTPRINT

Demand for construction aggregates correlates positively with changes in population growth, household formation and employment. We have pursued a strategy to increase our presence in metropolitan areas that are expected to grow the most rapidly.

 

LOGO

3. PROFITABLE GROWTH

Our growth is a result of acquisitions, cost management and investment activities.

 

§ STRATEGIC ACQUISITIONS: Since becoming a public company in 1956, Vulcan has principally grown by mergers and acquisitions. For example, in 1999 we acquired CalMat Co., thereby expanding our aggregates operations into California and Arizona and making us one of the nation’s leading producers of asphalt mix and ready-mixed concrete.

In 2007, we acquired Florida Rock Industries, Inc., the largest acquisition in our history. This acquisition expanded our aggregates business in Florida and other southeastern and Mid-Atlantic states, as well as adding to our ready-mixed concrete business and added cement manufacturing and distribution facilities in Florida.

In addition to these large acquisitions, we have completed many smaller acquisitions that have contributed significantly to our growth.

 

§ REINVESTMENT OPPORTUNITIES WITH HIGH RETURNS: During this decade, Moody’s Analytics projects that 75% of the U.S. population growth will occur in Vulcan-served states. The close proximity of our production facilities and our aggregates reserves to this projected population growth creates many opportunities to invest capital in high-return projects — projects that will add reserves, increase production capacity and improve costs.

 

Part I    6


Table of Contents
Index to Financial Statements

4. TIGHTLY MANAGED OPERATIONAL AND OVERHEAD COSTS

In a business where aggregates sell, on average, for approximately $10.00 per ton, we are accustomed to rigorous cost management throughout economic cycles. Small savings per ton add up to significant cost reductions. We are able to adjust production levels to meet varying market conditions without jeopardizing our ability to take advantage of future increased demand.

Our knowledgeable and experienced workforce and our flexible production capabilities have allowed us to manage operational and overhead costs aggressively during the prolonged recession. In addition to cost reduction steps taken in previous years, in 2012 we continued to control costs aggressively in our operations which improved our per-ton margins. As a result, our cash earnings for each ton of aggregates sold in 2012 was 27% higher than at the peak of demand in 2005 (refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for Non-GAAP disclosures). In 2012, we also reorganized our company structure enabling us to make significant reductions in our Selling, Administrative and General (SAG) expense.

 

LOGO

5. EFFECTIVE LAND MANAGEMENT

We believe that effective land management is both a business strategy and a social responsibility that contributes to our success. Good stewardship requires the careful use of existing resources as well as long-term planning because mining, ultimately, is an interim use of the land. Therefore, we strive to achieve a balance between the value we create through our mining activities and the value we create through effective post-mining land management. We continue to expand our thinking and focus our actions on wise decisions regarding the life cycle management of the land we currently hold and will hold in the future.

 

Part I    7


Table of Contents
Index to Financial Statements

PRODUCT LINES

We have four reporting segments organized around our principal product lines:

 

§ aggregates

 

§ concrete

 

§ asphalt mix

 

§ cement

1. AGGREGATES

 

LOGO

A number of factors affect the U.S. aggregates industry and our business including markets, reserves and demand cycles.

 

§ LOCAL MARKETS: Aggregates have a high weight-to-value ratio and, in most cases, must be produced near where they are used; if not, transportation can cost more than the materials rendering such material 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 inland quarries — shipping by barge and rail — and from our quarry on Mexico’s Yucatan Peninsula. We transport aggregates from Mexico to the U.S. principally on our three Panamax-class, self-unloading ships.

 

§ DIVERSE MARKETS: Large quantities of aggregates are used in virtually all types of public- and private-sector construction projects such as highways, airports, water and sewer systems, industrial manufacturing facilities, residential and nonresidential buildings. Aggregates also are used widely as railroad track ballast.

 

§ LOCATION AND QUALITY OF RESERVES: We currently have 15.0 billion tons of permitted and proven or probable aggregates reserves. The bulk of these reserves are located in areas where we expect greater than average rates of growth in population, jobs and households, which require new infrastructure, housing, offices, schools and other development. Such growth requires aggregates for construction. Zoning and permitting regulations in some markets have made it increasingly difficult for the aggregates industry to expand existing quarries or to develop new quarries. These restrictions could curtail expansion in certain areas, but they also could increase the value of our reserves at existing locations.

 

Part I    8


Table of Contents
Index to Financial Statements
§ DEMAND CYCLES: Long-term growth in demand for aggregates is largely driven by growth in population, jobs and households. While short- and medium-term demand for aggregates fluctuates with economic cycles, declines have historically been followed by strong recoveries, with each peak establishing a new historical high. In comparison to all other recent demand cycles, the current downturn has been unusually steep and long, making it difficult to predict the timing or strength of future recovery.

However, there are signs the current cyclical downturn is drawing to a close and a recovery in private construction is taking hold. Residential construction, as measured by housing starts, has bottomed out, and a sustained recovery appears to be underway. Since October 2011, year-over-year growth in trailing twelve month housing starts has been increasing. This is significant because housing contributes to Gross Domestic Product (GDP) in two basic ways: through fixed investment and through consumption spending and housing services. Residential investment, which includes construction of both new single-family and multi-family structures, has the most direct impact on construction activity. During the last four housing recoveries after economic downturns, increased construction activity in other end markets has followed growth in housing starts.

The diagram below depicts how housing starts can have a direct and indirect impact on the overall economy and construction end markets. Housing starts lead to growth in demand for private investment as well as initial and ongoing sources of tax revenue, both of which drive increased construction activity. Historically, housing has contributed 17% to 18% of GDP, according to the National Association of Home Builders.

 

LOGO

In addition, the following factors influence the aggregates market:

 

§ HIGHLY FRAGMENTED INDUSTRY: The U.S. aggregates industry is composed of over 5,000 companies that manage almost 10,000 operations. This fragmented structure provides many opportunities for consolidation. Companies in the industry commonly enter new markets or expand positions in existing markets through the acquisition of existing facilities.

 

§ RELATIVELY STABLE DEMAND FROM THE PUBLIC SECTOR: Publicly funded construction activity has historically been more stable and less cyclical than privately funded construction, and generally requires more aggregates per dollar of construction spending. Private construction (primarily residential and nonresidential buildings) typically is more affected by general economic cycles than publicly funded projects (particularly highways, roads and bridges) which tend to receive more consistent levels of funding throughout economic cycles.

 

Part I    9


Table of Contents
Index to Financial Statements
§ LIMITED PRODUCT SUBSTITUTION: There are limited substitutes for quality aggregates. In urban locations, recycled concrete and asphalt have applications as a lower-cost alternative to virgin aggregates. However, many types of construction projects cannot be served by recycled concrete or asphalt but require the use of virgin aggregates to meet specifications and performance-based criteria for durability, strength and other qualities.

 

§ WIDELY USED IN DOWNSTREAM PRODUCTS: In the production process, aggregates are processed for specific applications or uses. Two products that use aggregates as a raw material are asphalt mix and ready-mixed concrete. By weight, aggregates comprise approximately 95% of asphalt mix and 78% of ready-mixed concrete.

 

§ FLEXIBLE PRODUCTION CAPABILITIES: The production of aggregates is a mechanical process in which stone is crushed and, through a series of screens, separated into various sizes depending on how it will be used. Production capacity can be flexible by adjusting operating hours to meet changing market demand.

 

§ RAW MATERIAL INPUTS LARGELY UNDER OUR CONTROL: Unlike typical industrial manufacturing industries, the aggregates industry does not require the input of raw material beyond owned or leased aggregates reserves. Stone, sand and gravel are naturally occurring resources. However, production does require the use of explosives, hydrocarbon fuels and electric power.

 

Part I    10


Table of Contents
Index to Financial Statements

OUR MARKETS

We focus on the U.S. markets with the greatest expected population growth and where construction is expected to expand. Because transportation is a significant part of the delivered cost of aggregates, our facilities are typically located in the markets they serve or with access to economical transportation to their markets. We serve both the public and the private sectors.

PUBLIC SECTOR

Public sector construction includes spending by federal, state, and local governments for highways, bridges and airports as well as other infrastructure construction for sewer and waste disposal systems, water supply systems, dams, reservoirs and other public construction projects. Construction for power plants and other utilities is funded from both public and private sources. In 2012, publicly funded construction accounted for approximately 54% of our total aggregates shipments.

 

¡ PUBLIC SECTOR FUNDING: Generally, public sector construction spending is more stable than private sector construction because public sector spending is less sensitive to interest rates and has historically been supported by multi-year legislation and programs. For example, the federal transportation bill is a principal source of funding for public infrastructure and transportation projects. For over two decades, a portion of transportation projects has been funded through a series of multi-year bills. The long-term aspect of these bills is critical because it provides state departments of transportation with the ability to plan and execute long-term and complex highway projects. Federal highway spending is governed by multi-year authorization bills and annual budget appropriations using funds largely from the Federal Highway Trust Fund. This Trust Fund receives funding from taxes on gasoline and other levies. The level of state spending on infrastructure varies across the United States and depends on individual state needs and economies. In 2012, approximately 30% of our aggregates sales by volume were used in highway construction projects.

 

¡ FEDERAL HIGHWAY FUNDING: In June 2012, Congress passed MAP-21, a new multi-year highway bill. There was overwhelming bipartisan support for this legislation in both the House and the Senate, and it was signed into law by the President on July 6, 2012. This bill provides state departments of transportation with the funding certainty to move forward on infrastructure programs, and it helps rebuild America’s aging infrastructure by modernizing and reforming our current transportation system, while also protecting millions of jobs.

 

   MAP-21 maintains essentially level funding for the next two fiscal years, with approximately $105 billion for total funding through Fiscal Year 2014. It extends the Highway Trust Fund and tax collections through Fiscal Year 2016 adding additional stability to the Federal Highway Program. The bill’s substantial highway provisions are more reform-focused than previous bills, with a strong emphasis on improving project delivery and eliminating red tape that has slowed the construction of highway projects. Funding directly for highways provides a floor of $82 billion for Fiscal Years 2013 and 2014. On top of this, there is a very significant increase in the Transportation Infrastructure Finance & Innovation Act (TIFIA) program. Funding for this program will increase to $1.75 billion over the next two-year period from $122 million per year under the previous multi-year highway bill known as SAFETEA-LU. TIFIA funding is typically leveraged by a factor of 10, so that there is the potential for $17.5 billion in additional major project funding for Fiscal Years 2013 and 2014. The U.S. Department of Transportation estimates this new TIFIA funding will support $30 to $50 billion in new construction. However, given administrative requirements and other factors, it is expected that TIFIA will not have a meaningful impact on aggregates shipments until 2014 and beyond.

 

   TIFIA is a highly popular program that stimulates private capital investment for projects of national or regional significance in key growth areas throughout the United States, including large portions of our footprint. The program provides credit assistance in the form of secured loans, loan guarantees and lines of credit to major transportation infrastructure projects. Eligible sponsors for TIFIA projects include state and local governments, private firms, special authorities and transportation improvement districts. Eligible projects include highways and bridges, large multi-modal projects, as well as freight transfer and transit facilities. We are well positioned in states that are likely to get a disproportionate number of TIFIA-funded projects.

 

  

Overall, MAP-21 creates a positive framework for future authorizations through its significant reforms, consolidating and simplifying federal highway programs, accelerating the project delivery process, expanding project financing and promoting public-private partnership opportunities. The fact that Congress was able to pass the bill given the political climate in Washington, maintaining funding levels while also adding an additional year of program funding beyond what

 

Part I    11


Table of Contents
Index to Financial Statements
  was expected, has its own significance and makes us even more optimistic about the ability of Congress to continue to work towards long-term solutions that will rebuild America’s infrastructure.

PRIVATE SECTOR

The private sector markets include both nonresidential building construction and residential construction and is considerably more cyclical than public construction. In 2012, privately-funded construction accounted for approximately 46% of our total aggregates shipments.

 

¡ NONRESIDENTIAL CONSTRUCTION: Private nonresidential building construction includes a wide array of projects. Such projects generally are more aggregates intensive than residential construction. Overall demand in private nonresidential construction generally is driven by job growth, vacancy rates, private infrastructure needs and demographic trends. The growth of the private workforce creates demand for offices, hotels and restaurants. Likewise, population growth generates demand for stores, shopping centers, warehouses and parking decks as well as hospitals, churches and entertainment facilities. Large industrial projects, such as a new manufacturing facility, can increase the need for other manufacturing plants to supply parts and assemblies. Construction activity in this end market is influenced by a firm’s ability to finance a project and the cost of such financing.

 

     Consistent with past cycles of private sector construction, private nonresidential construction activity remained strong after residential construction peaked in 2006. Contract awards are a leading indicator of future construction activity and a continuation of the recent trend in awards should translate to growth in demand for aggregates. However, in late 2007, contract awards for private nonresidential buildings peaked. In 2008, contract awards in the U.S. declined 23% from the prior year and in 2009 fell sharply, declining 54% from 2008 levels. However, after bottoming in 2010, trailing twelve-month contract awards for private nonresidential buildings began to improve in 2011, ending the year up 16% from 2010 levels. In 2012, private nonresidential building awards grew another 14%, which was entirely attributable to strength in contract awards for stores and office buildings, up 34% and 17%, respectively. Employment growth, more attractive lending standards and general recovery in the economy will help drive continued growth in construction activity in this end market.

 

LOGO

 

Part I    12


Table of Contents
Index to Financial Statements
¡ RESIDENTIAL CONSTRUCTION: The majority of residential construction is for single-family houses with the remainder consisting of multi-family construction (i.e., two family houses, apartment buildings and condominiums). Public housing comprises only a small portion of housing demand. Household formations in our markets continue to outpace household formations in the rest of the U.S. Construction activity in this end market is influenced by the cost and availability of mortgage financing. Demand for our products generally occurs early in the infrastructure phase of residential construction and later as part of driveways or parking lots.

 

   U.S. housing starts, as measured by McGraw-Hill data, peaked in early 2006 at over 2 million units annually. By the end of 2009, total housing starts had declined to less than 600,000 units, well below prior historical lows of approximately 1 million units annually. In 2012, total housing starts increased to 783,000 units annually. The growth in residential construction bodes well for continued recovery in our markets.

 

LOGO

ADDITIONAL AGGREGATES PRODUCTS AND MARKETS

We sell aggregates that are used as ballast to railroads for construction and maintenance of railroad tracks. We also sell riprap and jetty stone for erosion control along waterways. In addition, stone can be used as a feedstock for cement and lime plants and for making a variety of adhesives, fillers and extenders. Coal-burning power plants use limestone in scrubbers to reduce harmful emissions. Limestone that is crushed to a fine powder can be sold as agricultural lime.

Our Brooksville, Florida calcium plant produces calcium products for the animal feed, paint, plastics, water treatment and joint compound industries. This facility is supplied with high quality calcium carbonate material mined at the Brooksville quarry.

We sell a relatively small amount of construction aggregates outside of the United States, principally in the areas surrounding our large quarry on the Yucatan Peninsula in Mexico. Nondomestic sales and long-lived assets outside the United States are reported in Note 15 “Segment Reporting” in Item 8 “Financial Statements and Supplementary Data.”

 

Part I    13


Table of Contents
Index to Financial Statements

OUR COMPETITIVE ADVANTAGES

The competitive advantages of our aggregates focused strategy include:

COAST-TO-COAST FOOTPRINT

 

¡ largest aggregates company in the U.S.

 

¡ high-growth markets requiring large amounts of aggregates to meet construction demand

 

¡ diversified regional exposure

 

¡ benefits of scale in operations, procurement and administrative support

 

¡ complementary asphalt mix, concrete and cement businesses in select markets

 

¡ promotion of effective land management

PROFITABLE GROWTH

 

¡ quality top-line growth that converts to higher-margin earnings and cash flow generation

 

¡ tightly managed operational and overhead costs

 

¡ more opportunities to manage our portfolio of locations to further enhance long-term earnings growth

STRATEGICALLY LOCATED ASSETS

 

¡ our reserves are located in high-growth markets that require large amounts of aggregates to meet construction demand

 

¡ zoning and permitting regulations in many metropolitan markets have made it increasingly difficult to expand existing quarries or to develop new quarries

 

¡ such regulations, while potentially curtailing expansion in certain areas, could also increase the value of our reserves at existing locations

2. CONCRETE

We produce and sell ready-mixed concrete in California, Florida, Georgia, Maryland, Texas, Virginia and the District of Columbia. Additionally, we produce and sell, in a limited number of these markets, other concrete products such as block. We also resell purchased building materials for use with ready-mixed concrete and concrete block.

This segment relies on our reserves of aggregates, functioning essentially as a customer to our aggregates operations. Aggregates are a major component in ready-mixed concrete, comprising approximately 78% by weight of this product. We meet the aggregates requirements of our Concrete segment almost wholly through our Aggregates segment. These product transfers are made at local market prices for the particular grade and quality of material required.

We serve our Concrete segment customers from our local production facilities or by truck. Because ready-mixed concrete hardens rapidly, delivery typically is within close proximity to the producing facility.

Ready-mixed concrete production also requires cement. In the Florida market, cement requirements for ready-mixed concrete production are supplied substantially by our Cement segment. In other markets, we purchase cement from third-party suppliers. We do not anticipate any material difficulties in obtaining the raw materials necessary for this segment to operate.

 

Part I    14


Table of Contents
Index to Financial Statements

3. ASPHALT MIX

We produce and sell asphalt mix in Arizona, California, and Texas. This segment relies on our reserves of aggregates, functioning essentially as a customer to our aggregates operations. Aggregates are a major component in asphalt mix, comprising approximately 95% by weight of this product. We meet the aggregates requirements for our Asphalt Mix segment almost wholly through our Aggregates segment. These product transfers are made at local market prices for the particular grade and quality of material required.

Because asphalt mix hardens rapidly, delivery typically is within close proximity to the producing facility. The asphalt mix production process requires liquid asphalt cement, which we purchase entirely from third-party producers. We do not anticipate any material difficulties in obtaining the raw materials necessary for this segment to operate. We serve our Asphalt Mix segment customers from our local production facilities.

4. CEMENT

Our Newberry, Florida cement plant produces Portland and masonry cement that we sell in both bulk and bags to the concrete products industry. Our Tampa, Florida distribution facility can import and export cement and slag. Cement can be resold, blended, bagged, or reprocessed into specialty cements that we then sell. The slag is ground and sold in blended or unblended form.

The Cement segment’s largest single customer is our own ready-mixed concrete operations within the Concrete segment.

An expansion of production capacity at our Newberry, Florida cement plant was completed in 2010. Total annual production capacity is 1.6 million tons per year. This plant is supplied by limestone mined at the facility. These limestone reserves total 189.8 million tons.

OTHER BUSINESS-RELATED ITEMS

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 volumes of our products. Therefore, the financial results for any quarter do not necessarily indicate the results expected for the year. Normally, the highest sales and earnings are in the third quarter and the lowest are in the first quarter because of winter weather in the first quarter. Furthermore, our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, primarily in the private sector. The levels of construction spending are affected by changing interest rates and demographic and population fluctuations.

CUSTOMERS

No material part of our business is dependent upon any single customer whose loss would have an adverse effect on our business. In 2012, our top five customers accounted for 5.6% of our total revenues (excluding internal sales), and no single customer accounted for more than 1.4% of our total revenues. Our products typically are sold to private industry and not directly to governmental entities. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly funded construction, such as highways, airports and government buildings, relatively insignificant sales are made directly to federal, state, county or municipal governments/agencies. Therefore, although reductions in state and federal funding can curtail publicly funded construction, our business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.

 

Part I    15


Table of Contents
Index to Financial Statements

ENVIRONMENTAL COSTS AND GOVERNMENTAL REGULATION

Our operations are subject to numerous federal, state and local laws and regulations relating to the protection of the environment and worker health and safety; examples include regulation of facility air emissions and water discharges, waste management, protection of wetlands, listed and threatened species, noise and dust exposure control for workers, and safety regulations under both MSHA and OHSA. Compliance with these various regulations requires a substantial capital investment, and ongoing expenditures for the operation and maintenance of systems and implementation of programs. We estimate that capital expenditures for environmental control facilities in 2013 and 2014 will be approximately $11.4 million and $17.1 million, respectively. These anticipated expenditures are not expected to have any material impact on our earnings or competitive position.

Frequently, we are required by state and local regulations or contractual obligations to reclaim our former mining sites. These reclamation liabilities are recorded in our financial statements as a liability at the time the obligation arises. The fair value of such obligations is capitalized and depreciated over the estimated useful life of the owned or leased site. The liability is accreted through charges to operating expenses. To determine the fair value, we estimate the cost for a third party to perform the legally required reclamation, which is adjusted for inflation and risk and includes a reasonable profit margin. All reclamation obligations are reviewed at least annually. Reclaimed quarries often have potential for use in commercial or residential development or as reservoirs or landfills. However, no projected cash flows from these anticipated uses have been considered to offset or reduce the estimated reclamation liability.

For additional information regarding reclamation obligations (referred to in our financial statements as asset retirement obligations), see Notes 1 and 17 to the consolidated financial statements in Item 8 “Financial Statements and Supplementary Data.”

PATENTS AND TRADEMARKS

We do not own or have a license or other rights under any patents, registered trademarks or trade names that are material to any of our reporting segments.

OTHER INFORMATION REGARDING VULCAN

Vulcan is a New Jersey corporation incorporated on February 14, 2007, while its predecessor company was incorporated on September 27, 1956. Our principal sources of energy are electricity, diesel fuel, natural gas and coal. We do not anticipate any difficulty in obtaining sources of energy required for operation of any of our reporting segments in 2013.

As of January 1, 2013, we employed 6,727 people in the U.S. Of these employees, 613 are represented by labor unions. As of that date, outside of the U.S., we employed 300 people in Mexico and one in the Bahamas, 235 of whom are represented by a labor union. We do not anticipate any significant issues with any unions in 2013.

We do not consider our backlog of orders to be material to, or a significant factor in, evaluating and understanding our business.

 

Part I    16


Table of Contents
Index to Financial Statements

EXECUTIVE OFFICERS OF THE REGISTRANT

The names, positions and ages, as of February 20, 2013, of our executive officers are as follows:

 

Name               Position    Age    

Donald M. James

  

Chairman and Chief Executive Officer

     64    

Daniel F. Sansone

  

Executive Vice President and Chief Financial Officer

     60    

Danny R. Shepherd

  

Executive Vice President and Chief Operating Officer

     61    

Michael R. Mills

  

Senior Vice President and General Counsel

     52    

J. Wayne Houston

  

Senior Vice President, Human Resources

     63    

Ejaz A. Khan

  

Vice President, Controller and Chief Information Officer

     55    

Stanley G. Bass

  

Senior Vice President – Central and West Regions

     51    

J. Thomas Hill

  

Senior Vice President – South Region

     53    

John R. McPherson

  

Senior Vice President – East Region

     44    

The principal occupations of the executive officers during the past five years are set forth below:

Donald M. James was named Chief Executive Officer and Chairman of the Board of Directors in 1997.

Daniel F. Sansone was elected Executive Vice President and Chief Financial Officer as of February 1, 2011. Prior to that, he served as Senior Vice President and Chief Financial Officer from May 2005.

Danny R. Shepherd was elected Executive Vice President and Chief Operating Officer as of November 1, 2012. He most recently served as Executive Vice President, Construction Materials from February 1, 2011. Prior to that, he was Senior Vice President, Construction Materials East from February 2007.

Michael R. Mills was appointed Senior Vice President and General Counsel as of November 1, 2012. He most recently served as Senior Vice President – East Region from December 2011. Prior to that, he was President, Southeast Division.

J. Wayne Houston was elected Senior Vice President, Human Resources in February 2004.

Ejaz A. Khan was elected Vice President and Controller in February 1999. He was appointed Chief Information Officer in February 2000.

Stanley G. Bass was appointed Senior Vice President – Central and West Regions as of February 1, 2013. He served as Senior Vice President – Central Region from December 9, 2011 to February 1, 2013. Before that he served as President, Midsouth and Southwest Divisions from September 2010 to December 2011. Prior to that, he was President, Midsouth Division from August 2005 to August 2010.

J. Thomas Hill was appointed Senior Vice President – South Region as of December 9, 2011. He most recently served as President, Florida Rock Division from September 2010 to December 2011. Prior to that, he was President, Southwest Division from July 2004 to August 2010.

John R. McPherson was appointed Senior Vice President – East Region as of November 1, 2012. He most recently served as Senior Vice President, Strategy and Business Development. Before joining Vulcan in October 2011, Mr. McPherson was a senior partner at McKinsey & Company, a global management consulting firm from 1995 to 2011.

 

Part I    17


Table of Contents
Index to Financial Statements

SHAREHOLDER RETURN PERFORMANCE PRESENTATION

Below is a graph comparing the performance of our common stock, with dividends reinvested, to that of the Standard & Poor’s 500 Stock Index (S&P 500) and the Materials and Services Sector of the Wilshire 5000 Index (Wilshire 5000 M&S) from December 31, 2007 to December 31, 2012. The Wilshire 5000 M&S is a market capitalization weighted sector containing public equities of firms in the Materials and Services sector, which includes our company and approximately 1,200 other companies.

 

LOGO

INVESTOR INFORMATION

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

 

¡ Annual Report on Form 10-K

 

¡ Quarterly Reports on Form 10-Q

 

¡ Current Reports on Form 8-K

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

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

We have a:

 

¡ Business Conduct Policy applicable to all employees and directors

 

¡ Code of Ethics for the CEO and Senior Financial Officers

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

Our Board of Directors has also adopted:

 

¡ Corporate Governance Guidelines

 

¡ Charters for its Audit, Compensation and Governance Committees

 

Part I    18


Table of Contents
Index to Financial Statements

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

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

 

ITEM 1A  

RISK FACTORS  

An investment in our common stock involves risks. You should carefully consider the following risks, together with the information included in or incorporated by reference in this report, before deciding whether an investment in our common stock is suitable for you. If any of these risks actually occurs, our business, results of operations or financial condition could be materially and adversely affected. In such an event, the trading prices of our common stock could decline and you might lose all or part of your investment. The following is a list of our risk factors.

FINANCIAL/ACCOUNTING RISKS

Continued slow economic recovery in the construction industry may result in an impairment of our goodwill — We test goodwill for impairment on an annual basis or more frequently if events or circumstances change in a manner that would more likely than not reduce the fair value of a reporting unit below its carrying value. While we have not identified any events or changes in circumstances since our annual impairment test on November 1, 2012 that indicate the fair value of any of our reporting units is below its carrying value, the timing of a sustained recovery in the construction industry may have a significant effect on the fair value of our reporting units. A significant 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 that would reduce equity and result in an increase in our total debt as a percentage of total capital (41.6% as of December 31, 2012).

We incurred considerable short-term and long-term debt to finance the Florida Rock merger. This additional debt significantly increased our interest expense and debt service requirements — The combination of this debt and our reduced operating cash flow over the last several years produced substantially higher financial leverage that has resulted in credit rating downgrades.

Our operating cash flow is burdened by substantial annual interest, and in some years, principal payments. Our ability to make scheduled interest and principal payments, or to refinance the maturing principal of debt, depends on our operating and financial performance. The ability to refinance maturing principal is also dependent upon the state of the capital markets. Operating and financial performance is, in turn, subject to general economic and business conditions, many of which are beyond our control.

Our debt instruments contain various reporting and financial covenants, as well as affirmative covenants (e.g., requirement to maintain proper insurance) and negative covenants (e.g., restrictions on lines of business). If we fail to comply with any of these covenants, the related debt could become due prior to its stated maturity, and our ability to obtain additional or alternative financing could be impaired.

Our new regional alignment and restructuring of our accounting and certain administrative functions may not yield the anticipated efficiencies and may result in a loss of key personnel — In December 2011, we announced a major change in the structure of our business, going from eight geographical divisions to four regions. We have taken steps to consolidate the operations, sales, finance, accounting, human resources, engineering and geologic services functions. This consolidation is expected to reduce the cost of overhead support functions going forward. The administrative efficiencies which we believe will result from the consolidation may not be realized to the extent anticipated thereby reducing the operating income benefit. Additionally, key personnel may decide not to relocate and employees affected by the consolidation may leave us due to uncertainty prior to completing the transition efforts, which may slow the restructuring process and increase its cost.

 

Part I    19


Table of Contents
Index to Financial Statements

Our announced earnings growth initiatives, including a Profit Enhancement Plan and Planned Asset Sales, may not realize results to the desired degree or within the desired time period, and therefore the results of these initiatives may differ materially from those anticipated — In February 2012, we announced a two-part initiative to accelerate earnings growth and improve our credit profile. This initiative included a plan to reduce costs and other earnings enhancements for a $100 million earnings effect over the subsequent 18 months. We also announced a plan to sell certain assets over 18 months ending July 2013 for net proceeds of $500 million. These anticipated results are subject to a number of execution risks that could result in actual results that are much lower than the anticipated results. Additionally, even if the results are achieved, it could take longer than the announced timeframe before such results may be realized.

Our industry is capital intensive, resulting in significant fixed and semi-fixed costs. Therefore, our earnings are highly sensitive to changes in volume — Due to the high levels of fixed capital required for extracting and producing construction aggregates, both our dollar profits and our percentage of net sales (margin) could be negatively affected by decreases in volume.

We use estimates in accounting for a number of significant items. Changes in our estimates could adversely affect our future financial results — As discussed more fully in “Critical Accounting Policies” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we use significant judgment in accounting for:

 

¡ goodwill and goodwill impairment

 

¡ impairment of long-lived assets excluding goodwill

 

¡ reclamation costs

 

¡ pension and other postretirement benefits

 

¡ environmental remediation liabilities

 

¡ claims and litigation including self-insurance

 

¡ income taxes

We believe we have sufficient experience and reasonable procedures to enable us to make appropriate assumptions and formulate reasonable estimates; however, these assumptions and estimates could change significantly in the future and could adversely affect our financial position, results of operations, or cash flows.

ECONOMIC/POLITICAL RISKS

Both commercial and residential construction are dependent upon the overall U.S. economy which has been recovering at a slow pace — Commercial and residential construction levels generally move with economic cycles. When the economy is strong, construction levels rise and when the economy is weak, construction levels fall. The overall U.S. economy has been adversely affected by the recent recession. Although the U.S. economy is now in recovery, the pace of recovery is slow. Since construction activity generally lags the recovery after down cycles, construction projects have not returned to their pre-recession levels.

Low housing starts and general weakness in the housing market could continue to negatively affect demand for our products — In most of our markets, sales volumes have been negatively impacted by foreclosures and a significant decline from peak housing starts in residential construction. Our sales volumes and earnings could continue to be depressed and negatively impacted by this segment of the market until residential construction sustains a significant recovery.

Changes in legal requirements and governmental policies concerning zoning, land use, environmental and other areas of the law may result in additional liabilities, a reduction in operating hours and additional capital expenditures — Our operations are affected by numerous federal, state and local laws and regulations related to zoning, land use and environmental matters. Despite our compliance efforts, we have an inherent risk of liability in the operation of our business. These potential liabilities could have an adverse impact on our operations and profitability. In addition, our operations are subject to environmental, zoning and land use requirements and require numerous governmental approvals and permits, which often require us to make significant capital and maintenance and operating expenditures to comply with the applicable requirements. Stricter laws and regulations, or more stringent interpretations of existing laws or regulations,

 

Part I    20


Table of Contents
Index to Financial Statements

may impose new liabilities on us, reduce operating hours, require additional investment by us in pollution control equipment, or impede our opening new or expanding existing plants or facilities.

Climate change and climate change legislation or regulations may adversely impact our business — A number of governmental bodies have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. Such legislation or regulation, if enacted, potentially could include provisions for a “cap and trade” system of allowances and credits or a carbon tax, among other provisions. The Environmental Protection Agency (EPA) promulgated a mandatory reporting rule covering greenhouse gas emissions from sources considered to be large emitters. The EPA has also promulgated a greenhouse gas emissions permitting rule, referred to as the “Tailoring Rule,” which requires permitting of large emitters of greenhouse gases under the Federal Clean Air Act. We have determined that our Newberry cement plant is subject to both the reporting rule and the permitting rule, although the impacts of the permitting rule are uncertain at this time. The first required greenhouse gas emissions report for the Newberry cement plant was submitted to the EPA on March 31, 2011.

Other potential impacts of climate change include physical impacts such as disruption in production and product distribution due to impacts from major storm events, shifts in regional weather patterns and intensities, and potential impacts from sea level changes. There is also a potential for climate change legislation and regulation to adversely impact the cost of purchased energy and electricity.

The impacts of climate change on our operations and the company overall are highly uncertain and difficult to estimate. However, climate change and legislation and regulation concerning greenhouse gases could have a material adverse effect on our future financial position, results of operations or cash flows.

GROWTH AND COMPETITIVE RISKS

Within our local markets, we operate in a highly competitive industry which may negatively impact prices, volumes and costs — The construction aggregates industry is highly fragmented with a large number of independent local producers in a number of our markets. Additionally, in most markets, we also compete against large private and public companies, some of which are significantly vertically integrated. Therefore, there is intense competition in a number of markets in which we operate. This significant competition could lead to lower prices, lower sales volumes and higher costs in some markets, negatively affecting our earnings and cash flows. In certain markets, vertically integrated competitors have acquired a portion of our asphalt mix and ready-mixed concrete customers and this trend may accelerate.

Our long-term success depends upon securing and permitting aggregates reserves in strategically located areas. If we are unable to secure and permit such reserves it could negatively affect our earnings in the future — Construction aggregates are bulky and heavy and, therefore, difficult to transport efficiently. Because of the nature of the products, the freight costs can quickly surpass the production costs. Therefore, except for geographic regions that do not possess commercially viable deposits of aggregates and are served by rail, barge or ship, the markets for our products tend to be localized around our quarry sites and are served by truck. New quarry sites often take years to develop, therefore our strategic planning and new site development must stay ahead of actual growth. Additionally, in a number of urban and suburban areas in which we operate, it is increasingly difficult to permit new sites or expand existing sites due to community resistance. Therefore, our future success is dependent, in part, on our ability to accurately forecast future areas of high growth in order to locate optimal facility sites and on our ability to secure operating and environmental permits to operate at those sites.

Our future growth depends in part on acquiring other businesses in our industry and successfully integrating them with our existing operations. If we are unable to integrate acquisitions successfully, it could lead to higher costs and could negatively affect our earnings — The expansion of our business is dependent in part on the acquisition of existing businesses that own or control aggregates reserves. Disruptions in the availability of financing could make it more difficult to capitalize on potential acquisitions. Additionally, with regard to the acquisitions we are able to complete, our future results will be dependent in part on our ability to successfully integrate these businesses with our existing operations.

 

Part I    21


Table of Contents
Index to Financial Statements

PERSONNEL RISKS

Our business depends on a successful succession plan — As a number of our long-serving top executives approach retirement age, effective succession planning has become very important to our long-term success. The Governance and Management Succession Committee of our Board of Directors as well as the full Board routinely reviews and updates the Company’s management succession plan. Failure to ensure effective transfer of knowledge and smooth transitions involving key employees could hinder our strategic planning and execution. Additionally, this change in management may be disruptive to our business and during the transition period there may be uncertainty among investors, vendors, customers and others concerning our future direction and performance.

Our future success greatly depends upon attracting and retaining qualified personnel, particularly in sales and operations — A significant factor in our future profitability is our ability to attract, develop and retain qualified personnel. Our success in attracting qualified personnel, particularly in the areas of sales and operations, is affected by changing demographics of the available pool of workers with the training and skills necessary to fill the available positions, the impact on the labor supply due to general economic conditions, and our ability to offer competitive compensation and benefit packages.

The costs of providing pension and healthcare benefits to our employees have risen in recent years. Continuing increases in such costs could negatively affect our earnings — The costs of providing pension and healthcare benefits to our employees have increased substantially over the past several years. We have instituted measures to help slow the rate of increase. However, if these costs continue to rise, we could suffer an adverse effect on our financial position, results of operations or cash flows.

OTHER RISKS

Weather can materially affect our operating results — Almost all of our products are consumed outdoors in the public or private construction industry, and our production and distribution facilities are located outdoors. Inclement weather affects both our ability to produce and distribute our products and affects our customers’ short-term demand because their work also can be hampered by weather. Therefore, our financial results can be negatively affected by inclement weather.

Our products are transported by truck, rail, barge or ship, often by third-party providers. Significant delays or increased costs affecting these transportation methods could materially affect our operations and earnings — Our products are distributed either by truck to local markets or by rail, barge or oceangoing vessel to remote markets. The costs of transporting our products could be negatively affected by factors outside of our control, including rail service interruptions or rate increases, tariffs, rising fuel costs and capacity constraints. Additionally, inclement weather, including hurricanes, tornadoes and other weather events, can negatively impact our distribution network.

We use large amounts of electricity, diesel fuel, liquid asphalt and other petroleum-based resources that are subject to potential supply constraints and significant price fluctuation, which could affect our operating results and profitability — In our production and distribution processes, we consume significant amounts of electricity, diesel fuel, liquid asphalt and other petroleum-based resources. The availability and pricing of these resources are subject to market forces that are beyond our control. Our suppliers contract separately for the purchase of such resources and our sources of supply could be interrupted should our suppliers not be able to obtain these materials due to higher demand or other factors that interrupt their availability. Variability in the supply and prices of these resources could materially affect our operating results from period to period and rising costs could erode our profitability.

We are involved in a number of legal proceedings. We cannot predict the outcome of litigation and other contingencies with certainty — We are involved in several complex litigation proceedings, some arising from our previous ownership and operation of our Chemicals business. Although we divested our Chemicals business in June 2005, we retained certain liabilities related to the business. As required by generally accepted accounting principles, we establish reserves when a loss is determined to be probable and the amount can be reasonably estimated. Our assessment of probability and loss estimates are based on the facts and circumstances known to us at a particular point in time. Subsequent developments in legal proceedings may affect our assessment and estimates of a loss contingency, and could result in an adverse effect on our financial position, results of operations or cash flows. For a description of our current significant legal proceedings see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data.”

 

Part I    22


Table of Contents
Index to Financial Statements

We are involved in certain environmental matters. We cannot predict the outcome of these contingencies with certainty — We are involved in environmental investigations and cleanups at sites where we operate or have operated in the past or sent materials for recycling or disposal, primarily in connection with our divested Chemicals and Metals businesses. As required by generally accepted accounting principles, we establish reserves when a loss is determined to be probable and the amount can be reasonably estimated. Our assessment of probability and loss estimates are based on the facts and circumstances known to us at a particular point in time. Subsequent developments related to these matters may affect our assessment and estimates of loss contingency, and could result in an adverse effect on our financial position, results of operations or cash flows. For a description of our current significant environmental matters see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data.”

 

Part I    23


Table of Contents
Index to Financial Statements
ITEM 1B  

UNRESOLVED STAFF COMMENTS  

We have not received any written comments from the Securities and Exchange Commission staff regarding our periodic or current reports under the Exchange Act of 1934 that remain unresolved.

 

ITEM 2  

PROPERTIES  

AGGREGATES

As the largest U.S. producer of construction aggregates, we have operating facilities across the U.S. and in Mexico and the Bahamas. We principally serve markets in 19 states, the District of Columbia and the local markets surrounding our operations in Mexico and the Bahamas. Our primary focus is serving states and metropolitan markets in the U.S. 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.

 

LOGO

Our current estimate of 15.0 billion tons of proven and probable aggregates reserves is essentially unchanged from 2011 as acquisition of new reserves offset production and divestures during the year. Estimates of reserves are of recoverable stone, sand and gravel of suitable quality for economic extraction, based on drilling and studies by our geologists and engineers, recognizing reasonable economic and operating restraints as to maximum depth of overburden and stone excavation, and subject to permit or other restrictions.

 

Part I    24


Table of Contents
Index to Financial Statements

Proven, or measured, reserves are those reserves for which the quantity is computed from dimensions revealed by drill data, together with other direct and measurable observations such as outcrops, trenches and quarry faces. The grade and quality of those reserves are computed from the results of detailed sampling, and the sampling and measurement data are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well established. Probable, or indicated, reserves are those reserves for which quantity and grade and quality are computed partly from specific measurements and partly from projections based on reasonable, though not drilled, geologic evidence. The degree of assurance, although lower than that for proven reserves, is high enough to assume continuity between points of observation.

Reported proven and probable reserves include only quantities that are owned in fee or under lease, and for which all appropriate zoning and permitting have been obtained. Leases, zoning, permits, reclamation plans and other government or industry regulations often set limits on the areas, depths and lengths of time allowed for mining, stipulate setbacks and slopes that must be left in place, and designate which areas may be used for surface facilities, berms, and overburden or waste storage, among other requirements and restrictions. Our reserve estimates take into account these factors. Technical and economic factors also affect the estimates of reported reserves regardless of what might otherwise be considered proven or probable based on a geologic analysis. For example, excessive overburden or weathered rock, rock quality issues, excessive mining depths, groundwater issues, overlying wetlands, endangered species habitats, and rights of way or easements may effectively limit the quantity of reserves considered proven and probable. In addition, computations for reserves in-place are adjusted for estimates of unsaleable sizes and materials as well as pit and plant waste.

The 15.0 billion tons of estimated aggregates reserves reported at the end of 2012 include reserves at inactive and greenfield (undeveloped) sites. We reported proven and probable reserves of 15.0 billion tons at the end of 2011 using the same basis. The table below presents, by region, the tons of proven and probable aggregates reserves as of December 31, 2012 and the types of facilities operated.

 

     

Aggregates

     Number of Aggregates Operating Facilities 1  
  Region   

Reserves

(billions of tons)

     Stone      Sand and Gravel    Sales Yards          

  Central

     5.5             79           6      33           

  East 2

     6.4             70           3      24           

  South

     2.1             19           12      13           

  West

     1.0             3           21      1           

  Total

     15.0             171           42      71           

1In addition to the facilities included in the table above, we operate 19 recrushed concrete plants which are not dependent on reserves.

2Includes 126.5 million tons of proven and probable reserves encumbered by the volumetric production payment (which includes an additional 16.7 million tons of possible reserves) as defined in Note 19 “Acquisitions and Divestitures” to the consolidated financial statements in Item 8 “Financial Statements and Supplementary Data.”

Of the 15.0 billion tons of aggregates reserves, 8.5 billion tons or 57% are located on owned land and 6.5 billion tons or 43% are located on leased land.

 

Part I    25


Table of Contents
Index to Financial Statements

The following table lists our ten largest active aggregates facilities based on the total proven and probable reserves at the sites. None of our aggregates facilities, other than Playa del Carmen, contributed more than 5% to our net sales in 2012.

 

Location

(nearest major metropolitan area)

  

Reserves

(millions of tons)

 

Playa del Carmen (Cancun), Mexico

     642.4   

Hanover (Harrisburg), Pennsylvania

     555.7   

McCook (Chicago), Illinois

     397.1   

Dekalb (Chicago), Illinois

     356.1   

Gold Hill (Charlotte), North Carolina

     292.7   

Macon, Georgia

     256.2   

Rockingham (Charlotte), North Carolina

     255.3   

1604 Stone (San Antonio), Texas

     227.0   

Cabarrus (Charlotte), North Carolina

     215.5   

Elijay, Georgia

     170.1   

ASPHALT MIX, CONCRETE AND CEMENT

We also operate a number of facilities producing other products in several of our Regions:

 

    Region1   

 

Asphalt Mix

Facilities

  

Concrete2

Facilities

  

    Cement3         

    Facilities        

  East

   0    41          0        

  South

   9    64          3        

  West

   23    12          0        

  1 Central Region has no asphalt mix, concrete or cement facilities.

  2 Includes ready-mixed concrete, concrete block and other concrete products facilities.

  3 Includes one cement manufacturing facility, one cement import terminal, and a calcium plant.

The asphalt mix and concrete facilities are able to meet their needs for raw material inputs with a combination of internally sourced and purchased raw materials. Our Cement segment operates two limestone quarries in Florida which provide our cement production facility with feedstock materials.

 

Location   

Reserves    

(millions of tons)    

 

Newberry

     189.8      

Brooksville

     5.7       

HEADQUARTERS

Our headquarters are located in an office complex in Birmingham, Alabama. The office space is leased through December 31, 2023, with three five-year renewal periods thereafter, and consists of approximately 184,125 square feet. The annual rental cost for the current term of the lease is $3.4 million.

 

Part I    26


Table of Contents
Index to Financial Statements
ITEM 3  

LEGAL PROCEEDINGS  

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

See Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data” for a discussion of our material legal proceedings.

 

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.

 

Part I    27


Table of Contents
Index to Financial Statements

PART II

 

   ITEM 5  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS  

AND ISSUER PURCHASES OF EQUITY SECURITIES  

Our common stock is traded on the New York Stock Exchange (ticker symbol VMC). As of February 14, 2013, the number of shareholders of record was 3,997. The prices in the following table represent the high and low sales prices for our common stock as reported on the New York Stock Exchange and the quarterly dividends declared by our Board of Directors in 2012 and 2011.

 

                            
      Common Stock
                    Prices                     
     Dividends  
     High      Low      Declared  
   

                2012

        

First quarter

     $48.09         $38.78         $0.01   

Second quarter

     43.91         32.31         0.01   

Third quarter

     49.99         35.69         0.01   

Fourth quarter

     53.85         44.19         0.01   

                2011

        

First quarter

     $47.18         $39.77         $0.25   

Second quarter

     46.80         36.51         0.25   

Third quarter

     39.99         27.44         0.25   

Fourth quarter

     45.00         25.06         0.01   

The future payment of dividends is within the discretion of our Board of Directors and depends on our profitability, capital requirements, financial condition, debt levels, growth projects, business opportunities and other factors which our Board of Directors deems relevant. We are not a party to any contracts or agreements that currently materially limit our ability to pay dividends.

On February 8, 2013, our Board declared a dividend of one cent per share for the first quarter of 2013.

ISSUER PURCHASES OF EQUITY SECURITIES

We did not have any repurchases of stock during the fourth quarter of 2012. We did not have any unregistered sales of equity securities during the fourth quarter of 2012.

 

Part II    28


Table of Contents
Index to Financial Statements
   ITEM 6  

SELECTED FINANCIAL DATA  

The selected earnings data, per share data and balance sheet data for each of the five most recent years ended December 31 set forth below, have been derived from our audited consolidated financial statements. The following data should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements in Item 8 “Financial Statements and Supplementary Data.”

 

 

     2012      2011      2010      2009      2008   

As of and for the years ended December 31

in millions, except per share data

                                        

Net sales

     $2,411.2        $2,406.9        $2,405.9        $2,543.7        $3,453.1   

Gross profit

     $334.0        $283.9        $300.7        $446.0        $749.7   

Gross profit as a percentage of net sales

     13.9%        11.8%        12.5%        17.5%        21.7%   

Earnings (loss) from continuing operations 1

     ($53.9     ($75.3     ($102.5     $18.6        $3.4   

Earnings (loss) on discontinued operations, net of tax 2

     $1.3        $4.5        $6.0        $11.7        ($2.4

Net earnings (loss)

     ($52.6     ($70.8     ($96.5     $30.3        $0.9   

Basic earnings (loss) per share

          

Earnings from continuing operations

     ($0.42     ($0.58     ($0.80     $0.16        $0.03   

Discontinued operations

     0.01        0.03        0.05        0.09        (0.02

Basic net earnings (loss) per share

     ($0.41     ($0.55     ($0.75     $0.25        $0.01   

Diluted earnings (loss) per share

          

Earnings from continuing operations

     ($0.42     ($0.58     ($0.80     $0.16        $0.03   

Discontinued operations

     0.01        0.03        0.05        0.09        (0.02

Diluted net earnings (loss) per share

     ($0.41     ($0.55     ($0.75     $0.25        $0.01   

Cash and cash equivalents

     $275.5        $155.8        $47.5        $22.3        $10.2   

Total assets

     $8,126.6        $8,229.3        $8,339.5        $8,526.5        $8,909.3   

Working capital

     $548.6        $456.8        $191.4        ($138.8     ($793.2

Current maturities and short-term borrowings

     $150.6        $134.8        $290.7        $621.9        $1,394.2   

Long-term debt

     $2,526.4        $2,680.7        $2,427.5        $2,116.1        $2,153.6   

Equity

     $3,761.1        $3,791.6        $3,955.8        $4,028.1        $3,529.8   

Cash dividends declared per share

     $0.04        $0.76        $1.00        $1.48        $1.96   

 

 

Earnings from continuing operations during 2008 include an after tax goodwill impairment charge of $227.6 million, or $2.05 per diluted share, for our Cement segment.

 

 

Discontinued operations include the results from operations attributable to our former Chemicals business.

 

Part II    29


Table of Contents
Index to Financial Statements
   ITEM 7  

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

EXECUTIVE SUMMARY

FINANCIAL SUMMARY FOR 2012

 

¡ Gross profit increased $50.2 million on flat revenues

 

¡ Gross profit margin as a percentage of net sales improved 2.1 percentage points (210 basis points)

 

¡ Aggregates segment gross profit margin as a percentage of segment revenues improved 2.7 percentage points (270 basis points) from the prior year due to lower unit cost of sales and higher pricing

 

  ¡ Aggregates shipments declined 1% and pricing increased 2%

 

  ¡ Aggregates segment cash gross profit per ton increased 5%

 

¡ Selling, Administrative and General (SAG) expenses were $259.1 million versus $290.0 million in the prior year

 

¡ Net loss improved by $18.2 million and Adjusted EBITDA increased $59.5 million

 

¡ Gross cash proceeds of $173.6 million were realized from asset sales

 

¡ We retired $134.8 million of debt as scheduled

KEY DRIVERS OF VALUE CREATION

 

LOGO

 

* Source: Moody’s Analytics

 

Part II    30


Table of Contents
Index to Financial Statements

EARNINGS GROWTH INITIATIVES

In February 2012, our Board of Directors approved a two-part initiative to accelerate earnings and cash flow growth, improve our operating leverage, reduce overhead costs and strengthen our credit profile:

 

§ A Profit Enhancement Plan that includes cost reductions and other earnings enhancements intended to improve our run-rate profitability, as measured by EBITDA, by more than $100 million annually at current volumes. The Profit Enhancement Plan is focused on three areas — sourcing, general & administrative costs and transportation/logistics. Including the $55 million run-rate benefit referable to our previously announced organizational restructuring and ERP and Shared Services Platforms, we expect to increase pretax earnings by $130 million in 2013 and $155 million in 2014 from 2011 levels.

 

§ Planned Asset Sales with targeted net proceeds of approximately $500 million from the sale of non-core assets. Through 2012, we have achieved $168.6 million of proceeds net of $5.0 million of transaction costs related to the sale of assets as outlined in Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.” The intended asset sales are consistent with our strategic focus on building leading aggregates positions in markets with above-average long-term demand growth. However, the ultimate composition and timing of such transactions is difficult to project. The proceeds of these sales, together with the increased earnings resulting from the Profit Enhancement Plan, will be used to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create value for shareholders.

MARKET DEVELOPMENTS

We believe economic and construction-related fundamentals that drive demand for our products are continuing to improve from the historically low levels created by the economic downturn. The passage of the new federal highway bill in July 2012 is providing stability and predictability to future highway funding. Through the first three months of fiscal year 2013 (i.e., October—December 2012), obligation of federal funds for future highway projects is up sharply versus the prior year, a positive indicator of growth in future contract awards. The large increase in TIFIA (Transportation Infrastructure Finance and Innovation Act) funding contained in the new highway bill should also positively impact demand going forward.

Leading indicators of private construction activity, specifically residential housing starts and contract awards for nonresidential buildings, continue to improve. Consequently, aggregates demand in private construction is growing. We are seeing tangible evidence of this growth in several key states, including Florida, Texas, California, Georgia and Arizona. Growth in residential construction has historically been a leading indicator of other construction end uses.

UNSOLICITED EXCHANGE OFFER

In December 2011, Martin Marietta commenced an unsolicited exchange offer for all outstanding shares of our common stock at a fixed exchange ratio of 0.50 shares of Martin Marietta common stock for each Vulcan common share and indicated its intention to nominate a slate of directors to our Board. After careful consideration, including a thorough review of the offer with its financial and legal advisors, our Board unanimously determined that Martin Marietta’s offer was inadequate, substantially undervalued Vulcan, had substantial execution risk, and therefore was not in the best interests of Vulcan and its shareholders.

In May 2012, the Delaware Chancery Court ruled and the Delaware Supreme Court affirmed that Martin Marietta had breached two confidentiality agreements between the companies, and enjoined Martin Marietta for a period of four months from pursuing its exchange offer for our shares, prosecuting its proxy contest, or otherwise taking steps to acquire control of our shares or assets and from any further violations of the two confidentiality agreements between the parties. As a result of the court ruling, Martin Marietta withdrew its exchange offer and its board nominees.

In response to Martin Marietta’s action, we incurred legal, professional and other costs of $43.4 million in 2012 and $2.2 million in 2011.

 

Part II    31


Table of Contents
Index to Financial Statements

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

FREE CASH FLOW

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

 

in millions    2012      2011     2010  

Net cash provided by operating activities

   $ 238.5      $ 169.0      $ 202.7   

Purchases of property, plant & equipment

     (93.4     (98.9     (86.3

Free cash flow

   $ 145.1        $70.1      $ 116.4   

SEGMENT CASH GROSS PROFIT

Segment cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization to gross profit.

 

in millions, except per ton data    2012     2011     2010  

Aggregates segment

      

Gross profit

     $352.1        $306.2        $320.2   

Depreciation, depletion, accretion and amortization

     240.7        267.0        288.6   

Aggregates segment cash gross profit

     $592.8        $573.2        $608.8   

Sales tons

     141.0        143.0        147.6   

Aggregates segment cash gross profit per ton

     $4.21        $4.01        $4.12   

Concrete segment

      

Gross profit

     ($38.2     ($43.4     ($45.0

Depreciation, depletion, accretion and amortization

     41.3        47.7        50.5   

Concrete segment cash gross profit

     $3.1        $4.3        $5.5   

Asphalt Mix segment

      

Gross profit

     $22.9        $25.6        $29.3   

Depreciation, depletion, accretion and amortization

     8.7        7.7        8.4   

Asphalt Mix segment cash gross profit

     $31.6        $33.3        $37.7   

Cement segment

      

Gross profit

     ($2.8     ($4.5     ($3.8

Depreciation, depletion, accretion and amortization

     18.1        17.8        20.1   

Cement segment cash gross profit

     $15.3        $13.3        $16.3   

 

Part II    32


Table of Contents
Index to Financial Statements

EBITDA AND ADJUSTED EBITDA

EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation and Amortization.

 

in millions    2012     2011     2010  

Net loss

     ($52.6     ($70.8     ($96.5

Benefit from income taxes

     (66.5     (78.5     (89.7

Interest expense, net of interest income

     211.9        217.3        180.7   

Earnings on discontinued operations, net of taxes

     (1.3     (4.5     (6.0

Depreciation, depletion, accretion and amortization

     332.0        361.7        382.1   

EBITDA

     $423.5        $425.2        $370.6   

Gain on sale of real estate and businesses

     ($65.1     ($42.1     ($39.5

(Recovery from) charge for legal settlement

     0.0        (46.4     40.0   

Restructuring charges

     9.5        12.9        0.0   

Exchange offer costs

     43.4        2.2        0.0   

Adjusted EBITDA

     $411.3        $351.8        $371.1   

EPS AND ADJUSTED EPS

EPS is an acronym for Earnings Per Share, a GAAP measure of performance. The table below adjusts this GAAP measure for the same items as noted in the Adjusted EBITDA table above.

 

      2012     2011     2010  

Diluted Earnings (Loss) Per Share

      

Net loss

     ($0.41     ($0.55     ($0.75

Less: Discontinued operations earnings

     0.01        0.03        0.05   

Continuing operations loss

     ($0.42     ($0.58     ($0.80

Gain on sale of real estate and businesses

     (0.30     (0.20     (0.19

(Recovery from) charge for legal settlement

     0.00        (0.22     0.19   

Restructuring charges

     0.05        0.06        0.00   

Exchange offer costs

     0.20        0.01        0.00   

Adjusted EPS - continuing operations

     ($0.47     ($0.93     ($0.80

 

Part II    33


Table of Contents
Index to Financial Statements

RESULTS OF OPERATIONS

Net sales and cost of goods sold exclude intersegment sales and delivery revenues and cost. This presentation is consistent with the basis on which we review our consolidated results of operations. We discuss separately our discontinued operations, which consists of our former Chemicals business.

The following table shows net earnings in relationship to net sales, cost of goods sold, operating earnings, EBITDA and Adjusted EBITDA.

CONSOLIDATED OPERATING RESULTS

 

For the years ended December 31

in millions, except per share data

   2012     2011     2010  

Net sales

     $2,411.2        $2,406.9        $2,405.9   

Cost of goods sold

     2,077.2        2,123.0        2,105.2   

Gross profit

     $334.0        $283.9        $300.7   

Operating earnings (loss)

     $84.8        $63.4        ($14.5

Loss from continuing operations
before income taxes

     ($120.4     ($153.7     ($192.2

Loss from continuing operations

     ($53.9     ($75.3     ($102.5

Earnings on discontinued operations,
net of income taxes

     1.3        4.5        6.0   

Net loss

     ($52.6     ($70.8     ($96.5

Basic earnings (loss) per share

      

Continuing operations

     ($0.42     ($0.58     ($0.80

Discontinued operations

     0.01        0.03        0.05   

Basic net earnings (loss) per share

     ($0.41     ($0.55     ($0.75

Diluted earnings (loss) per share

      

Continuing operations

     ($0.42     ($0.58     ($0.80

Discontinued operations

     0.01        0.03        0.05   

Diluted net earnings (loss) per share

     ($0.41     ($0.55     ($0.75

EBITDA

     $423.5        $425.2        $370.6   

Adjusted EBITDA

     $411.3        $351.8        $371.1   

OPERATING LEVERAGE EMBEDDED IN OUR BUSINESS

The strong recovery in 2012’s gross profit demonstrates the operating leverage embedded in our business as demand recovers. We expect this momentum to continue in 2013 due primarily to an improving demand environment, continued improvement in pricing and our continued focus on:

 

§ reducing overhead costs through streamlined management structure

 

§ reducing debt

 

§ improving our liquidity position and earnings through divestitures of non-strategic assets or other strategic alternatives

Since 2007, we have invested $63.5 million to implement our new ERP and Shared Services platforms. We initiated the project to create a common platform for all systems that support our business, and have completed all of the major milestones for the project. These platforms are helping to streamline processes enterprise-wide and standardize administrative and support functions while providing enhanced flexibility to monitor and control costs.

These new platforms enabled us to consolidate our eight divisions into four regions, streamline our support functions, and reduce related positions and overhead costs — resulting in annualized overhead cost savings of over $55 million. As a

 

Part II    34


Table of Contents
Index to Financial Statements

result of these restructuring initiatives, we incurred severance and other related charges of $10.0 million during 2012 and $13.0 million during 2011.

To position Vulcan for significant earnings growth, we remain focused on taking prudent steps to control costs. When prudent, we adjust our geographic footprint so as to focus on building leading aggregates positions in markets with above-average long-term demand growth.

We completed several transactions in 2012 that provided $173.6 million in gross cash proceeds. And, we continue to work on additional asset sales. However, the ultimate timing of such transactions is difficult to predict. We remain committed to completing transactions designed to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create value for shareholders.

Results for 2012 were a net loss of $52.6 million, or $0.41 per diluted share, compared to a net loss of $70.8 million, or $0.55 per diluted share in 2011. Higher unit costs for diesel fuel and liquid asphalt resulted in higher pretax costs of $3.9 million and $10.7 million, respectively. Additionally, each year’s results were impacted by discrete items as follows:

 

§ The 2012 results include a $65.1 million pretax gain on sale of real estate and businesses, a pretax charge of $9.6 million related to our restructuring and a pretax charge of $43.4 million related to the unsolicited exchange offer

 

§ The 2011 results include a $42.1 million pretax gain on sale of real estate and businesses, a $46.4 million recovery from legal settlement (settled in 2010 for $40.0 million, see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data), a pretax charge of $12.9 million related to our restructuring and a pretax charge of $2.2 million related to the unsolicited exchange offer

 

§ The 2010 results include a $39.5 million pretax gain on sale of real estate and businesses and a $40.0 million charge for legal settlement

Year-over-year changes in earnings from continuing operations before income taxes are summarized below:

 

                                 
in millions                           
       2010         ($192.2     2011         ($153.7

Higher (lower) aggregates earnings due to

          

Lower volumes

        (26.7        (11.8

Higher selling prices

        17.6           27.2   

Lower (higher) costs and other items

        (4.9        30.5   

Higher concrete earnings

        1.6           5.2   

Lower asphalt mix earnings

        (3.7        (2.7

Higher (lower) cement earnings

        (0.7        1.7   

Lower selling, administrative and general expenses

        37.5           30.9   

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

        (11.5        20.7   

Legal settlement - 2010 charge, 2011 insurance recovery

        86.4           (46.4

Lower (higher) restructuring charges

        (13.0        3.4   

Higher exchange offer costs

        (2.2        (41.2

Lower (higher) interest expense

        (39.0        7.6   

All other

              (2.9              8.2   
       2011         ($153.7     2012         ($120.4

OPERATING RESULTS BY SEGMENT

We present our results of operations by segment at the gross profit level. We have four reporting segments organized around our principal product lines: 1) Aggregates, 2) Concrete, 3) Asphalt Mix and 4) Cement. Management reviews earnings for the product line segments principally at the gross profit level.

 

Part II    35


Table of Contents
Index to Financial Statements

1. AGGREGATES

Our year-over-year aggregates shipments:

 

§ declined 1% in 2012

 

§ declined 3% in 2011

 

§ declined 2% in 2010

Several key states, including Florida and Texas, reported volume growth versus the prior year. Other markets in key states such as Virginia, North Carolina and Georgia were down modestly in 2012. Shipments in California were relatively flat versus the prior year. Less large-scale project work contributed to lower shipments in certain markets.

Our year-over-year freight-adjusted selling price for aggregates:

 

§ increased 2% in 2012

 

§ increased 1% in 2011

 

§ declined 2% in 2010

Nearly all of our markets realized increased pricing in 2012.

 

AGGREGATES REVENUES

 

in millions

 

LOGO

  

AGGREGATES GROSS PROFIT AND

CASH GROSS PROFIT

 

in millions

 

LOGO

 

AGGREGATES UNIT SHIPMENTS   

AGGREGATES SELLING PRICE AND

CASH GROSS PROFIT PER TON

Customer and internal 1 tons, in millions    Freight-adjusted average sales price per ton 2

LOGO

  

LOGO

1 Represents tons shipped primarily to our downstream operations (i.e., asphalt mix and ready-mixed concrete)    2 Freight-adjusted sales price is calculated as total sales dollars less freight to remote distribution sites divided by total sales units

 

Part II    36


Table of Contents
Index to Financial Statements

Aggregates segment gross profit increased $45.9 million from the prior year and gross profit margin as a percentage of segment revenues increased 2.7 percentage points (270 basis points). As shown on the chart on page 35, the increase in Aggregates segment gross profit resulted from lower costs and higher selling prices slightly offset by lower shipments. Most key labor productivity and energy efficiency metrics improved from the prior year, more than offsetting a 3% increase in the unit cost of diesel fuel.

Aggregates segment cash gross profit per ton increased 5% to $4.21 in 2012. This measure continues to improve from a cyclical low in the third quarter of 2011, reflecting the cumulative effect of our cost-control efforts and a disciplined approach to pricing during the downturn. These efforts are establishing unit profitability higher than in 2005, which was a peak year for volume, adding to the attractiveness of the earnings potential of our aggregates business.

2. CONCRETE

Our year-over-year ready-mixed concrete shipments:

 

§ increased 9% in 2012

 

§ declined 6% in 2011

 

§ declined 5% in 2010

The Concrete segment reported a loss of $38.2 million in 2012 compared to a loss of $43.4 million in 2011. Ready-mixed concrete shipments were up 9% benefitting from increased private construction activity while the average sales price was essentially flat, contributing to a $5.2 million improvement.

 

CONCRETE REVENUES

 

in millions

 

LOGO

  

CONCRETE GROSS PROFIT AND

CASH GROSS PROFIT

 

in millions

 

LOGO

3. ASPHALT MIX

Our year-over-year asphalt mix shipments:

 

§ declined 7% in 2012

 

§ increased 1% in 2011

 

§ declined 3% in 2010

Asphalt Mix segment gross profit of $22.9 million was down $2.7 million from the prior year. The average sales price for asphalt mix increased 1% from the prior year, offsetting some of the earnings effect of the 7% decline in shipments. The decline in shipments was due in part to less large project work in California in the second half of 2012 and the divestiture of our New Mexico asphalt mix business in the fourth quarter of 2011, partially offset by a 15% increase in our asphalt mix shipments in Texas. Materials margin remained steady despite lower volumes, finishing the year 3% higher than the prior year.

 

Part II    37


Table of Contents
Index to Financial Statements

ASPHALT MIX REVENUES

 

in millions

 

LOGO

  

ASPHALT MIX GROSS PROFIT AND

CASH GROSS PROFIT

 

in millions

 

LOGO

4. CEMENT

The $1.7 million improvement in the Cement segment’s profitability resulted from an 18% increase in shipments and a 6% increase in pricing.

 

CEMENT REVENUES

 

in millions

 

LOGO

  

CEMENT GROSS PROFIT AND

CASH GROSS PROFIT

 

in millions

 

LOGO

SELLING, ADMINISTRATIVE AND

GENERAL EXPENSES

in millions

 

LOGO

SAG expenses decreased $30.9 million, or 11%, from 2011. This 2012 decrease resulted from lower spending in most major overhead categories, including savings from reduced employment levels. In 2011, we substantially completed the implementation of a multi-year project to replace our legacy information technology systems with new ERP and Shared Services platforms. These platforms are helping us streamline processes enterprise-wide and standardize administrative and support functions while providing enhanced flexibility to monitor and control costs. During 2012, we consolidated our eight divisions into four regions as part of an ongoing effort to reduce overhead costs, and we initiated a Profit Enhancement

 

Part II    38


Table of Contents
Index to Financial Statements

Plan that further leverages our streamlined management structure and substantially completed ERP and Shared Services platforms. These actions allowed us to achieve cost reductions and reduce overhead and administrative staff.

Our comparative total company employment levels at year end:

 

§ declined 9% in 2012

 

§ declined 7% in 2011

 

§ declined 4% in 2010

Severance charges included in SAG expenses were as follows: 2012 — $0.9 million, 2011 — $4.1 million and 2010 — $6.9 million. Severance and other related restructuring charges not included in SAG expenses were as follows: 2012 — $9.6 million and 2011 — $13.0 million.

GAIN ON SALE OF PROPERTY, PLANT &

EQUIPMENT AND BUSINESSES, NET

in millions

 

LOGO

The 2012 gain includes a $41.2 million pretax gain from the sale of reclaimed and surplus real estate, a $5.6 million pretax gain from the sale of a non-strategic aggregates production facility, a $12.3 million pretax gain from the sale of mitigation credits and a $6.0 million pretax gain on the sale of developed real estate. The 2011 gain includes a $39.7 million pretax gain associated with the sale of four aggregates facilities and a $0.6 million pretax gain associated with an exchange of assets (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”). The 2010 gain includes a $39.5 million pretax gain associated with the sale of three aggregates facilities.

INTEREST EXPENSE

in millions

 

LOGO

Interest expense decreased $7.5 million from the 2011 level. This comparative decline resulted primarily from the $27.2 million of charges incurred in 2011 in connection with our debt refinancing (tender offer and debt retirement) partially offset by the effects of a higher level of fixed-rate debt stemming from the debt refinancing.

The 2011 increase in interest expense resulted primarily from our aforementioned debt refinancing completed in June. In addition to higher effective interest rates on the new debt, we incurred $27.2 million of charges in connection with our tender offer and debt retirement. These charges resulted from the $18.4 million difference between the purchase price and par value of the notes purchased in the tender offer, $0.7 million in transaction fees and $8.1 million of noncash write-offs of unamortized discounts, deferred financing costs and amounts in accumulated other comprehensive income (AOCI) related to the retired debt.

 

Part II    39


Table of Contents
Index to Financial Statements

INCOME TAXES

Our income tax benefit from continuing operations for the years ended December 31 is shown below:

 

dollars in millions    2012     2011     2010  

Loss from continuing
operations before income taxes

     ($120.4     ($153.7     ($192.2

Benefit from income taxes

     (66.5     (78.5     (89.7

Effective tax rate

     55.2%        51.0%        46.6%   

The $12.0 million decrease in our 2012 benefit from income taxes is primarily related to the year-over-year improvement in our results from continuing operations. The $11.2 million decrease in our 2011 benefit from income taxes is primarily related to the year-over-year improvement in our results from continuing operations. A reconciliation of the federal statutory rate of 35% to our effective tax rates for 2012, 2011 and 2010 is presented in Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data.”

DISCONTINUED OPERATIONS

Pretax earnings from discontinued operations were:

 

§ $2.2 million in 2012

 

§ $7.4 million in 2011

 

§ $10.0 million in 2010

The 2012 pretax earnings include gains related primarily to the 5CP earn-out of $10.3 million. The 2011 pretax earnings include gains totaling $18.6 million related to the 5CP earn-out and insurance recoveries compared to similar pretax gains totaling $13.9 million in 2010. These gains were partially offset by general and product liability costs, including legal defense costs, and environmental remediation costs. For additional information regarding discontinued operations and the 5CP earn-out, see Note 2 “Discontinued Operations” in Item 8 “Financial Statements and Supplementary Data.”

LIQUIDITY AND FINANCIAL RESOURCES

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

 

§ cash contractual obligations

 

§ capital expenditures

 

§ debt service obligations

 

§ potential future acquisitions

 

§ dividend payments

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

 

§ maintain substantial bank line of credit borrowing capacity

 

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

 

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

 

§ avoid financial and other covenants that limit our operating and financial flexibility

 

§ opportunistically access the capital markets when conditions and terms are favorable

 

Part II    40


Table of Contents
Index to Financial Statements

CASH

Included in our December 31, 2012 cash and cash equivalents balance of $275.5 million is $52.9 million of cash held at one of our foreign subsidiaries. The majority of this $52.9 million of cash relates to earnings prior to January 1, 2012 that are permanently reinvested offshore.

CASH FROM OPERATING ACTIVITIES

in millions

 

LOGO

Net cash provided by operating activities is derived primarily from net earnings before deducting noncash charges for depreciation, depletion, accretion and amortization.

 

                        
in millions    2012     2011     2010  

Net loss

     ($52.6     ($70.8     ($96.5

Depreciation, depletion, accretion
and amortization

     332.0        361.7        382.1   

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

     (78.7     (58.8     (68.1

Proceeds from sale of future production,
net of transaction costs

     73.6        0.0        0.0   

Other operating cash flows, net

     (35.8     (63.1     (14.8

Net cash provided by operating
activities

     $238.5        $169.0        $202.7   

2012 VERSUS 2011 — Net cash provided by operating activities of $238.5 million increased $69.5 million from 2011 due primarily to proceeds from the sale of future production. In December 2012, we unlocked capital in our East Region through a volumetric production payment resulting in net cash proceeds of $73.6 million (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”).

2011 VERSUS 2010 — Although net earnings before noncash deductions for depreciation, depletion, accretion and amortization increased to $290.9 million from $285.6 million, net cash provided by operating activities decreased $33.7 million. Operating cash flows were negatively impacted by changes in our working capital accounts which used $25.3 million in cash in 2011 compared to $37.2 million of cash generated in 2010. This increase in cash outflows was partially offset by a decrease in contributions to pension plans from $24.5 million in 2010 to $4.9 million in 2011.

 

Part II    41


Table of Contents
Index to Financial Statements

CASH FROM INVESTING ACTIVITIES

in millions

 

LOGO

2012 VERSUS 2011 — Net cash provided by investing activities increased $29.9 million in 2012. This increase resulted from an increase in proceeds from divestitures of non-core assets (a $13.6 million year-over-year increase in proceeds from the sale of property, plant and equipment and businesses) and a decrease in spending for acquisitions (a $16.1 million year-over-year decrease in purchases of property, plant & equipment and businesses). These divestitures (as outlined in Note 19 “Acquisition and Divestitures” in Item 8 “Financial Statements and Supplementary Data”) are consistent with our strategic focus on disposing non-core assets and building leading aggregates positions in markets with above average long-term demand growth.

2011 VERSUS 2010 — Net cash used for investing activities of $19.5 million decreased $68.9 million from 2010. Proceeds from the sale of non-strategic businesses increased $23.8 million year-over-year to $74.7 million in 2011. We utilized an asset swap strategy to acquire aggregates facilities in high growth markets while disposing of non-strategic assets. This strategy allowed us to acquire net assets valued at $35.4 million for a cash outlay of $10.5 million. Accordingly, cash used to acquire businesses decreased by $60.0 million compared to 2010. Cash used for the purchase of property, plant & equipment totaled $98.9 million in 2011, compared to $86.3 million in 2010 and $109.7 million in 2009.

CASH FROM FINANCING ACTIVITIES

in millions

LOGO

2012 VERSUS 2011 — Net cash used for financing activities increased $87.9 million in 2012 compared to 2011. In 2011, we restructured our debt portfolio which generated $24.8 million of net cash proceeds. In 2012, we paid $134.8 million of debt as scheduled. This decrease in cash flows related to debt was partially offset by $93.0 million in cash savings derived from the decrease in dividend payments (2012 — $0.04 per share, 2011 — $0.76 per share).

2011 VERSUS 2010 — Net cash used for financing activities of $41.3 million decreased $47.8 million from 2010. Increases in financing cash flows were largely due to an increase in cash flows related to debt of $71.5 million. This net positive cash flow variance includes proceeds and payments of short-term and long-term debt, debt issuance costs, cash paid to purchase our own debt at a premium above par value and proceeds from the settlement of interest rate swap agreements. The positive cash flows from debt-related items and the $29.6 million decrease in dividends paid (largely as a result of the dividend reduction in the fourth quarter of 2011) were partially offset by year-over-year decreases in proceeds from the issuance of common stock and the exercise of stock options totaling $53.7 million.

 

Part II    42


Table of Contents
Index to Financial Statements

DEBT

Certain debt measures as of December 31 are outlined below:

 

dollars in millions    2012      2011  
Debt      

Current maturities of long-term debt

     $150.6         $134.8   

Long-term debt

     2,526.4         2,680.7   

Total debt

     $2,677.0         $2,815.5   
Capital      

Total debt

     $2,677.0         $2,815.5   

Equity

     3,761.1         3,791.6   

Total capital

     $6,438.1         $6,607.1   

Total Debt as a Percentage of Total Capital

     41.6%         42.6%   

Weighted-average Effective Interest Rate

     

Bank line of credit 1

     N/A         N/A   

Long-term debt excluding bank line of credit

     7.71%         7.64%   

Fixed versus Floating Interest Rate Debt

     

Fixed-rate debt

     99.5%         99.5%   

Floating-rate debt

     0.5%         0.5%   

 

  1

There were no borrowings at December 31, 2012 and 2011. However, we do pay fees for unused borrowing capacity and standby letters of credit.

As of December 31, 2012, current maturities for the next four quarters and maturities for the next five years are due as follows:

 

in millions   Current
Maturities
        in millions   Debt
Maturities
 
     

2013

    $150.6   

First quarter 2013

    $10.0       

2014

    0.2   

Second quarter 2013

    140.5       

2015

    150.1   

Third quarter 2013

    0.0       

2016

    500.1   

Fourth quarter 2013

    0.1       

2017

    350.2   

We expect to retire debt maturities using existing cash, cash generated from operations, by drawing on our bank line of credit or accessing the capital markets.

In June 2011, we issued $1.1 billion of long-term notes in two series, as follows: $500.0 million of 6.50% notes due in 2016 and $600.0 million of 7.50% notes due in 2021. These notes were issued principally to:

 

§ repay and terminate our $450.0 million floating-rate term loan due in 2015

 

§ fund the purchase through a tender offer of $165.4 million of our outstanding 5.60% notes due in 2012 and $109.6 million of our outstanding 6.30% notes due in 2013

 

§ repay $275.0 million outstanding under our bank line of credit, and

 

§ for general corporate purposes

During the fourth quarter of 2011, we entered into a new $600.0 million bank line of credit (the line of credit). The line of credit expires on December 15, 2016 and is secured by certain domestic accounts receivable and inventory. Borrowing capacity fluctuates with the level of eligible accounts receivable and inventory and may be less than $600.0 million at any point in time.

 

Part II    43


Table of Contents
Index to Financial Statements

Utilization of the borrowing capacity under the line of credit as of December 31, 2012:

 

§ none was drawn

 

§ $57.3 million of borrowing capacity was used to provide support for outstanding standby letters of credit

Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to the lower of the London Interbank Offered Rate (LIBOR) plus a margin ranging from 1.75% to 2.25% based on the level of utilization or an alternative rate derived from the lender’s prime rate. Letters of credit issued under the line of credit are charged a fee equal to the applicable margin for borrowings. As of December 31, 2012, the applicable margin was 1.75%. We had no draws on the line of credit during 2012.

DEBT RATINGS

Our debt ratings and outlooks as of December 31, 2012 are summarized below:

 

      Rating/Outlook      Date     Description

Short-term Debt

       

Moody’s

     not prime/negative         9/16/2011      outlook changed from stable to negative

Long-term Debt

       

Moody’s

     Ba3/negative         7/12/2012      downgraded from Ba2/negative

Standard & Poor’s

     BB/stable         6/11/2012   1    outlook changed from watch positive to stable

 

1

Rating/outlook reaffirmed December 14, 2012.

EQUITY

Our common stock issuances are summarized below:

 

in thousands    2012      2011      2010  

 

Common stock shares at January 1,
issued and outstanding

     129,245         128,570         125,912   

Common Stock Issuances

        

Public offering

        0         0   

Acquisitions

     61         373         0   

401(k) savings and retirement plan

     0         111         882   

Pension plan contribution

     0         0         1,190   

Share-based compensation plans

     415         191         586   

 

Common stock shares at December 31,
issued and outstanding

     129,721         129,245         128,570   

During 2011 and 2012 , we issued a total of 0.4 million shares of our common stock in connection with a business acquisition as explained in Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.”

 

Part II    44


Table of Contents
Index to Financial Statements

We periodically sell shares of common stock to the trustee of our 401(k) savings and retirement plan to satisfy the plan participants’ elections to invest in our common stock. This arrangement provides a means of improving cash flow, increasing equity and reducing leverage. Under this arrangement, the stock issuances and resulting cash proceeds for the years ended December 31 were:

 

§ 2012 — no shares issued

 

§ 2011 — issued 0.1 million shares for cash proceeds of $4.7 million

 

§ 2010 — issued 0.9 million shares for cash proceeds of $41.7 million

In 2010, we issued 1.2 million shares of common stock (par value of $1 per share) to our qualified pension plans as explained in Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data.” This transaction increased equity by $53.9 million (common stock $1.2 million and capital in excess of par $52.7 million).

There were no shares held in treasury as of December 31, 2012, 2011 and 2010. There were 3,411,416 shares remaining under the current purchase authorization of the Board of Directors as of December 31, 2012.

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

 

§ financial position

 

§ liquidity

 

§ capital expenditures

 

§ capital resources

STANDBY LETTERS OF CREDIT

For a discussion of our standby letters of credit see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data.”

 

Part II    45


Table of Contents
Index to Financial Statements

CASH CONTRACTUAL OBLIGATIONS

We expect cash requirements for income taxes of $26.0 million during 2013. Additionally, we have a number of contracts containing commitments or contingent obligations that are not material to our earnings. These contracts are discrete and it is unlikely that the various contingencies contained within the contracts would be triggered by a common event. Excluding future cash requirements for income taxes and these immaterial contracts, our obligations to make future contractual payments as of December 31, 2012 are summarized in the table below:

 

      Note    Payments Due by Year  
in millions    Reference    2013      2014-2015      2016-2017      Thereafter      Total  

Cash Contractual Obligations

                 

Bank line of credit 1

                 

Principal payments

   Note 6      $0.0         $0.0         $0.0         $0.0         $0.0   

Interest payments and fees 2

        3.1         6.2         3.1         0.0         12.4   

Long-term debt excluding bank line of credit

                 

Principal payments

   Note 6      150.6         150.3         850.3         1,510.4         2,661.6   

Interest payments

   Note 6      191.4         373.8         310.9         543.6         1,419.7   

Operating leases

   Note 7      26.7         45.8         37.3         138.1         247.9   

Mineral royalties

   Note 12      24.7         39.5         25.1         132.9         222.2   

Unconditional purchase obligations

                 

Capital

   Note 12      3.9         0.0         0.0         0.0         3.9   

Noncapital 3

   Note 12      15.4         20.1         6.4         8.7         50.6   

Benefit plans 4

   Note 10      5.2         67.0         32.1         80.0         184.3   

Total cash contractual obligations 5, 6

          $421.0         $702.7         $1,265.2         $2,413.7         $4,802.6   

 

  1 Bank line of credit represents borrowings under our five-year credit facility which expires December 15, 2016.

 

  2 Includes fees for unused borrowing capacity, and fees for letters of credit. The figures for all years assume that the amount of unused borrowing capacity, and the amount of letters of credit, do not change from December 31, 2012.

 

  3 Noncapital unconditional purchase obligations relate primarily to transportation and electrical contracts.

 

  4 Payments in “Thereafter” column for benefit plans are for the years 2018-2022.

 

  5 The above table excludes discounted asset retirement obligations in the amount of $150.1 million at December 31, 2012, the majority of which have an estimated settlement date beyond 2017 (see Note 17 “Asset Retirement Obligations” in Item 8 “Financial Statements and Supplementary Data”).

 

  6 The above table excludes unrecognized income tax benefits in the amount of $13.6 million at December 31, 2012, as we cannot make a reasonably reliable estimate of the amount and period of related future payment of these uncertain tax positions (for more details, see Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data”).

CRITICAL ACCOUNTING POLICIES

We follow certain significant accounting policies when we prepare our consolidated financial statements. A summary of these policies is included in Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data.”

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 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.

 

Part II    46


Table of Contents
Index to Financial Statements

We believe the following seven critical accounting policies require the most significant judgments and estimates used in the preparation of our consolidated financial statements:

1.  Goodwill and goodwill impairment

2.  Impairment of long-lived assets excluding goodwill

3.  Reclamation costs

4.  Pension and other postretirement benefits

5.  Environmental compliance

6.  Claims and litigation including self-insurance

7.  Income taxes

1. GOODWILL AND

GOODWILL IMPAIRMENT

Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than its carrying amount. Goodwill is tested for impairment on an annual basis or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment evaluation is a critical accounting policy because goodwill is material to our total assets (as of December 31, 2012, goodwill represents 38% of total assets) and the evaluation involves the use of significant estimates and assumptions and considerable management judgment. Thus, an impairment charge could be material to our financial condition and results of operations.

HOW WE TEST GOODWILL FOR IMPAIRMENT

Goodwill is tested for impairment at the reporting unit level. In December 2011, we announced an organizational restructuring plan that led to changes in the manner in which our operations are managed. As a result, we reorganized our reporting unit structure and reassigned goodwill among our revised reporting units using a relative fair value approach. This reorganization led to an increase in reporting units from 13 to 19, of which 10 carry goodwill. The reporting units are evaluated using a two-step process.

STEP 1

We compare the fair value of a reporting unit to its carrying value, including goodwill

 

§ if the fair value exceeds its carrying value, the goodwill of the reporting unit is not considered impaired

 

§ if the carrying value of a reporting unit exceeds its fair value, we go to step two to measure the amount of impairment loss, if any

STEP 2

We compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill.

 

§ if the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess

HOW WE DETERMINE CARRYING VALUE AND FAIR VALUE

First, we determine the carrying value of each reporting unit by assigning assets and liabilities, including goodwill, to those units as of the measurement date. Then, we estimate the fair values of the reporting units by considering the indicated fair values derived from both an income approach, which involves discounting estimated future cash flows, and a market approach, which involves the application of revenue and EBITDA multiples of comparable companies. Finally, we consider market factors when determining the assumptions and estimates used in our valuation models. To substantiate the fair values derived from these valuations, we reconcile the implied fair values to our market capitalization.

 

Part II    47


Table of Contents
Index to Financial Statements

OUR ASSUMPTIONS

We base our fair value estimates on market participant assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from those estimates. Changes in key assumptions or management judgment with respect to a reporting unit or its prospects may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or significant underperformance relative to historical or projected future operating results. These conditions could result in a significantly different estimate of the fair value of our reporting units, which could result in an impairment charge in the future.

The significant assumptions in our discounted cash flow models include our estimate of future profitability, capital requirements and the discount rate. The profitability estimates used in the models were derived from internal operating budgets and forecasts for long-term demand and pricing in our industry. Estimated capital requirements reflect replacement capital estimated on a per ton basis and acquisition capital necessary to support growth estimated in the models. The discount rate was derived using a capital asset pricing model.

RESULTS OF OUR IMPAIRMENT TESTS

The results of our annual impairment tests for:

 

§ November 1, 2012 indicated that the fair values of all reporting units with goodwill substantially exceeded their carrying values

 

§ November 1, 2011 indicated that the fair values of one of our reporting units with $1,815.1 million of goodwill exceeded its carrying value by 8%. The fair values of all other reporting units with goodwill substantially exceeded their carrying values (see further discussion below)

 

§ November 1, 2010 indicated that the fair values of all reporting units with goodwill substantially exceeded their carrying values

The key assumptions used in our 2011 discounted cash flows (DCF) model of the aggregates reporting unit for which the fair value exceeded its carrying value by 8% were growth rates for volume, price and variable costs to produce, capital requirements and the discount rate. Based on our historical experience and macroeconomic forecasts for each of the counties that are served by our operations, we developed projections for volume, price and cost growth rates. Subsequently, projections were revised downwards to reflect assumptions that we believe a market participant, not privy to our internal information, would make based on information available through normal and customary due diligence procedures. Accordingly, the DCF model assumes that over a twenty year projection period volumes, pricing and variable cost grow at inflation-adjusted (real) average annual rates of 4.8%, 0.9% and 0.7%, respectively. Our capital spending assumptions are based on the level of projected volume and our historical experience. For goodwill impairment testing purposes, we utilized a 9.50% discount rate to present value the estimated future cash flows.

The market approach was based on multiples of revenue and EBITDA to enterprise value for comparative public companies. The six data points (derived from the revenue and EBITDA multiples for the past three years, trailing twelve months and analysts’ estimates for next year) were averaged to arrive at the estimated fair value of the reporting unit.

Delays in a sustained recovery in our Gulf Coast markets may result in an impairment of this reporting unit’s goodwill.

For additional information regarding goodwill, see Note 18 “Goodwill and Intangible Assets” in Item 8 “Financial Statements and Supplementary Data.”

 

Part II    48


Table of Contents
Index to Financial Statements

2. IMPAIRMENT OF LONG-LIVED ASSETS

EXCLUDING GOODWILL

We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. The impairment evaluation is a critical accounting policy because long-lived assets are material to our total assets (as of December 31, 2012, net property, plant & equipment represents 39% of total assets, while net other intangible assets represents 9% of total assets) and the evaluation involves the use of significant estimates and assumptions and considerable management judgment. Thus, an impairment charge could be material to our financial condition and results of operations. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value of the long-lived assets.

Fair value is determined primarily by using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results. We periodically review the appropriateness of the estimated useful lives of our long-lived assets.

We test long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. As a result, our long-lived asset impairment test is at a significantly lower level than the level at which we test goodwill for impairment. In markets where we do not produce downstream products (e.g. ready-mixed concrete and asphalt mix), the lowest level of largely independent identifiable cash flows is at the individual aggregates operation or a group of aggregates operations collectively serving a local market. Conversely, in vertically integrated markets, the cash flows of our downstream and upstream businesses are not largely independently identifiable as the selling price of the upstream products (aggregates and cement) determines the profitability of the downstream business.

During 2012, we recorded a $2.0 million loss on impairment of long-lived assets. This impairment loss related primarily to assets classified as held for sale (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”). Long-lived asset impairments during 2011 were immaterial and related to property abandonments. During 2010 we recorded a $3.9 million loss on impairment of long-lived assets.

We maintain certain long-lived assets that are not currently being utilized in our operations. These assets totaled approximately $325 million at December 31, 2012, representing an approximate 5% increase from December 31, 2011. Of the total $325 million, approximately 30% relates to real estate held for future development and expansion of our operations. An additional 25% is comprised of real estate (principally former mining sites) pending development as commercial or residential real estate, reservoirs or landfills. The remaining 45% is composed of aggregates, ready-mix and asphalt mix operating assets idled temporarily as a result of a decline in demand for our products. We anticipate moving these idled assets back into operation as demand recovers. We evaluate the useful lives and the recoverability of these assets whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

For additional information regarding long-lived assets and intangible assets, see Note 4 “Property, Plant & Equipment” and Note 18 “Goodwill and Intangible Assets” in Item 8 “Financial Statements and Supplementary Data.”

3. RECLAMATION COSTS

Reclamation costs resulting from normal use of long-lived assets are recognized over the period the asset is in use only if there is a legal obligation to incur these costs upon retirement of the assets. Additionally, reclamation costs resulting from normal use under a mineral lease are recognized over the lease term only if there is a legal obligation to incur these costs upon expiration of the lease. The obligation, which cannot be reduced by estimated offsetting cash flows, is recorded at fair value as a liability at the obligating event date and is accreted through charges to operating expenses. This fair value is also capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. If the obligation is settled for other than the carrying amount of the liability, a gain or loss is recognized on settlement.

Reclamation costs are considered a critical accounting policy because of the significant estimates, assumptions and considerable management judgment used to determine the fair value of the obligation and the significant carrying amount of these obligations ($150.1 million as of December 31, 2012 and $154.0 million as of December 31, 2011).

 

Part II    49


Table of Contents
Index to Financial Statements

HOW WE DETERMINE FAIR VALUE OF THE OBLIGATION

To determine the fair value of the obligation, we estimate the cost for a third party to perform the legally required reclamation tasks including a reasonable profit margin. This cost is then increased for both future estimated inflation and an estimated market risk premium related to the estimated years to settlement. Once calculated, this cost is discounted to fair value using present value techniques with a credit-adjusted, risk-free rate commensurate with the estimated years to settlement.

In estimating the settlement date, we evaluate the current facts and conditions to determine the most likely settlement date. If this evaluation identifies alternative estimated settlement dates, we use a weighted-average settlement date considering the probabilities of each alternative.

We review reclamation obligations at least annually for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date. Examples of events that would trigger a change in the cost include a new reclamation law or amendment of an existing mineral lease. Examples of events that would trigger a change in the estimated settlement date include the acquisition of additional reserves or the closure of a facility.

For additional information regarding reclamation obligations (referred to in our financial statements as asset retirement obligations), see Note 17 “Asset Retirement Obligations” in Item 8 “Financial Statements and Supplementary Data.”

4. PENSION AND OTHER

POSTRETIREMENT BENEFITS

Accounting for pension and postretirement benefits requires that we make significant assumptions regarding the valuation of benefit obligations and the performance of plan assets. Each year we review our assumptions about the discount rate, the expected return on plan assets, the rate of compensation increase (for salary-related plans) and the rate of increase in the per capita cost of covered healthcare benefits.

 

§ DISCOUNT RATE — The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future

 

§ EXPECTED RETURN ON PLAN ASSETS — We project the future return on plan assets based principally on prior performance and our expectations for future returns for the types of investments held by the plan as well as the expected long-term asset allocation of the plan. These projected returns reduce the recorded net benefit costs

 

§ RATE OF COMPENSATION INCREASE — For salary-related plans only, we project employees’ annual pay increases, which are used to project employees’ pension benefits at retirement

 

§ RATE OF INCREASE IN THE PER CAPITA COST OF COVERED HEALTHCARE BENEFITS — We project the expected increases in the cost of covered healthcare benefits

HOW WE SET OUR ASSUMPTIONS

In selecting the discount rate, we consider fixed-income security yields, specifically high-quality bonds. We also analyze the duration of plan liabilities and the yields for corresponding high-quality bonds. At December 31, 2012, the discount rates for our various plans ranged from 3.05% to 4.35% (December 31, 2011 ranged from 4.15% to 5.08%).

In estimating the expected return on plan assets, we consider past performance and long-term future expectations for the types of investments held by the plan as well as the expected long-term allocation of plan assets to these investments. At December 31, 2012, the expected return on plan assets was reduced to 7.5% from the 8.0% used to determine the 2012 expense.

In projecting the rate of compensation increase, we consider past experience and future expectations. At December 31, 2012, our projected weighted-average rate of compensation remained at 3.5%.

In selecting the rate of increase in the per capita cost of covered healthcare benefits, we consider past performance and forecasts of future healthcare cost trends. At December 31, 2012, our assumed rate of increase in the per capita cost of covered healthcare benefits was increased to 8.0% for 2013, decreasing each year until reaching 5.0% in 2019 and remaining level thereafter.

 

Part II    50


Table of Contents
Index to Financial Statements

Changes to the assumptions listed above would have an impact on the projected benefit obligations, the accrued other postretirement benefit liabilities, and the annual net periodic pension and other postretirement benefit cost. The following table reflects the favorable and unfavorable outcomes associated with a change in certain assumptions:

 

 

     (Favorable) Unfavorable  
     0.5 Percentage Point Increase     0.5 Percentage Point Decrease  
in millions   

Inc (Dec) in

Benefit Obligation

   

Inc (Dec) in

Benefit Cost

   

Inc (Dec) in

Benefit Obligation

   

Inc (Dec) in

Benefit Cost

 

Actuarial Assumptions

        

Discount rate

        

Pension

     ($63.8     ($6.0     $71.5        $6.6   

Other postretirement benefits

     (3.7     0.0        3.9        0.0   

Expected return on plan assets

     not applicable        (3.1     not applicable        3.1   

Rate of compensation increase

        

(for salary-related plans)

     12.7        2.3        (11.8     (2.1

Rate of increase in the per capita cost
of covered healthcare benefits

     1.6        0.2        (1.6     (0.2

As of the December 31, 2012 measurement date, the fair value of our pension plan assets increased from $636.6 million to $683.1 million due to investment gains. No contributions were made to the qualified pension plans in 2012.

During 2013, we expect to recognize net periodic pension expense of approximately $46.0 million and net periodic postretirement expense of approximately $4.5 million compared to $36.6 million and $10.2 million, respectively, in 2012. The increase in pension expense is due primarily to the decrease in discount rates. The decrease in other postretirement benefit expense is primarily the result of a plan change which caps the employer cost of medical coverage at the 2015 level. We do not anticipate contributions will be required to the funded pension plans during 2013 as a result of interest rate relief provided as part of the Moving Ahead for Progress in the 21st Century (MAP-21) Act. We currently do not anticipate that the funded status of any of our plans will fall below statutory thresholds requiring accelerated funding or constraints on benefit levels or plan administration.

For additional information regarding pension and other postretirement benefits, see Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data.”

 

Part II    51


Table of Contents
Index to Financial Statements

5. ENVIRONMENTAL COMPLIANCE

Our environmental compliance costs include the cost of ongoing monitoring programs, the cost of remediation efforts and other similar costs.

HOW WE ACCOUNT FOR ENVIRONMENTAL COSTS

To account for environmental costs, we:

 

§ expense or capitalize environmental costs consistent with our capitalization policy

 

§ expense costs for an existing condition caused by past operations that do not contribute to future revenues

 

§ accrue costs for environmental assessment and remediation efforts when we determine that a liability is probable and we can reasonably estimate the cost

At the early stages of a remediation effort, environmental remediation liabilities are not easily quantified due to the uncertainties of various factors. The range of an estimated remediation liability is defined and redefined as events in the remediation effort occur. When we can estimate a range of probable loss, we accrue the most likely amount. In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. As of December 31, 2012, the difference between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $3.9 million.

Accrual amounts may be based on technical cost estimations or the professional judgment of experienced environmental managers. Our Safety, Health and Environmental Affairs Management Committee routinely reviews cost estimates, including key assumptions, for accruing environmental compliance costs; however, a number of factors, including adverse agency rulings and encountering unanticipated conditions as remediation efforts progress, may cause actual results to differ materially from accrued costs.

For additional information regarding environmental compliance costs, see Note 8 “Accrued Environmental Remediation Costs” in Item 8 “Financial Statements and Supplementary Data.”

6. CLAIMS AND LITIGATION

INCLUDING SELF-INSURANCE

We are involved with claims and litigation, including items covered under our self-insurance program. We are self-insured for losses related to workers’ compensation up to $2.0 million per occurrence and automotive and general/product liability up to $3.0 million per occurrence. We have excess coverage on a per occurrence basis beyond these retention levels.

Under our self-insurance program, we aggregate certain claims and litigation costs that are reasonably predictable based on our historical loss experience and accrue losses, including future legal defense costs, based on actuarial studies. Certain claims and litigation costs, due to their unique nature, are not included in our actuarial studies. For matters not included in our actuarial studies, legal defense costs are accrued when incurred.

HOW WE ASSESS THE PROBABILITY OF LOSS

We use both internal and outside legal counsel to assess the probability of loss, and establish an accrual when the claims and litigation represent a probable loss and the cost can be reasonably estimated. Significant judgment is used in determining the timing and amount of the accruals for probable losses, and the actual liability could differ materially from the accrued amounts.

For additional information regarding claims and litigation including self-insurance, see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption Claims and Litigation Including Self-insurance.

 

Part II    52


Table of Contents
Index to Financial Statements

7. INCOME TAXES

HOW WE DETERMINE OUR DEFERRED TAX ASSETS AND LIABILITIES

We file various federal, state and foreign income tax returns, including some returns that are consolidated with subsidiaries. We account for the current and deferred tax effects of such returns using the asset and liability method. Our current and deferred tax assets and liabilities reflect our best assessment of the estimated future taxes we will pay. Significant judgments and estimates are required in determining the current and deferred assets and liabilities. Annually, we compare the liabilities calculated for our federal, state and foreign income tax returns to the estimated liabilities calculated as part of the year end income tax provision. Any adjustments are reflected in our current and deferred tax assets and liabilities.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which we have already properly recorded the tax benefit in the income statement. On a quarterly basis, we assess all positive and negative evidence to determine the likelihood that the deferred tax asset balance will be recovered from future taxable income. We take into account such factors as:

 

§ cumulative losses in recent years

 

§ taxable income in prior carryback years, if carryback is permitted under tax law

 

§ future reversal of existing taxable temporary differences against deductible temporary differences

 

§ future taxable income exclusive of reversing temporary differences

 

§ the mix of taxable income in the jurisdictions in which we operate

 

§ tax planning strategies

If we were to determine that we would not be able to realize a portion of our deferred tax assets in the future, we would charge an adjustment to the deferred tax assets to earnings. Conversely, if we were to determine that realization is more likely than not for deferred tax assets with a valuation allowance, the related valuation allowance would be reduced and we would record a benefit to earnings.

FOREIGN EARNINGS

U.S. income taxes are not provided on foreign earnings when such earnings are indefinitely reinvested offshore. We periodically evaluate our investment strategies for each foreign tax jurisdiction in which we operate to determine whether foreign earnings will be indefinitely reinvested offshore and, accordingly, whether U.S. income taxes should be provided when such earnings are recorded.

UNRECOGNIZED INCOME TAX BENEFITS

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

Before a particular matter for which we have recorded a liability related to an unrecognized income tax benefit is audited and finally resolved, a number of years may elapse. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized income tax benefits is adequate. Favorable resolution of an unrecognized income tax benefit could be recognized as a reduction in our income tax provision and effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized income tax benefit could increase the income tax provision and effective tax rate in the period of resolution.

We consider an issue to be resolved at the earlier of settlement of an examination, the expiration of the statute of limitations, or when the issue is “effectively settled.” Our liability for unrecognized income tax benefits is generally presented as

 

Part II    53


Table of Contents
Index to Financial Statements

noncurrent. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current. We classify interest and penalties recognized on the liability for unrecognized income tax benefits as income tax expense.

STATUTORY DEPLETION

Our largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The impact of statutory depletion on the effective tax rate is presented in Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data.” The deduction for statutory depletion does not necessarily change proportionately to changes in pretax earnings.

NEW ACCOUNTING STANDARDS

For a discussion of accounting standards recently adopted and pending adoption and the affect such accounting changes will have on our results of operations, financial position or liquidity, see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption New Accounting Standards.

FORWARD-LOOKING STATEMENTS

The foregoing discussion and analysis, as well as certain information contained elsewhere in this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor created thereby. See the discussion in Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 in Part I, above.

 

Part II    54


Table of Contents
Index to Financial Statements
ITEM 7A  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

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

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

At December 31, 2012, the estimated fair value of our long-term debt instruments including current maturities was $2,917.4 million compared to a book value of $2,677.0 million. The estimated fair value was determined by discounting expected future cash flows based on credit-adjusted interest rates on U.S. Treasury bills, notes or bonds, as appropriate. The fair value estimate is based on information available as of the measurement date. Although we are not aware of any factors that would significantly affect the estimated fair value amount, it has not been comprehensively revalued since the measurement date. The effect of a decline in interest rates of one percentage point would increase the fair value of our liability by $149.6 million.

We are exposed to certain economic risks related to the costs of our pension and other postretirement benefit plans. These economic risks include changes in the discount rate for high-quality bonds, the expected return on plan assets, the rate of compensation increase for salaried employees and the rate of increase in the per capita cost of covered healthcare benefits. The impact of a change in these assumptions on our annual pension and other postretirement benefit costs is discussed in greater detail within the Critical Accounting Policies section of this Annual Report.

 

Part II    55


Table of Contents
Index to Financial Statements
ITEM 8  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Vulcan Materials Company:

We have audited the accompanying consolidated balance sheets of Vulcan Materials Company and its subsidiary companies (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vulcan Materials Company and its subsidiary companies as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

LOGO

Birmingham, Alabama

February 28, 2013

 

Part II    56


Table of Contents
Index to Financial Statements

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   
     2012     2011     2010  

For the years ended December 31

in thousands, except per share data

                        

 

Net sales

     $2,411,243        $2,406,909        $2,405,916   

Delivery revenues

     156,067        157,641        152,946   

Total revenues

     2,567,310        2,564,550        2,558,862   

Cost of goods sold

     2,077,217        2,123,040        2,105,190   

Delivery costs

     156,067        157,641        152,946   

Cost of revenues

     2,233,284        2,280,681        2,258,136   

Gross profit

     334,026        283,869        300,726   

 

Selling, administrative and general expenses

     259,140        289,993        327,537   

Gain on sale of property, plant & equipment and businesses, net

     68,455        47,752        59,302   

Recovery from (charge for) legal settlement

     0        46,404        (40,000

Restructuring charges

     (9,557     (12,971     0   

Exchange offer costs

     (43,380     (2,227     0   

Other operating expense, net

     (5,623     (9,390     (7,031

Operating earnings (loss)

     84,781        63,444        (14,540

 

Other nonoperating income, net

     6,727        2        3,074   

Interest income

     1,141        3,444        863   

Interest expense

     213,067        220,628        181,603   

Loss from continuing operations before income taxes

     (120,418     (153,738     (192,206

 

Provision for (benefit from) income taxes

      

Current

     1,913        14,318        (37,805

Deferred

     (68,405     (92,801     (51,858

Total benefit from income taxes

     (66,492     (78,483     (89,663

 

Loss from continuing operations

     (53,926     (75,255     (102,543

Earnings on discontinued operations, net of income taxes (Note 2)

     1,333        4,477        6,053   

Net loss

     ($52,593     ($70,778     ($96,490

 

Other comprehensive income (loss), net of tax

      

Fair value adjustments to cash flow hedges

     0        0        (481

Reclassification adjustment for cash flow hedges

     3,816        7,151        10,709   

Adjustment for funded status of pension and postretirement
benefit plans

     (24,454     (54,366     3,201   

Amortization of pension and postretirement benefit plans actuarial loss
and prior service cost

     11,965        7,710        3,590   

Other comprehensive income (loss)

     (8,673     (39,505     17,019   

Comprehensive loss

     ($61,266     ($110,283     ($79,471

 

Basic earnings (loss) per share

      

Continuing operations

     ($0.42     ($0.58     ($0.80

Discontinued operations

     $0.01        $0.03        $0.05   

Net earnings (loss) per share

     ($0.41     ($0.55     ($0.75

 

Diluted earnings (loss) per share

      

Continuing operations

     ($0.42     ($0.58     ($0.80

Discontinued operations

     $0.01        $0.03        $0.05   

Net earnings (loss) per share

     ($0.41     ($0.55     ($0.75

 

Weighted-average common shares outstanding

      

Basic

     129,745        129,381        128,050   

Assuming dilution

     129,745        129,381        128,050   

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

 

Part II    57


Table of Contents
Index to Financial Statements

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS

                 
     2012     2011  

As of December 31

in thousands

              

 

Assets

    

Cash and cash equivalents

     $275,478        $155,839   

Restricted cash

     0        81   

Accounts and notes receivable

    

Customers, less allowance for doubtful accounts
2012 — $6,198; 2011 — $6,498

     277,539        299,166   

Other

     19,441        15,727   

Inventories

     335,022        327,657   

Current deferred income taxes

     40,696        43,032   

Prepaid expenses

     21,713        21,598   

Assets held for sale

     15,083        0   

Total current assets

     984,972        863,100   

Investments and long-term receivables

     42,081        29,004   

Property, plant & equipment, net

     3,159,185        3,418,179   

Goodwill

     3,086,716        3,086,716   

Other intangible assets, net

     692,532        697,502   

Other noncurrent assets

     161,113        134,813   

Total assets

     $8,126,599        $8,229,314   

 

Liabilities

    

Current maturities of long-term debt

     $150,602        $134,762   

Trade payables and accruals

     113,337        103,931   

Accrued salaries, wages and management incentives

     62,695        60,132   

Accrued interest

     11,424        12,045   

Other accrued liabilities

     97,552        95,383   

Liabilities of assets held for sale

     801        0   

Total current liabilities

     436,411        406,253   

Long-term debt

     2,526,401        2,680,677   

Noncurrent deferred income taxes

     657,367        732,528   

Deferred management incentive and other compensation

     21,756        29,275   

Pension benefits

     303,036        225,846   

Other postretirement benefits

     103,134        124,960   

Asset retirement obligations

     150,072        153,979   

Deferred revenue (Note 19)

     73,583        0   

Other noncurrent liabilities

     93,777        84,179   

Total liabilities

     4,365,537        4,437,697   

Other commitments and contingencies (Note 12)

    

 

Equity

    

Common stock, $1 par value — 129,721 shares issued as of 2012 and
129,245 shares issued as of 2011

     129,721        129,245   

Capital in excess of par value

     2,580,209        2,544,740   

Retained earnings

     1,276,649        1,334,476   

Accumulated other comprehensive loss

     (225,517     (216,844

Total equity

     3,761,062        3,791,617   

Total liabilities and equity

     $8,126,599        $8,229,314   

 

Part II    58


Table of Contents
Index to Financial Statements

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

                          
     2012      2011      2010  

For the years ended December 31

in thousands

                          

 

Operating Activities

        

Net loss

     ($52,593)         ($70,778)         ($96,490)   

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

        

Depreciation, depletion, accretion and amortization

     331,959          361,719          382,093    

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

     (78,654)         (58,808)         (68,095)   

Contributions to pension plans

     (4,509)         (4,892)         (24,496)   

Share-based compensation

     17,474          18,454          20,637    

Excess tax benefits from share-based compensation

     (267)         (121)         (808)   

Deferred tax provision

     (69,830)         (93,739)         (51,684)   

Cost of debt purchase

             19,153            

(Increase) decrease in assets before initial effects of business acquisitions
and dispositions

        

Accounts and notes receivable

     17,412          5,035          (49,656)   

Inventories

     (9,028)         (6,927)         6,708    

Prepaid expenses

     (117)         (1,354)         22,945    

Other assets

     (29,043)         7,673          (58,243)   

Increase (decrease) in liabilities before initial effects of business acquisitions
and dispositions

        

Accrued interest and income taxes

     (15,709)         5,831          12,661    

Trade payables and other accruals

     27,091          (27,871)         44,573    

Proceeds from sale of future production, net of transaction costs (Note 19)

     73,583                    

Other noncurrent liabilities

     29,772          5,707          40,950    

Other, net

     934          9,961          21,611    

Net cash provided by operating activities

     238,475          169,043          202,706    

 

Investing Activities

        

Purchases of property, plant & equipment

     (93,357)         (98,912)         (86,324)   

Proceeds from sale of property, plant & equipment

     80,829          13,675          13,602    

Proceeds from sale of businesses, net of transaction costs

     21,166          74,739          50,954    

Payment for businesses acquired, net of acquired cash

             (10,531)         (70,534)   

Other, net

     1,761          1,550          3,926    

Net cash provided by (used for) investing activities

     10,399          (19,479)         (88,376)   

 

Financing Activities

        

Net short-term borrowings (payments)

             (285,500)         48,988    

Payment of current maturities and long-term debt

     (134,780)         (743,075)         (519,204)   

Cost of debt purchase

             (19,153)           

Proceeds from issuance of long-term debt, net of discounts

             1,100,000          450,000    

Debt issuance costs

             (27,426)         (3,058)   

Proceeds from settlement of interest rate swap agreements

             23,387            

Proceeds from issuance of common stock

             4,936          41,734    

Dividends paid

     (5,183)         (98,172)         (127,792)   

Proceeds from exercise of stock options

     10,462          3,615          20,502    

Excess tax benefits from share-based compensation

     267          121          808    

Other, net

     (1)                 (1,032)   

Net cash used for financing activities

     (129,235)         (41,266)         (89,054)   

Net increase in cash and cash equivalents

     119,639          108,298          25,276    

Cash and cash equivalents at beginning of year

     155,839          47,541          22,265    

Cash and cash equivalents at end of year

     $275,478          $155,839          $47,541    

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

 

Part II    59


Table of Contents
Index to Financial Statements

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF EQUITY

 

      Common Stock 1      Capital in
Excess of
    Retained    

Accumulated

Other

Comprehensive

        
in thousands    Shares      Amount      Par Value     Earnings     Income (Loss)     Total  

Balances at December 31, 2009

     125,912         $125,912         $2,368,228        $1,728,273        ($194,358     $4,028,055   

 

Net loss

     0         0         0        (96,490     0        (96,490

Common stock issued

              

401(k) Trustee (Note 13)

     882         882         40,852        0        0        41,734   

Pension plan contribution

     1,190         1,190         52,674        0        0        53,864   

Share-based compensation plans

     586         586         17,382        0        0        17,968   

Share-based compensation expense

     0         0         20,637        0        0        20,637   

Excess tax benefits from share-based compensation

     0         0         808        0        0        808   

Accrued dividends on share-based compensation awards

     0         0         308        (308     0        0   

Cash dividends on common stock ($1.00 per share)

     0         0         0        (127,792     0        (127,792

Other comprehensive income

     0         0         0        0        17,019        17,019   

Other

     0         0         (3     (2     0        (5

Balances at December 31, 2010

     128,570         $128,570         $2,500,886        $1,503,681        ($177,339     $3,955,798   

 

Net loss

     0         0         0        (70,778     0        (70,778

Common stock issued

              

Acquisitions

     373         373         18,347        0        0        18,720   

401(k) Trustee (Note 13)

     111         111         4,634        0        0        4,745   

Share-based compensation plans

     191         191         2,041        0        0        2,232   

Share-based compensation expense

     0         0         18,454        0        0        18,454   

Excess tax benefits from share-based compensation

     0         0         121        0        0        121   

Accrued dividends on share-based compensation awards

     0         0         257        (257     0        0   

Cash dividends on common stock ($0.76 per share)

     0         0         0        (98,172     0        (98,172

Other comprehensive loss

     0         0         0        0        (39,505     (39,505

Other

     0         0         0        2        0        2   

Balances at December 31, 2011

     129,245         $129,245         $2,544,740        $1,334,476        ($216,844     $3,791,617   

 

Net loss

     0         0         0        (52,593     0        (52,593

Common stock issued

              

Acquisitions

     61         61         (199     0        0        (138

Share-based compensation plans

     415         415         7,113        0        0        7,528   

Share-based compensation expense

     0         0         17,474        0        0        17,474   

Excess tax benefits from share-based compensation

     0         0         267        0        0        267   

Reclass deferred compensation liability to equity (Note 13)

     0         0         10,764        0        0        10,764   

Accrued dividends on share-based compensation awards

     0         0         51        (51     0        0   

Cash dividends on common stock ($0.04 per share)

     0         0         0        (5,183     0        (5,183

Other comprehensive loss

     0         0         0        0        (8,673     (8,673

Other

     0         0         (1     0        0        (1

Balances at December 31, 2012

     129,721         $129,721         $2,580,209        $1,276,649        ($225,517     $3,761,062   

 

1 

Common stock, $1 par value, 480 million shares authorized in 2012, 2011 and 2010

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

 

Part II    60


Table of Contents
Index to Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT

ACCOUNTING POLICIES

NATURE OF OPERATIONS

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

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

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Vulcan Materials Company and all our majority or wholly-owned subsidiary companies. All intercompany transactions and accounts have been eliminated in consolidation.

RESTRUCTURING CHARGES

Costs associated with restructuring our operations include severance and related charges to eliminate a specified number of employee positions, costs to relocate employees, contract cancellation costs and charges to vacate facilities and consolidate operations. Relocation and contract cancellation costs and charges to vacate facilities are recognized in the period the liability is incurred. Severance charges for employees, who are required to render service beyond a minimum retention period, generally more than 60 days, are recognized ratably over the retention period; otherwise, the full severance charge is recognized on the date a detailed restructuring plan has been authorized by management and communicated to employees.

In 2011, we substantially completed the implementation of a multi-year project to replace our legacy information technology systems with new ERP and Shared Services platforms. These platforms are helping us streamline processes enterprise-wide and standardize administrative and support functions while providing enhanced flexibility to monitor and control costs. Leveraging this significant investment in technology allowed us to reduce overhead and administrative staff. Additionally, in December 2011, our Board of Directors approved a restructuring plan to consolidate our eight divisions into four regions as part of an ongoing effort to reduce overhead costs and increase operating efficiency. As a result of these two restructuring plans, we recognized $12,971,000 of severance and related charges in 2011. There were no significant charges related to these restructuring plans in 2012.

In 2012, our Board approved a Profit Enhancement Plan that further leverages our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During 2012, we incurred $9,557,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan, $8,038,000 of which was paid as of December 31, 2012. We do not expect to incur any future material charges related to this Profit Enhancement Plan.

EXCHANGE OFFER COSTS

In December 2011, Martin Marietta Materials, Inc. (Martin Marietta) commenced an unsolicited exchange offer for all outstanding shares of our common stock and indicated its intention to nominate a slate of directors to our Board. After careful consideration, including a thorough review of the offer with its financial and legal advisors, our Board unanimously determined that Martin Marietta’s offer was inadequate, substantially undervalued Vulcan, was not in the best interests of Vulcan and its shareholders and had substantial risk.

In May 2012, the Delaware Chancery Court ruled and the Delaware Supreme Court affirmed that Martin Marietta had breached two confidentiality agreements between the companies, and enjoined Martin Marietta through September 15, 2012 from pursuing its exchange offer for our shares, prosecuting its proxy contest, or otherwise taking steps to acquire control of our shares or assets and from any further violations of the two confidentiality agreements between the parties. As a result of the court ruling, Martin Marietta withdrew its exchange offer and its board nominees.

 

Part II    61


Table of Contents
Index to Financial Statements

In response to Martin Marietta’s actions, we incurred legal, professional and other costs as follows: 2012 — $43,380,000 and 2011 — $2,227,000. As of December 31, 2012, $43,107,000 of the incurred costs was paid.

CASH EQUIVALENTS

We classify as cash equivalents all highly liquid securities with a maturity of three months or less at the time of purchase. The carrying amount of these securities approximates fair value due to their short-term maturities.

ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable from customers result from our extending credit to trade customers for the purchase of our products. The terms generally provide for payment within 30 days of being invoiced. On occasion, when necessary to conform to regional industry practices, we sell product under extended payment terms, which may result in either secured or unsecured short-term notes; or, on occasion, notes with durations of less than one year are taken in settlement of existing accounts receivable. Other accounts and notes receivable result from short-term transactions (less than one year) other than the sale of our products, such as interest receivable; insurance claims; freight claims; tax refund claims; bid deposits or rents receivable. Receivables are aged and appropriate allowances for doubtful accounts and bad debt expense are recorded. Bad debt expense for the years ended December 31 was as follows: 2012 — $2,505,000, 2011 — $1,644,000 and 2010 — $3,100,000. Write-offs of accounts receivables for the years ended December 31 were as follows: 2012 — $2,805,000, 2011 — $2,651,000 and 2010 — $4,317,000.

FINANCING RECEIVABLES

Financing receivables are included in accounts and notes receivable and/or investments and long-term receivables in the accompanying Consolidated Balance Sheets. Financing receivables are contractual rights to receive money on demand or on fixed or determinable dates. Trade receivables with normal credit terms are not considered financing receivables. Financing receivables were as follows: December 31, 2012 — $8,609,000 and December 31, 2011 — $7,471,000. Both of these balances include a related-party (Vulcan Materials Company Foundation) receivable in the amount of $1,550,000 due in 2014. None of our financing receivables are individually significant. We evaluate the collectibility of financing receivables on a periodic basis or whenever events or changes in circumstances indicate we may be exposed to credit losses. As of December 31, 2012 and 2011, no allowances were recorded for these receivables.

INVENTORIES

Inventories and supplies are stated at the lower of cost or market. We use the last-in, first-out (LIFO) method of valuation for most of our inventories because it results in a better matching of costs with revenues. Such costs include fuel, parts and supplies, raw materials, direct labor and production overhead. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Substantially all operating supplies inventory is carried at average cost. For additional information regarding our inventories see Note 3.

PROPERTY, PLANT & EQUIPMENT

Property, plant & equipment are carried at cost less accumulated depreciation, depletion and amortization. The cost of properties held under capital leases, if any, is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease.

Capitalized software costs of $10,855,000 and $12,910,000 are reflected in net property, plant & equipment as of December 31, 2012 and 2011, respectively. We capitalized software costs for the years ended December 31 as follows: 2012— $408,000, 2011 — $3,746,000 and 2010 — $1,167,000. During the same periods, $2,463,000, $2,520,000 and $2,895,000, respectively, of previously capitalized costs were depreciated. For additional information regarding our property, plant & equipment see Note 4.

 

Part II    62


Table of Contents
Index to Financial Statements

REPAIR AND MAINTENANCE

Repair and maintenance costs generally are charged to operating expense as incurred. Renewals and betterments that add materially to the utility or useful lives of property, plant & equipment are capitalized and subsequently depreciated. Actual costs for planned major maintenance activities, related primarily to periodic overhauls on our oceangoing vessels, are capitalized and amortized to the next overhaul.

DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION

Depreciation is generally computed by the straight-line method at rates based on the estimated service lives of the various classes of assets, which include machinery and equipment (3 to 30 years), buildings (10 to 20 years) and land improvements (7 to 20 years). Capitalized software costs are included in machinery and equipment and are depreciated on a straight-line basis beginning when the software project is substantially complete. Depreciation for our Newberry, Florida cement production facilities is computed by the unit-of-production method based on estimated output.

Cost depletion on depletable quarry land is computed by the unit-of-production method based on estimated recoverable units.

Accretion reflects the period-to-period increase in the carrying amount of the liability for asset retirement obligations. It is computed using the same credit-adjusted, risk-free rate used to initially measure the liability at fair value.

Amortization of intangible assets subject to amortization is computed based on the estimated life of the intangible assets. A significant portion of our intangible assets is contractual rights in place associated with zoning, permitting and other rights to access and extract aggregates reserves. Contractual rights in place associated with aggregates reserves are amortized using the unit-of-production method based on estimated recoverable units. Other intangible assets are amortized principally by the straight-line method.

Leaseholds are amortized over varying periods not in excess of applicable lease terms or estimated useful lives.

Depreciation, depletion, accretion and amortization expense for the years ended December 31 is outlined below:

 

  in thousands    2012      2011      2010  

  Depreciation, Depletion, Accretion and Amortization

        

  Depreciation

         $301,146             $328,072             $349,460   

  Depletion

     10,607         11,195         10,337   

  Accretion

     7,956         8,195         8,641   

  Amortization of leaseholds

     381         225         195   

  Amortization of intangibles

     11,869         14,032         13,460   

  Total

     $331,959         $361,719         $382,093   

DERIVATIVE INSTRUMENTS

We periodically use derivative instruments to reduce our exposure to interest rate risk, currency exchange risk or price fluctuations on commodity energy sources consistent with our risk management policies. We do not use derivative financial instruments for speculative or trading purposes. Additional disclosures regarding our derivative instruments are presented in 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

 

Part II    63


Table of Contents
Index to Financial Statements

Our assets at December 31 subject to fair value measurement on a recurring basis are summarized below:

 

      Level 1  
  in thousands    2012      2011  

  Fair Value Recurring

     

  Rabbi Trust

     

  Mutual funds

     $13,349         $13,536   

  Equities

     9,843         7,057   

  Total

     $23,192         $20,593   
     
      Level 2  
  in thousands    2012