966d9327a973484

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

x

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


For the quarterly period ended September 30, 2013


OR

o

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

 

 

For the transition period from                 to

 

Commission File Number 001-33841

 

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

 

 

 

 

 


New Jersey
(State or other jurisdiction of incorporation)


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


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


35242
(zip code)


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

 

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 Noo

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether 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 x


Accelerated filer o


Non-accelerated filer  o
(Do not check if a smaller reporting company)


Smaller reporting company o


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


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


                  Class                  
Common Stock, $1 Par Value

 

Shares outstanding
      at September 30, 2013      
129,989,477

 

 

 


 

 

 

 

VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2013

 

Contents

 

 

 

 

 

 

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Comprehensive Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

 

 

 2

 3

 4

 5

 

Item 2.

Management’s Discussion and Analysis of Financial

   Condition and Results of Operations

 

 

23

 

Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

40

 

Item 4.

Controls and Procedures

40

 

 

 

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

41

 

Item 1A.

Risk Factors

41

 

Item 4.

Mine Safety Disclosures

41

 

Item 6.

Exhibits

42

 

 

 

Signatures

 

 

43

 

 

1

 


 

 

 

 

part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited, except for December 31

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$       245,813 

 

 

$       275,478 

 

 

$       243,126 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

450,642 

 

 

303,178 

 

 

403,520 

 

  Less: Allowance for doubtful accounts

(5,412)

 

 

(6,198)

 

 

(6,106)

 

   Accounts and notes receivable, net

445,230 

 

 

296,980 

 

 

397,414 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

255,047 

 

 

262,886 

 

 

263,893 

 

  Raw materials

29,480 

 

 

27,758 

 

 

28,221 

 

  Products in process

6,385 

 

 

5,963 

 

 

6,209 

 

  Operating supplies and other

37,267 

 

 

38,415 

 

 

38,655 

 

   Inventories

328,179 

 

 

335,022 

 

 

336,978 

 

Current deferred income taxes

39,326 

 

 

40,696 

 

 

45,353 

 

Prepaid expenses

31,854 

 

 

21,713 

 

 

26,384 

 

Assets held for sale

10,559 

 

 

15,083 

 

 

 

Total current assets

1,100,961 

 

 

984,972 

 

 

1,049,255 

 

Investments and long-term receivables

43,275 

 

 

42,081 

 

 

42,226 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

6,792,470 

 

 

6,666,617 

 

 

6,690,448 

 

  Reserve for depreciation, depletion & amortization

(3,578,010)

 

 

(3,507,432)

 

 

(3,477,496)

 

   Property, plant & equipment, net

3,214,460 

 

 

3,159,185 

 

 

3,212,952 

 

Goodwill

3,081,521 

 

 

3,086,716 

 

 

3,086,716 

 

Other intangible assets, net

697,655 

 

 

692,532 

 

 

693,308 

 

Other noncurrent assets

172,184 

 

 

161,113 

 

 

141,459 

 

Total assets

$    8,310,056 

 

 

$    8,126,599 

 

 

$    8,225,916 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$              163 

 

 

$       150,602 

 

 

$       285,153 

 

Trade payables and accruals

154,451 

 

 

113,337 

 

 

133,209 

 

Other current liabilities

204,029 

 

 

171,671 

 

 

213,735 

 

Liabilities of assets held for sale

 

 

801 

 

 

 

Total current liabilities

358,643 

 

 

436,411 

 

 

632,097 

 

Long-term debt

2,523,389 

 

 

2,526,401 

 

 

2,527,450 

 

Noncurrent deferred income taxes

673,135 

 

 

657,367 

 

 

680,880 

 

Deferred revenue

225,863 

 

 

73,583 

 

 

 

Other noncurrent liabilities

666,115 

 

 

671,775 

 

 

618,292 

 

Total liabilities

4,447,145 

 

 

4,365,537 

 

 

4,458,719 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Issued 129,989, 129,721 and 129,596 shares, respectively

129,989 

 

 

129,721 

 

 

129,596 

 

Capital in excess of par value

2,598,744 

 

 

2,580,209 

 

 

2,567,859 

 

Retained earnings

1,288,054 

 

 

1,276,649 

 

 

1,274,465 

 

Accumulated other comprehensive loss

(153,876)

 

 

(225,517)

 

 

(204,723)

 

Total equity

3,862,911 

 

 

3,761,062 

 

 

3,767,197 

 

Total liabilities and equity

$    8,310,056 

 

 

$    8,126,599 

 

 

$    8,225,916 

 

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

 

 

2

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

Unaudited

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands, except per share data

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Net sales

$       775,183 

 

 

$       687,616 

 

 

$    1,975,814 

 

 

$    1,836,357 

 

Delivery revenues

38,385 

 

 

41,245 

 

 

114,649 

 

 

122,522 

 

  Total revenues

813,568 

 

 

728,861 

 

 

2,090,463 

 

 

1,958,879 

 

Cost of goods sold

616,200 

 

 

560,693 

 

 

1,666,281 

 

 

1,581,537 

 

Delivery costs

38,385 

 

 

41,245 

 

 

114,649 

 

 

122,522 

 

  Cost of revenues

654,585 

 

 

601,938 

 

 

1,780,930 

 

 

1,704,059 

 

  Gross profit

158,983 

 

 

126,923 

 

 

309,533 

 

 

254,820 

 

Selling, administrative and general expenses

65,854 

 

 

65,441 

 

 

195,411 

 

 

192,267 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses, net

9,350 

 

 

2,009 

 

 

36,869 

 

 

21,687 

 

Restructuring charges

 

 

(3,056)

 

 

(1,509)

 

 

(9,018)

 

Exchange offer costs

 

 

(1,206)

 

 

 

 

(43,331)

 

Other operating expense, net

(2,712)

 

 

(3,363)

 

 

(12,907)

 

 

(2,642)

 

  Operating earnings

99,767 

 

 

55,866 

 

 

136,575 

 

 

29,249 

 

Other nonoperating income, net

2,310 

 

 

1,806 

 

 

4,968 

 

 

4,196 

 

Interest expense, net

49,134 

 

 

53,043 

 

 

152,757 

 

 

158,997 

 

Earnings (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

52,943 

 

 

4,629 

 

 

(11,214)

 

 

(125,552)

 

Provision for (benefit from) income taxes

10,793 

 

 

(10,992)

 

 

(21,874)

 

 

(67,138)

 

Earnings (loss) from continuing operations

42,150 

 

 

15,621 

 

 

10,660 

 

 

(58,414)

 

Earnings (loss) on discontinued operations, net of tax

(787)

 

 

(1,361)

 

 

4,640 

 

 

2,338 

 

Net earnings (loss)

$         41,363 

 

 

$         14,260 

 

 

$         15,300 

 

 

$       (56,076)

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Reclassification adjustment for cash flow hedges

679 

 

 

975 

 

 

2,368 

 

 

2,868 

 

  Adjustment for funded status of pension plans

 

 

 

 

60,299 

 

 

 

  Amortization of pension and postretirement benefit

 

 

 

 

 

 

 

 

 

 

 

    plans actuarial loss and prior service cost

2,111 

 

 

3,084 

 

 

8,974 

 

 

9,252 

 

Other comprehensive income

2,790 

 

 

4,059 

 

 

71,641 

 

 

12,120 

 

Comprehensive income (loss)

$         44,153 

 

 

$         18,319 

 

 

$         86,941 

 

 

$       (43,956)

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.32 

 

 

$             0.12 

 

 

$             0.08 

 

 

$           (0.45)

 

  Discontinued operations

0.00 

 

 

(0.01)

 

 

0.04 

 

 

0.02 

 

  Net earnings (loss)

$             0.32 

 

 

$             0.11 

 

 

$             0.12 

 

 

$           (0.43)

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.32 

 

 

$             0.12 

 

 

$             0.08 

 

 

$           (0.45)

 

  Discontinued operations

(0.01)

 

 

(0.01)

 

 

0.04 

 

 

0.02 

 

  Net earnings (loss)

$             0.31 

 

 

$             0.11 

 

 

$             0.12 

 

 

$           (0.43)

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

130,266 

 

 

129,753 

 

 

130,234 

 

 

129,674 

 

  Assuming dilution

131,320 

 

 

130,215 

 

 

131,368 

 

 

129,674 

 

Cash dividends per share of common stock

$             0.01 

 

 

$             0.01 

 

 

$             0.03 

 

 

$             0.03 

 

Depreciation, depletion, accretion and amortization

$         78,320 

 

 

$         84,108 

 

 

$       230,877 

 

 

$       253,391 

 

Effective tax rate from continuing operations

20.4% 

 

 

NMF

 

 

195.1% 

 

 

53.5% 

 

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

 

 

3

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Unaudited

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

Operating Activities

 

 

 

 

 

Net earnings (loss)

$         15,300 

 

 

$       (56,076)

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

230,877 

 

 

253,391 

 

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

(48,597)

 

 

(31,886)

 

  Proceeds from sale of future production, net of transactions costs (Note 16)

153,095 

 

 

 

  Contributions to pension plans

(3,535)

 

 

(3,379)

 

  Share-based compensation

16,789 

 

 

9,362 

 

  Deferred tax provision

(25,862)

 

 

(66,194)

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(78,947)

 

 

(9,886)

 

Other, net

892 

 

 

(1,573)

 

Net cash provided by operating activities

260,012 

 

 

93,759 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(117,310)

 

 

(49,418)

 

Proceeds from sale of property, plant & equipment

14,974 

 

 

28,930 

 

Proceeds from sale of businesses, net of transaction costs

51,604 

 

 

10,690 

 

Payment for businesses acquired, net of acquired cash

(89,951)

 

 

 

Other, net

 

 

963 

 

Net cash used for investing activities

(140,681)

 

 

(8,835)

 

Financing Activities

 

 

 

 

 

Proceeds from line of credit

156,000 

 

 

 

Payment of current maturities of long-term debt & line of credit

(306,493)

 

 

(120)

 

Dividends paid

(3,890)

 

 

(3,885)

 

Proceeds from exercise of stock options

4,491 

 

 

6,167 

 

Other, net

896 

 

 

201 

 

Net cash provided by (used for) financing activities

(148,996)

 

 

2,363 

 

Net increase (decrease) in cash and cash equivalents

(29,665)

 

 

87,287 

 

Cash and cash equivalents at beginning of year

275,478 

 

 

155,839 

 

Cash and cash equivalents at end of period

$       245,813 

 

 

$       243,126 

 

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

 

 

 

 

 

4

 


 

notes to condensed consolidated financial statements

 

Note 1: summary of significant accounting policies

 

NATURE OF OPERATIONS

 

Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation's largest 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.

 

BASIS OF PRESENTATION

 

Our accompanying unaudited condensed consolidated financial statements were prepared in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Our condensed consolidated balance sheet as of December 31, 2012 was derived from the audited financial statement at that date. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K.

 

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

 

RECLASSIFICATIONS

 

Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2013 presentation.

 

RESTRUCTURING CHARGES

 

In 2012, our Board approved a Profit Enhancement Plan that further leveraged our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During the first nine months of 2013 and 2012, we incurred $1,509,000 and $9,018,000, respectively, of costs (primarily project design, outside advisory and severance) related to the implementation of this plan. We do not anticipate 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.

 

In response to Martin Marietta’s actions, we have incurred legal, professional and other costs of $45,607,000 to date, of which $43,331,000 was incurred during the first nine months of 2012. As of September 30, 2013, $43,107,000 of the incurred costs was paid. We do not anticipate any future material charges related to this exchange offer.

 

5

 


 

EARNINGS PER SHARE (EPS)

 

We report two earnings per share numbers: basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

130,266 

 

 

129,753 

 

 

130,234 

 

 

129,674 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock options/SOSARs

405 

 

 

120 

 

 

449 

 

 

 

  Other stock compensation plans

649 

 

 

342 

 

 

685 

 

 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

131,320 

 

 

130,215 

 

 

131,368 

 

 

129,674 

 

 

All dilutive common stock equivalents are reflected in our earnings per share calculations. Antidilutive common stock equivalents are not included in our earnings per share calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation are excluded. These excluded shares are as follows: nine months ended September 30, 2012 — 471,000.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Antidilutive common stock equivalents

2,899 

 

 

5,046 

 

 

2,899 

 

 

5,046 

 

 

 

Note 2: Discontinued Operations

 

In 2005, we sold substantially all the assets of our Chemicals business to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. In addition to the initial cash proceeds, Basic Chemicals was required to make payments under two earn-out agreements subject to certain conditions. During 2007, we received the final payment under the ECU (electrochemical unit) earn-out, bringing cumulative cash receipts to its $150,000,000 cap.

 

Proceeds under the second earn-out agreement were based on the performance of the hydrochlorocarbon product HCC-240fa (commonly referred to as 5CP) from the closing of the transaction through December 31, 2012 (5CP earn-out). The primary determinant of the value for this earn-out is the level of growth in 5CP sales volume.

 

In March 2013, we received a payment of $13,031,000 under the 5CP earn-out related to performance during 2012, the final year of the earn-out agreement. During 2012, we received $11,336,000 in the first quarter and $33,000 in the third quarter under the 5CP earn-out related to the year ended December 31, 2011. Through September 30, 2013, we have received a total of $79,391,000 under the 5CP earn-out, a total of $46,290,000 in excess of the receivable recorded on the date of disposition.

 

We were liable for a cash transaction bonus payable annually (2009 - 2013) to certain former key Chemicals employees based on the prior year’s 5CP earn-out results. Payments for the transaction bonus were $1,303,000 during the first nine months of 2013 and $1,137,000 during the first nine months of 2012.

 

6

 


 

The financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income for all periods presented. There were no net sales or revenues from discontinued operations for the periods presented. Results from discontinued operations are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax loss

$       (1,302)

 

 

$       (2,283)

 

 

$       (4,063)

 

 

$       (6,360)

 

Gain on disposal, net of transaction bonus

 

 

30 

 

 

11,728 

 

 

10,232 

 

Income tax (provision) benefit

515 

 

 

892 

 

 

(3,025)

 

 

(1,534)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of income taxes

$          (787)

 

 

$       (1,361)

 

 

$        4,640 

 

 

$        2,338 

 

 

The pretax losses from discontinued operations noted above were due primarily to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business.

 

 

Note 3: Income Taxes

 

Our estimated annual effective tax rate (EAETR) is based on full year expectations of pretax book earnings, statutory tax rates, permanent differences such as percentage depletion and tax planning alternatives available in the various jurisdictions in which we operate. For interim financial reporting, except in circumstances as described in the following paragraph, we calculate our quarterly income tax provision in accordance with the EAETR. Each quarter, we update our EAETR based on our revised full year expectation of pretax book earnings and calculate the income tax provision or benefit so that the year-to-date income tax provision reflects the EAETR. Significant judgment is required in determining our EAETR.

 

When expected pretax book earnings or loss for the full year is at or near breakeven, the EAETR can distort the income tax provision for an interim period due to the size and nature of our permanent differences. In these circumstances, we calculate the interim income tax provision or benefit using the year-to-date effective tax rate. This method results in an income tax provision or benefit based solely on the year-to-date pretax book earnings or loss as adjusted for permanent differences on a pro rata basis. In the third quarter of 2013, income taxes were calculated based on the year-to-date effective tax rate. In the third quarter of 2012, income taxes were calculated based on the EAETR.

 

We recorded an income tax provision from continuing operations of $10,793,000 in the third quarter of 2013 compared to an income tax benefit from continuing operations of $10,992,000 in the third quarter of 2012. After applying the statutory rate to the pretax earnings, the decrease in the income tax benefit (to a provision) mainly relates to the different methodologies used to calculate income taxes in the two periods.

 

We recorded income tax benefits from continuing operations of $21,874,000 for the nine months ended September 30, 2013, compared to income tax benefits of $67,138,000 for the nine months ended September 30, 2012. After applying the statutory rate to the pretax losses, the decrease in our income tax benefit mainly relates to the different methodologies used to calculate income taxes in the two periods.

 

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 benefits and subsequent adjustments as we consider appropriate.

 

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. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.

 

7

 


 

Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. A summary of our deferred tax assets is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

On an annual basis, we perform a complete analysis of all forms of positive and negative evidence based on year end results. During each interim period, we update our annual analysis for significant changes to the positive and negative evidence.

 

Based on our third quarter 2013 analysis, we believe it is more likely than not that we will realize the benefit of all our deferred tax assets with the exception of the state net operating loss carryforwards for which a valuation allowance was previously recorded. For 2013, we project these state net operating loss carryforwards (and the associated valuation allowance) to increase by $7,567,000. This change in the valuation allowance is reflected as a component of our income tax provision.

 

In the future, if we determine that realization is more likely than not for deferred tax assets with a valuation allowance, the related valuation allowance will be reduced and we will record a benefit to earnings. Conversely, if we determine that it is more likely than not that we will not be able to realize a portion of our deferred tax assets, we will increase the valuation allowance and record a charge to earnings.

 

 

Note 4: deferred revenue

 

In two separate transactions during the third quarter of 2013 and the fourth quarter of 2012, we sold a percentage of the future production from aggregates reserves at certain owned and leased quarries. These sales were structured as volumetric production payments (VPP) for which we received net cash proceeds of $153,095,000 and $73,644,000 for the 2013 and 2012 transactions, respectively. These proceeds were recorded as deferred revenue and are amortized on a unit-of-sales basis to revenue over the terms of the VPPs.

 

The impact to our net sales and gross margin related to the 2012 VPP (the 2013 VPP closed on September 30, 2013) is outlined as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Revenue amortized from deferred revenue

$           300 

 

 

$               0 

 

 

$           876 

 

 

$               0 

 

Purchaser's proceeds from sale of production

(1,014)

 

 

 

 

(2,911)

 

 

 

Decrease to net sales and gross margin

$          (714)

 

 

$               0 

 

 

$       (2,035)

 

 

$               0 

 

 

Based on projected aggregates sales from the specified quarries, we anticipate recognizing a range of $4,000,000 to $5,000,000 of deferred revenue during the 12-month period ending September 30, 2014.

 

The common key terms of both VPP transactions are:

 

§

the purchaser has a nonoperating interest in reserves entitling them to a percentage of future production

§

there is no minimum annual or cumulative production or sales volume, nor any minimum sales price required

§

the purchaser has the right to take its percentage of future production in physical product, or receive the cash proceeds from the sale of its percentage of future production under the terms of a separate marketing agreement

§

the purchaser's percentage of future production is conveyed free and clear of future costs of production and sales

§

we retain full operational and marketing control of the specified quarries

§

we retain fee simple interest in the land as well as any residual values that may be realized upon the conclusion of mining

 

The key terms specific to the 2013 VPP transaction are:

 

§

terminates at the earlier to occur of September 30, 2051 or the sale of 250.8 million tons of aggregates from the specified quarries subject to the VPP; based on historical and projected volumes from the specified quarries, it is expected that 250.8 million tons will be sold prior to September 30, 2051

§

the purchaser's percentage of the maximum 250.8 million tons of future production is estimated, based on current sales volume projection, to be 11.5% (approximately 29 million tons); the actual percentage may vary

 

8

 


 

The key terms specific to the 2012 VPP transaction are:

 

§

terminates at the earlier to occur of December 31, 2052 or the sale of 143.2 million tons of aggregates from the specified quarries subject to the VPP; based on historical and projected volumes from the specified quarries, it is expected that 143.2 million tons will be sold prior to December 31, 2052

§

the purchaser's percentage of the maximum 143.2 million tons of future production is estimated, based on current sales volume projection, to be 10.5% (approximately 15 million tons); the actual percentage may vary

 

 

Note 5: Fair Value Measurements

 

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

 

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

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

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       14,371 

 

 

$       13,349 

 

 

$       13,144 

 

 Equities

11,688 

 

 

9,843 

 

 

8,427 

 

Total

$       26,059 

 

 

$       23,192 

 

 

$       21,571 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Common/collective trust funds

$        1,365 

 

 

$        2,265 

 

 

$        2,229 

 

Total

$        1,365 

 

 

$        2,265 

 

 

$        2,229 

 

 

We have established two Rabbi Trusts for the purpose of providing a level of security for the employee nonqualified retirement and deferred compensation plans and for the directors' nonqualified deferred compensation plans. The fair values of these investments are estimated using a market approach. The Level 1 investments include mutual funds and equity securities for which quoted prices in active markets are available. Level 2 investments are stated at estimated fair value based on the underlying investments in those funds (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).

 

The carrying values of our cash equivalents, accounts and notes receivable, current maturities of long-term debt, short-term borrowings, trade payables and accruals, and other current liabilities approximate their fair values because of the short-term nature of these instruments. Additional disclosures for derivative instruments and interest-bearing debt are presented in Notes 6 and 7, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2012

 

 

 

 

 

Impairment

 

in thousands

Level 3

 

 

Charges

 

Fair Value Nonrecurring

 

 

 

 

 

Assets held for sale (Note 16)

$       10,559 

 

 

$         1,738 

 

Totals

$       10,559 

 

 

$         1,738 

 

 

9

 


 

The fair values of the assets classified as held for sale were estimated based on the negotiated transaction values. The impairment charges represent the difference between the carrying value and the fair value, less costs to sell, of the assets.

 

 

Note 6: Derivative Instruments

 

During the normal course of operations, we are exposed to market risks including fluctuations in interest rates, foreign currency exchange rates and commodity pricing. From time to time, and consistent with our risk management policies, we use derivative instruments to hedge against these market risks. We do not utilize derivative instruments for trading or other speculative purposes.

 

The accounting for gains and losses that result from changes in the fair value of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationship. The interest rate swap agreements described below were designated as either cash flow hedges or fair value hedges. The changes in fair value of our interest rate swap cash flow hedges are recorded in accumulated other comprehensive income (AOCI) and are reclassified into interest expense in the same period the hedged items affect earnings. The changes in fair value of our interest rate swap fair value hedges are recorded as interest expense consistent with the change in the fair value of the hedged items attributable to the risk being hedged.

 

CASH FLOW HEDGES

 

We have used interest rate swap agreements designated as cash flow hedges to minimize the variability in cash flows of liabilities or forecasted transactions caused by fluctuations in interest rates. During 2007, we entered into fifteen forward starting interest rate swap agreements for a total stated amount of $1,500,000,000. Upon the 2007 and 2008 issuances of the related fixed-rate debt, we terminated and settled these forward starting swaps for cash payments of $89,777,000. Amounts in AOCI are being amortized to interest expense over the term of the related debt. This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Location on

 

September 30

 

 

September 30

 

in thousands

Statement

 

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$       (1,127)

 

 

$       (1,615)

 

 

$       (3,928)

 

 

$       (4,755)

 

 

For the 12-month period ending September 30, 2014, we estimate that $4,734,000 of the pretax loss in AOCI will be reclassified to earnings.

 

FAIR VALUE HEDGES

We have used interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in the benchmark interest rates for such debt. In June 2011, we issued $500,000,000 of 6.50% fixed-rate notes due in 2016. Concurrently, we entered into interest rate swap agreements in the stated amount of $500,000,000. Under these agreements, we paid 6-month LIBOR plus a spread of 4.05% and received a fixed interest rate of 6.50%. Additionally, in June 2011, we entered into interest rate swap agreements on our $150,000,000 of 10.125% fixed-rate notes due in 2015. Under these agreements, we paid 6-month LIBOR plus a spread of 8.03% and received a fixed interest rate of 10.125%. In August 2011, we terminated and settled these interest rate swap agreements for $25,382,000 of cash proceeds. The $23,387,000 forward component of the settlement (cash proceeds less $1,995,000 of accrued interest) was added to the carrying value of the related debt and is being amortized as a reduction to interest expense over the remaining lives of the related debt using the effective interest method. This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30

 

 

September 30

 

in thousands

 

 

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Deferred Gain on Settlement

 

 

 

 

 

 

 

 

 

 

 

 

Amortized to earnings as a reduction

 

 

 

 

 

 

 

 

 

 

 

 

 to interest expense

 

$        1,093 

 

 

$        1,021 

 

 

$        3,223 

 

 

$        3,014 

 

 

 

10

 


 

Note 7: Debt

 

Debt is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

Long-term Debt

 

 

 

 

 

 

 

 

5.60% notes due 2012 1

$                  0 

 

 

$                0 

 

 

$     134,548 

 

6.30% notes due 2013 2

 

 

140,413 

 

 

140,398 

 

10.125% notes due 2015 3

152,110 

 

 

152,718 

 

 

152,911 

 

6.50% notes due 2016 4

512,505 

 

 

515,060 

 

 

515,887 

 

6.40% notes due 2017 5

349,902 

 

 

349,888 

 

 

349,883 

 

7.00% notes due 2018 6

399,761 

 

 

399,731 

 

 

399,721 

 

10.375% notes due 2018 7

248,799 

 

 

248,676 

 

 

248,637 

 

7.50% notes due 2021 8

600,000 

 

 

600,000 

 

 

600,000 

 

7.15% notes due 2037 9

239,559 

 

 

239,553 

 

 

239,551 

 

Medium-term notes

6,000 

 

 

16,000 

 

 

16,000 

 

Industrial revenue bonds

14,000 

 

 

14,000 

 

 

14,000 

 

Other notes

916 

 

 

964 

 

 

1,067 

 

Total long-term debt including current maturities

$    2,523,552 

 

 

$  2,677,003 

 

 

$  2,812,603 

 

Less current maturities

163 

 

 

150,602 

 

 

285,153 

 

Total long-term debt

$    2,523,389 

 

 

$  2,526,401 

 

 

$  2,527,450 

 

Estimated fair value of long-term debt

$    2,795,661 

 

 

$  2,766,835 

 

 

$  2,796,358 

 

 

 

Includes decreases for unamortized discounts, as follows: September 30, 2012 — $9 thousand.

Includes decreases for unamortized discounts, as follows: December 31, 2012 — $30 thousand and September 30, 2012 — $46 thousand.

Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: September 30, 2013 — $2,315 thousand, December 31, 2012 — $2,983 thousand and September 30, 2012 — $3,195 thousand. Additionally, includes decreases for unamortized discounts, as follows: September 30, 2013 — $206 thousand, December 31, 2012 — $265 thousand and September 30, 2012 — $284 thousand. The effective interest rate for these notes is 9.59%.

Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: September 30, 2013 — $12,505 thousand, December 31, 2012 — $15,060 thousand and September 30, 2012 — $15,887 thousand. The effective interest rate for these notes is 6.02%.  

Includes decreases for unamortized discounts, as follows: September 30, 2013 — $98 thousand, December 31, 2012 — $112 thousand and September 30, 2012 — $117 thousand. The effective interest rate for these notes is 7.41%.

Includes decreases for unamortized discounts, as follows: September 30, 2013 — $239 thousand, December 31, 2012 — $269 thousand and September 30, 2012 — $279 thousand. The effective interest rate for these notes is 7.87%.

Includes decreases for unamortized discounts, as follows: September 30, 2013 — $1,201 thousand, December 31, 2012 — $1,324 thousand and September 30, 2012 — $1,363 thousand. The effective interest rate for these notes is 10.62%.

The effective interest rate for these notes is 7.75%.

Includes decreases for unamortized discounts, as follows: September 30, 2013 — $629 thousand, December 31, 2012 — $635 thousand and September 30, 2012 — $637 thousand. The effective interest rate for these notes is 8.05%.

 

Our long-term debt is presented in the table above net of unamortized discounts from par and unamortized deferred gains realized upon settlement of interest rate swaps. Discounts and deferred gains are being amortized using the effective interest method over the respective terms of the notes.

 

The estimated fair value of long-term debt presented in the table above was determined by averaging the asking price quotes for the notes. The fair value estimates were based on Level 2 information (as defined in Note 5) available to us as of the respective balance sheet dates. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued since those dates.

 

Scheduled debt payments during the first nine months of 2013 included $10,000,000 in January to retire the 8.70% medium-term note and $140,444,000 in June to retire the 6.30% notes. Scheduled debt payments during 2012 included $134,557,000 in November to retire the 5.60% notes.

 

11

 


 

In December 2011, we entered into a $600,000,000 bank line of credit expiring on December 15, 2016. In March 2013, we proactively amended this line of credit to reduce its capacity to $500,000,000 and extend its term to March 12, 2018. The line of credit 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 $500,000,000 at any point in time. As of September 30, 2013, our available borrowing capacity was $380,289,000 (net of the $55,032,000 backing for 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 LIBOR plus a margin ranging from 1.50% to 2.00% based on the level of utilization, or an alternative rate derived from the lender’s prime rate. Borrowings on our line of credit are classified as short-term due to our intent to repay within twelve months. As of September 30, 2013, the applicable margin for LIBOR based borrowing was 1.75%.

 

 

Note 8: Commitments and Contingencies

 

LETTERS OF CREDIT

 

We provide, in the normal course of business, certain third party beneficiaries standby letters of credit to support our obligations to pay or perform according to the requirements of an underlying agreement. Such letters of credit typically have an initial term of one year, typically renew automatically, and can only be modified or cancelled with the approval of the beneficiary. All of our letters of credit are issued by banks that participate in our $500,000,000 line of credit, and reduce the borrowing capacity thereunder. We pay a fee for all letters of credit equal to the LIBOR margin (ranges from 1.50% to 2.00%) applicable to borrowings under the line of credit, plus 0.125%. Our standby letters of credit as of September 30, 2013 are summarized by purpose in the table below:

 

 

 

 

 

 

 

 

in thousands

 

 

Standby Letters of Credit

 

 

Risk management insurance

$       34,478 

 

Industrial revenue bond

14,230 

 

Reclamation/restoration requirements

6,324 

 

Total

$       55,032 

 

 

LITIGATION AND ENVIRONMENTAL MATTERS

 

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

 

In addition to these lawsuits in which we are involved in the ordinary course of business, certain other material legal proceedings are more specifically described below. At this time, we cannot determine the likelihood or reasonably estimate a range of loss pertaining to these matters.

 

Perchloroethylene cases

 

We are a defendant in cases involving perchloroethylene (perc), which was a product manufactured by our former Chemicals business. Perc is a cleaning solvent used in dry cleaning and other industrial applications. Vulcan is vigorously defending these cases:

 

§

Suffolk County Water Authority — On July 29, 2010, we were served in an action styled Suffolk County Water Authority v. The Dow Chemical Company, et al., in the Supreme Court for Suffolk County, State of New York. The complaint alleges that the plaintiff “owns and/or operates drinking water systems and supplies drinking water to thousands of residents and businesses, in Suffolk County, New York.” The complaint alleges that perc and its breakdown products “have been and are contaminating and damaging Plaintiff's drinking water supply wells.” The plaintiff is seeking compensatory and punitive damages. The trial court ruled that any detectable amount of perc in a well constitutes a legal injury. We are appealing this and other rulings of the trial court. Discovery is ongoing. At this time, plaintiffs have not established that our perc was used at any specific dry cleaner or that we are liable for any alleged contamination.

 

§

R.R. Street Indemnity — Street, a former distributor of perc manufactured by us, alleges that we owe Street, and its insurer (National Union), a defense and indemnity in several litigation matters in which Street was named as a defendant. National Union alleges that we are obligated to contribute to National Union's share of defense fees, costs and any indemnity payments made on Street's behalf. We have had discussions with Street about the nature and extent of indemnity obligations, if any, and to date there has been no resolution of these issues.

 

12

 


 

lower passaic river matter

 

§

NJDEP LITIGATION — In 2009, Vulcan and over 300 other parties were named as third-party defendants in New Jersey Department of Environmental Protection, et al. v. Occidental Chemical Corporation, et al., a case originally brought by the New Jersey Department of Environmental Protection (NJDEP) in the New Jersey Superior Court. Vulcan was brought into the suit due to alleged discharges to the lower Passaic River (River) from the former Chemicals Division - Newark Plant. Vulcan owned and operated this site as a chloralkali plant from 1961-1974. In 1974, we sold the plant, although we continued to operate the plant for one additional year. This suit by the NJDEP seeks recovery of past and future clean-up costs, as well as unspecified economic damages, punitive damages, penalties and a variety of other forms of relief. All defendants, with the exception of Occidental Chemical Corporation, have reached a tentative settlement agreement with the plaintiffs. Vulcan’s settlement amount is immaterial and has been fully accrued. Final approval of the settlement is pending.

 

§

Lower Passaic River Study Area (Superfund Site) — Vulcan and approximately 70 other companies are parties to a May 2007 Administrative Order on Consent (AOC) with the U.S. Environmental Protection Agency (EPA) to perform a Remedial Investigation/Feasibility Study (RI/FS) of the lower 17 miles of the River. Separately, the EPA issued a draft Focused Feasibility Study (FFS) that evaluated early action remedial alternatives for a portion of the River. The EPA has given a range of estimated costs for these alternatives between $0.9 billion and $3.5 billion, although estimates of the cost and timing of future environmental remediation requirements are inherently imprecise and subject to revision. The EPA has not released the final FFS. As an interim step related to the 2007 AOC, Vulcan and 69 other companies voluntarily entered into an Administrative Settlement Agreement and Order on Consent on June 18, 2012 with the EPA for remediation actions focused at River Mile 10.9 of the River. Our estimated costs related to this focused remediation action, based on an interim allocation, are immaterial and have been accrued. On June 25, 2012, the EPA issued a Unilateral Administrative Order for Removal Response Activities to Occidental Chemical Corporation ordering Occidental to participate and cooperate in this remediation action at River Mile 10.9.

 

At this time, we cannot reasonably estimate our liability related to this matter because the RI/FS is ongoing; the ultimate remedial approach and associated cost has not been determined; and the parties that will participate in funding the remediation and their respective allocations are not yet known.

 

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

 

 

13

 


 

Note 9: Asset Retirement Obligations

 

Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets.

 

Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the ARO is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement.

 

We record all AROs for which we have legal obligations for land reclamation at estimated fair value. Essentially all these AROs relate to our underlying land parcels, including both owned properties and mineral leases. For the three and nine month periods ended September 30, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

ARO Operating Costs

 

 

 

 

 

 

 

 

 

 

 

Accretion

$        2,908 

 

 

$        1,973 

 

 

$        7,731 

 

 

$        5,990 

 

Depreciation

886 

 

 

1,110 

 

 

2,495 

 

 

4,837 

 

Total

$        3,794 

 

 

$        3,083 

 

 

$      10,226 

 

 

$      10,827 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Asset Retirement Obligations

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     222,851 

 

 

$     150,413 

 

 

$     150,072 

 

 

$     153,979 

 

  Liabilities incurred

3,524 

 

 

82 

 

 

69,111 

 

 

127 

 

  Liabilities settled

(2,328)

 

 

(822)

 

 

(8,839)

 

 

(2,241)

 

  Accretion expense

2,908 

 

 

1,973 

 

 

7,731 

 

 

5,990 

 

  Revisions up (down), net

6,606 

 

 

(2,923)

 

 

15,486 

 

 

(9,132)

 

Balance at end of period

$     233,561 

 

 

$     148,723 

 

 

$     233,561 

 

 

$     148,723 

 

 

The ARO liabilities incurred during 2013 relate primarily to reclamation activities required under a new development agreement and a new conditional use permit at an aggregates facility on owned property in Southern California. Upward revisions to our ARO liability during 2013 are largely attributable to an adjacent aggregates facility on owned property. The reclamation requirements at this property will result in the restoration and development of mined property into a 90 acre tract suitable for commercial and retail development. The estimated cost to fill and compact the property increased and the estimated settlement date decreased resulting in an upward revision to the ARO.

 

Downward revisions to our ARO liability during 2012 relate primarily to extensions in the estimated settlement dates at numerous sites.

 

 

14

 


 

Note 10: Benefit Plans

 

We sponsor three funded, noncontributory defined benefit pension plans. These plans cover substantially all employees hired prior to July 15, 2007, other than those covered by union-administered plans. Benefits for the Salaried Plan are generally based on salaries or wages and years of service; the Construction Materials Hourly Plan and the Chemicals Hourly Plan provide benefits equal to a flat dollar amount for each year of service. In addition to these qualified plans, we sponsor three unfunded, nonqualified pension plans. Effective July 15, 2007, we amended our defined benefit pension plans to no longer accept new participants. In May 2013, we announced that future accruals for salaried pension participants will cease effective December 31, 2013. This change included a special transition provision which will allow salaries or wages through December 31, 2015 to be considered in the participants’ benefit calculations. The announcement resulted in a curtailment and remeasurement of the salaried and nonqualified pension plans as of May 31, 2013 that will reduce our 2013 pension expense by approximately $7,600,000 (net of the one-time curtailment loss noted below) of which $800,000 relates to discontinued operations. See Note 11 for the impact of this remeasurement to our pension plan funded status.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PENSION BENEFITS

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

 

 

 

 

 

 

Service cost

$        4,958 

 

 

$        5,587 

 

 

$      16,852 

 

 

$      16,762 

 

Interest cost

10,179 

 

 

10,798 

 

 

30,816 

 

 

32,395 

 

Expected return on plan assets

(11,926)

 

 

(12,195)

 

 

(35,500)

 

 

(36,585)

 

Curtailment loss

 

 

 

 

855 

 

 

 

Amortization of prior service cost

79 

 

 

69 

 

 

259 

 

 

206 

 

Amortization of actuarial loss

4,264 

 

 

4,882 

 

 

16,259 

 

 

14,645 

 

Net periodic pension benefit cost

$        7,554 

 

 

$        9,141 

 

 

$      29,541 

 

 

$      27,423 

 

Pretax reclassification from AOCI included in

 

 

 

 

 

 

 

 

 

 

 

 net periodic pension benefit cost

$        4,343 

 

 

$        4,951 

 

 

$      17,373 

 

 

$      14,851 

 

 

In addition to pension benefits, we provide certain healthcare and life insurance benefits for some retired employees. In the fourth quarter of 2012, we amended our postretirement healthcare plan to cap our portion of the medical coverage cost at the 2015 level. Effective July 15, 2007, we amended our salaried postretirement healthcare coverage to increase the eligibility age for early retirement coverage to age 62, unless certain grandfathering provisions were met. Substantially all our salaried employees and where applicable, hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain service requirements. Generally, Company-provided healthcare benefits terminate when covered individuals become eligible for Medicare benefits, become eligible for other group insurance coverage or reach age 65, whichever occurs first.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER POSTRETIREMENT BENEFITS

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

 

 

 

 

 

 

Service cost

$           708 

 

 

$        1,166 

 

 

$        2,123 

 

 

$        3,499 

 

Interest cost

815 

 

 

1,563 

 

 

2,445 

 

 

4,687 

 

Amortization of prior service credit

(1,215)

 

 

(169)

 

 

(3,647)

 

 

(506)

 

Amortization of actuarial loss

343 

 

 

287 

 

 

1,029 

 

 

862 

 

Net periodic postretirement benefit cost

$           651 

 

 

$        2,847 

 

 

$        1,950 

 

 

$        8,542 

 

Pretax reclassification from AOCI included in

 

 

 

 

 

 

 

 

 

 

 

 net periodic postretirement benefit cost

$          (872)

 

 

$           118 

 

 

$       (2,618)

 

 

$           356 

 

 

The reclassifications from AOCI noted in the tables above are related to curtailment losses, amortization of prior service costs or credits and actuarial losses as shown in Note 11.

 

Prior contributions, along with the existing funding credits, are sufficient to cover required contributions to the qualified plans through 2013.

 

 

15

 


 

Note 11: other Comprehensive Income

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

AOCI

 

 

 

 

 

 

 

 

Cash flow hedges

$       (25,802)

 

 

$       (28,170)

 

 

$       (29,118)

 

Pension and postretirement benefit plans

(128,074)

 

 

(197,347)

 

 

(175,605)

 

Total

$     (153,876)

 

 

$     (225,517)

 

 

$     (204,723)

 

 

Changes in AOCI, net of tax, for the nine months ended September 30, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension and

 

 

 

 

 

Cash Flow

 

 

Postretirement

 

 

 

 

in thousands

Hedges

 

 

Benefit Plans

 

 

Total

 

AOCI

 

 

 

 

 

 

 

 

Balance as of December 31, 2012

$       (28,170)

 

 

$     (197,347)

 

 

$     (225,517)

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 before reclassifications  1

 

 

60,299 

 

 

60,299 

 

Amounts reclassified from AOCI

2,368 

 

 

8,974 

 

 

11,342 

 

Net current period OCI changes

2,368 

 

 

69,273 

 

 

71,641 

 

Balance as of September 30, 2013

$       (25,802)

 

 

$     (128,074)

 

 

$     (153,876)

 

 

Remeasurement of the pension plan funded status resulting from the plan change as described in Note 10.

 

Amounts reclassified from AOCI to earnings, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Reclassification Adjustment for Cash Flow

 

 

 

 

 

 

 

 

 

 

 

 Hedges Losses

 

 

 

 

 

 

 

 

 

 

 

Interest expense

$          1,127 

 

 

$          1,615 

 

 

$          3,928 

 

 

$          4,755 

 

Benefit from income taxes

(448)

 

 

(640)

 

 

(1,560)

 

 

(1,887)

 

Total

$             679 

 

 

$             975 

 

 

$          2,368 

 

 

$          2,868 

 

Amortization of Pension and Postretirement

 

 

 

 

 

 

 

 

 

 

 

 Plan Actuarial Loss and Prior Service Cost 1

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

$          2,827 

 

 

$          4,092 

 

 

$        11,837 

 

 

$        12,066 

 

Selling, administrative and general expenses

644 

 

 

977 

 

 

2,918 

 

 

3,141 

 

Benefit from income taxes

(1,360)

 

 

(1,985)

 

 

(5,781)

 

 

(5,955)

 

Total

$          2,111 

 

 

$          3,084 

 

 

$          8,974 

 

 

$          9,252 

 

Total reclassifications from AOCI to earnings

$          2,790 

 

 

$          4,059 

 

 

$        11,342 

 

 

$        12,120 

 

 

See Note 10 for a breakdown of the reclassifications among the curtailment loss and amortization of actuarial loss and prior service cost.

 

 

16

 


 

Note 12: Equity

 

Changes in total equity for the nine months ended September 30, 2013 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

in thousands

 

 

 

Equity

 

Balance at December 31, 2012

 

 

$    3,761,062 

 

Net earnings

 

 

15,300 

 

Common stock issued

 

 

 

 

  Share-based compensation plans

 

 

1,115 

 

Share-based compensation expense

 

 

16,789 

 

Excess tax benefits from share-based compensation

 

 

896 

 

Cash dividends on common stock ($0.03 per share)

 

 

(3,890)

 

Other comprehensive income

 

 

71,641 

 

Other

 

 

(2)

 

Balance at September 30, 2013

 

 

$    3,862,911 

 

 

There were no shares held in treasury as of September 30, 2013, December 31, 2012 and September 30, 2012. As of September 30, 2013, 3,411,416 shares may be repurchased under the current purchase authorization of our Board of Directors.

 

 

17

 


 

Note 13: Segment Reporting

 

We have four operating (and reportable) segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. The vast majority of our activities are domestic. We sell a relatively small amount of construction aggregates outside the United States. Intersegment sales are made at local market prices for the particular grade and quality of product utilized in the production of ready-mixed concrete and asphalt mix. Management reviews earnings from the product line reporting segments principally at the gross profit level.

 

segment financial disclosure

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in millions

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Total Revenues

 

 

 

 

 

 

 

 

 

 

 

Aggregates 1

 

 

 

 

 

 

 

 

 

 

 

  Segment revenues

$        561.2 

 

 

$        491.1 

 

 

$     1,428.6 

 

 

$     1,317.9 

 

  Intersegment sales

(56.5)

 

 

(42.5)

 

 

(134.5)

 

 

(112.9)

 

Net sales

504.7 

 

 

448.6 

 

 

1,294.1 

 

 

1,205.0 

 

Concrete 2

 

 

 

 

 

 

 

 

 

 

 

  Segment revenues

129.7 

 

 

108.7 

 

 

349.9 

 

 

303.3 

 

Net sales

129.7 

 

 

108.7 

 

 

349.9 

 

 

303.3 

 

Asphalt Mix

 

 

 

 

 

 

 

 

 

 

 

  Segment revenues

127.9 

 

 

118.2 

 

 

295.1 

 

 

293.3 

 

Net sales

127.9 

 

 

118.2 

 

 

295.1 

 

 

293.3 

 

Cement 3

 

 

 

 

 

 

 

 

 

 

 

  Segment revenues

25.1 

 

 

22.7 

 

 

71.6 

 

 

63.6 

 

  Intersegment sales

(12.2)

 

 

(10.6)

 

 

(34.9)

 

 

(28.8)

 

Net sales

12.9 

 

 

12.1 

 

 

36.7 

 

 

34.8 

 

Totals

 

 

 

 

 

 

 

 

 

 

 

   Net sales

775.2 

 

 

687.6 

 

 

1,975.8 

 

 

1,836.4 

 

   Delivery revenues

38.4 

 

 

41.3 

 

 

114.7 

 

 

122.5 

 

Total revenues

$        813.6 

 

 

$        728.9 

 

 

$     2,090.5 

 

 

$     1,958.9 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

Aggregates

$        149.8 

 

 

$        124.9 

 

 

$        301.7 

 

 

$        270.8 

 

Concrete

(3.9)

 

 

(8.5)

 

 

(19.8)

 

 

(29.9)

 

Asphalt Mix

13.6 

 

 

10.9 

 

 

24.8 

 

 

15.5 

 

Cement

(0.5)

 

 

(0.4)

 

 

2.8 

 

 

(1.6)

 

Total

$        159.0 

 

 

$        126.9 

 

 

$        309.5 

 

 

$        254.8 

 

Depreciation, Depletion,

 

 

 

 

 

 

 

 

 

 

 

 Accretion and Amortization 4

 

 

 

 

 

 

 

 

 

 

 

Aggregates

$          56.7 

 

 

$          59.6 

 

 

$        169.2 

 

 

$        183.7 

 

Concrete

8.4 

 

 

10.5 

 

 

24.5 

 

 

32.1 

 

Asphalt Mix

2.2 

 

 

2.1 

 

 

6.4 

 

 

6.6 

 

Cement

5.4 

 

 

5.8 

 

 

13.8 

 

 

13.5 

 

Other

5.6 

 

 

6.1 

 

 

17.0 

 

 

17.5 

 

Total

$          78.3 

 

 

$          84.1 

 

 

$        230.9 

 

 

$        253.4 

 

 

 

 

 

Includes crushed stone, sand and gravel, sand, other aggregates, as well as transportation and service revenues associated with the aggregates business.

Includes ready-mixed concrete, concrete block, precast concrete, as well as building materials purchased for resale.

Includes cement and calcium products.

The allocation of indirect depreciation to our operating segments was changed in the fourth quarter of 2012 to better align the presentation with how management views information internally. The 2012 DDA&A amounts presented above have been revised to conform to the 2013 presentation.

 

 

 

18

 


 

 

 

Note 14: Supplemental Cash Flow Information

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

Cash Payments

 

 

 

 

 

Interest (exclusive of amount capitalized)

$     102,137 

 

 

$     104,440 

 

Income taxes

29,909 

 

 

19,219 

 

Noncash Investing and Financing Activities

 

 

 

 

 

Amounts referable to business acquisition (Note 16)

 

 

 

 

 

 Liabilities assumed

$            232 

 

 

$                0 

 

Accrued liabilities for purchases of property, plant

 

 

 

 

 

 & equipment

9,197 

 

 

4,316 

 

 

 

Note 15: Goodwill

 

Goodwill is recognized when the consideration paid for a business combination (acquisition) exceeds the fair value of the tangible and identifiable intangible assets acquired. Goodwill is allocated to reporting units for purposes of testing goodwill for impairment. There were no charges for goodwill impairment in the nine month periods ended September 30, 2013 and 2012.

 

We have four reportable segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. Changes in the carrying amount of goodwill by reportable segment from December 31, 2012 to September 30, 2013 are summarized below:

 

GOODWILL

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in thousands

Aggregates

 

 

Concrete

 

 

Asphalt Mix

 

 

Cement

 

 

Total

 

Gross Carrying Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total as of December 31, 2012

$    2,995,083 

 

 

$             0 

 

 

$    91,633 

 

 

$     252,664 

 

 

$    3,339,380 

 

Goodwill of divested businesses 1

(5,195)

 

 

 

 

 

 

 

 

(5,195)

 

Total as of September 30, 2013

$    2,989,888 

 

 

$             0 

 

 

$    91,633 

 

 

$     252,664 

 

 

$    3,334,185 

 

Accumulated Impairment Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total as of December 31, 2012

$                  0 

 

 

$             0 

 

 

$             0 

 

 

$   (252,664)

 

 

$      (252,664)

 

Total as of September 30, 2013

$                  0 

 

 

$             0 

 

 

$             0 

 

 

$   (252,664)

 

 

$      (252,664)

 

Goodwill, net of Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Impairment Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total as of December 31, 2012

$    2,995,083 

 

 

$             0 

 

 

$    91,633 

 

 

$                0 

 

 

$    3,086,716 

 

Total as of September 30, 2013

$    2,989,888 

 

 

$             0 

 

 

$    91,633 

 

 

$                0 

 

 

$    3,081,521 

 

 

The goodwill of divested businesses relates to the 2013 divestitures discussed in Note 16.

 

We test goodwill for impairment on an annual basis or more frequently if events or circumstances change in a manner that would more likely than not reduce the fair value of a reporting unit below its carrying value. A decrease in the estimated fair value of one or more of our reporting units could result in the recognition of a material, noncash write-down of goodwill.

 

 

19

 


 

Note 16: Acquisitions and Divestitures

 

In the third quarter of 2013, we sold reclaimed land associated with a former site of a ready-mixed concrete facility resulting in net pretax cash proceeds of $11,261,000 and a pretax gain of $9,027,000.

 

Also in the third quarter of 2013, we completed the sale of a percentage of the future production from aggregates reserves at certain owned quarries. The sale was structured as a volumetric production payment (VPP) for which we received gross cash proceeds of $154,000,000 and incurred transaction costs of $905,000. The net proceeds were recorded as deferred revenue and are amortized on a unit-of-sales basis to revenues over the term of the VPP. See Note 4 for the key terms of the VPP.

 

In the second quarter of 2013, we acquired an aggregates production facility and four ready-mixed concrete facilities for $29,983,000. As a result, we recognized $5,425,000 of amortizable intangible assets (contractual rights in place). The contractual rights in place will be amortized against earnings using the unit-of-production method over an estimated weighted-average period in excess of 50 years and will be deductible for income tax purposes over 15 years.

 

In the second quarter of 2013, we sold four aggregates production facilities resulting in net pretax cash proceeds of $34,743,000 and a pretax gain of $21,183,000. We allocated $4,521,000 of goodwill to these dispositions based on the relative fair values of the businesses disposed of and the portion of the reporting unit retained. Additionally, the dispositions of these facilities will likely result in a partial withdrawal from one of our multiemployer pension plans; therefore, we recognized a $4,000,000 liability related to this plan.

 

In the first quarter of 2013, we acquired two aggregates production facilities for $59,968,000. The initial accounting for the business combination was not finalized at the end of the second quarter because appraisals of amortizable intangible assets (contractual rights in place) and property, plant & equipment were not completed. Provisional amounts for contractual rights in place and property, plant & equipment were adjusted to the appraised values in the second and third quarters of 2013. These adjustments resulted in an increase in contractual rights in place from $800,000 to $3,620,000, an increase in property, plant & equipment from $45,888,000 to $52,583,000, a decrease in goodwill from $9,759,000 to $0 and other minor adjustments to working capital. The comparative balance sheets as of March 31, 2013 and June 30, 2013, will be retrospectively adjusted to reflect these adjustments. The impact of applying these adjustments retrospectively to 2013’s first and second quarter statements of comprehensive income was immaterial. The contractual rights in place will be amortized against earnings using the unit-of-production method over an estimated weighted-average period in excess of 20 years and will be deductible for income tax purposes over 15 years.

 

In the first quarter of 2013, we sold an aggregates production facility and its related replacement reserve land resulting in net pretax cash proceeds of $5,133,000 and a pretax gain of $2,802,000. We allocated $674,000 of goodwill to this disposition based on the relative fair values of the business disposed of and the portion of the reporting unit retained. Additionally, we sold equipment and other personal property from two idled prestress concrete production facilities in the first quarter of 2013 resulting in net pretax cash proceeds of $622,000 and a pretax gain of $457,000.

 

Pending divestiture (Aggregates segment — a previously mined and subsequently reclaimed tract of land) is presented in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2013 as assets held for sale. We expect the sale to occur during 2013. Likewise, pending divestitures as of December 31, 2012 (Aggregates segment — a previously mined and subsequently reclaimed tract of land, an aggregates production facility and its related replacement reserve land, and Concrete segment — reclaimed land associated with a former site of a ready-mixed concrete facility) are presented in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2012 as assets held for sale and liabilities of assets held for sale. The major classes of assets and liabilities of assets classified as held for sale are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

Held for Sale

 

 

 

 

 

 

 

 

Current assets

$              0 

 

 

$          809 

 

 

$              0 

 

Property, plant & equipment, net

10,559 

 

 

14,274 

 

 

 

Total assets held for sale

$     10,559 

 

 

$     15,083 

 

 

$              0 

 

Noncurrent liabilities

$              0 

 

 

$          801 

 

 

$              0 

 

Total liabilities of assets held for sale

$              0 

 

 

$          801 

 

 

$              0 

 

 

20

 


 

During the first nine months of 2012, we sold:

 

§

mitigation credits resulting in net pretax cash proceeds of $13,469,000 and a pretax gain of $12,342,000

§

real estate resulting in net pretax cash proceeds of $9,691,000 and a pretax gain of $5,979,000

 

Effective land management is both a business strategy and a social responsibility. We strive to achieve value through our mining activities as well as incremental value through effective post-mining land management. Our land management strategy includes routinely reclaiming and selling our previously mined land. Additionally, this strategy includes developing conservation banks by preserving land as a suitable habitat for endangered or sensitive species. These conservation banks have received approval from the United States Fish and Wildlife Service to offer mitigation credits for sale to third parties who may be required to compensate for the loss of habitats of endangered or sensitive species.

 

 

Note 17: New Accounting Standards

 

ACCOUNTING STANDARDS RECENTLY ADOPTED

 

NEW DISCLOSURE REQUIREMENTS ON OFFSETTING ASSETS AND LIABILITIES  As of and for the interim period ended March 31, 2013, we adopted Accounting Standards Update (ASU) No. ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities.” This ASU creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial and derivative instruments. The scope of instruments covered under this ASU was further clarified in the January 2013 issuance of ASU 2013-01,"Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." These new disclosures are designed to facilitate comparisons between financial statements prepared under U.S. GAAP and those prepared under International Financial Reporting Standards (IFRS). Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.

 

AMENDMENTS ON INDEFINITE-LIVED INTANGIBLE ASSET IMPAIRMENT TESTING  As of and for the interim period ended March 31, 2013, we adopted ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” This ASU amends the impairment testing guidance in Accounting Standards Codification 350-30, “General Intangibles Other Than Goodwill.” Under the amended guidance, an entity has the option of performing a qualitative assessment when testing an indefinite-lived intangible asset for impairment. Further testing would be required only if, on the basis of the qualitative factors, an entity determines that the fair value of the intangible asset is more likely than not (a likelihood of more than 50%) less than the carrying amount. Additionally, this ASU revises the examples of events and circumstances that an entity should consider when determining if an interim impairment test is required. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.

 

presentation of other comprehensive income  As of the annual period ended December 31, 2011, we adopted ASU No. 2011-05, "Presentation of Comprehensive Income." This standard eliminates the option to present components of other comprehensive income (OCI) as part of the statement of equity. The amendments in this standard require that all nonowner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the Financial Accounting Standards Board (FASB) issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU No. 2011-12 indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income (AOCI) by component in the Consolidated Statement of Comprehensive Income. In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 finalizes the requirements of ASU 2011-05 that ASU 2011-12 deferred, clarifying how to report the effect of significant reclassifications out of AOCI. Our accompanying Condensed Consolidated Statements of Comprehensive Income and Note 11 conform to the presentation requirements of these standards.

 

21

 


 

ACCOUNTING STANDARDS PENDING ADOPTION

 

GUIDANCE ON FINANCIAL STATEMENT PRESENTATION OF UNRECOGNIZED TAX BENEFITS  In July 2013, the FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" which provides explicit presentation guidelines. Under this ASU, an unrecognized tax benefit, or portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except when specific conditions are met as outlined in the ASU. When these specific conditions are met, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Both early adoption and retrospective application are permitted. We will adopt this standard as of and for the interim period ending March 31, 2014. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

GUIDANCE ON THE LIQUIDATION BASIS OF ACCOUNTING  In April 2013, the FASB issued ASU 2013-07, “Liquidation Basis of Accounting” which provides guidance on when and how to apply the liquidation basis of accounting and on what to disclose. This ASU is effective for fiscal years beginning after December 15, 2013, with early adoption permitted, and should be applied prospectively from the date liquidation is imminent. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

GUIDANCE FOR OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS  In February 2013, the FASB issued ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date" which provides guidance for the recognition, measurement and disclosure of such obligations that are within the scope of the ASU. Obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled litigation and judicial rulings. Under this ASU, an entity (1) recognizes such obligations at the inception of the arrangement, (2) measures such obligations as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors and (3) discloses the nature and amount of such obligations as well as other information about those obligations. This ASU is effective for all prior periods in fiscal years beginning on or after December 15, 2013, with retrospective application required. We will adopt this standard as of and for the interim period ending June 30, 2014. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

 

TANGIBLE PROPERTY REGULATIONS  In September 2013, the Internal Revenue Service issued final tangible property regulations. These regulations apply to amounts paid to acquire, produce or improve tangible property, as well as dispose of such property and are effective for tax years beginning on or after January 1, 2014. We have considered the effect of these tax law changes to our deferred tax assets and liabilities and do not expect their implementation to have a material impact on our consolidated financial statements.

 

 

22

 


 

ITEM 2

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

 

 

GENERAL COMMENTS

 

Overview

 

Vulcan provides the basic materials for the infrastructure needed to expand the U.S. economy. We are the nation's largest producer of construction aggregates, primarily crushed stone, sand and gravel; a major producer of asphalt mix and ready-mixed concrete as well as a leading producer of cement in Florida.

 

Demand for our products is dependent on construction activity. The primary end uses include public construction, such as highways, bridges, airports, schools and prisons, as well as private nonresidential (e.g., manufacturing, retail, offices, industrial and institutional) and private residential construction (e.g., single-family houses, duplexes, apartment buildings and condominiums). Customers for our products include heavy construction and paving contractors; commercial building contractors; concrete products manufacturers; residential building contractors; state, county and municipal governments; railroads and electric utilities.

 

We operate primarily in the United States and our principal product — aggregates — is used in virtually all types of public and private construction projects and in the production of asphalt mix and ready-mixed concrete. Aggregates have a high weight-to-value ratio and, in most cases, must be produced near where they are used; if not, transportation can cost more than the materials. 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.

 

There are practically no substitutes for quality aggregates. Because of barriers to entry created by zoning and permitting regulation and because of high transportation costs relative to the value of the product, the location of reserves is a critical factor to long-term success.

 

While aggregates is our primary business, we believe vertical integration between aggregates and downstream products, such as asphalt mix and concrete, can be managed effectively in certain markets to generate acceptable financial returns. We produce and sell asphalt mix and ready-mixed concrete primarily in our mid-Atlantic, Georgia, Florida, southwestern and western markets. Aggregates comprise approximately 95% of asphalt mix by weight and 78% of ready-mixed concrete by weight. In all of these downstream businesses, we supply virtually all of the required aggregates from our own operations.

 

Seasonality and cyclical nature of our business

 

Almost all our products are produced and consumed outdoors. Seasonal changes and other weather-related conditions can affect the production and sales volumes of our products. Therefore, the financial results for any quarter do not necessarily indicate the results expected for the year. Normally, the highest sales and earnings are in the third quarter and the lowest are in the first quarter. Furthermore, our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending, primarily in the private sector. The levels of construction spending are affected by changing interest rates and demographic and population fluctuations.

 

 

23

 


 

EXECUTIVE SUMMARY

 

Financial highlights for Third Quarter 2013

 

§

Net sales increased $87.6 million, or 13%, versus the prior year’s third quarter

§

Gross profit improved $32.1 million, or 25%, from the prior year

§

Each major product line realized growth in unit shipments from the prior year, due mostly to continued improvement in private construction

§

Aggregates shipments increased 9%

§

Volumes in ready-mixed concrete and cement increased 17% and 10%, respectively

§

Asphalt mix volumes increased 4%

§

Aggregates gross profit increased $24.9 million and gross profit margin as a percentage of segment revenues increased 1.3 percentage points (130 basis points)

§

Earnings from continuing operations were $42.2 million, or $0.32 per diluted share, versus $15.6 million or $0.12 per diluted share, in the prior year

§

EBITDA was $180.4 million, an increase of $38.6 million, or 27%, compared to the third quarter of last year

§

Results from the current year’s third quarter include a pretax gain of $9.2 million related to the sale of reclaimed real estate

§

Results from the prior year’s third quarter include a pretax charge of $4.3 million related to restructuring charges and exchange offer costs

 

Our third quarter results reflect the continued recovery of our markets and the benefits of our powerful earnings leverage. A 9% increase in aggregates volume helped drive a 20% increase in Aggregates segment gross profit. Cash gross profit per ton of aggregates increased to $4.83 per ton, our highest quarterly unit profitability in more than four years. Pricing continues to benefit from an improving demand outlook and we are realizing price improvements across most of our markets. Demand for our products continues to benefit from recovery in private construction activity, particularly residential construction, in many of our key markets. Growth in residential construction activity, and its traditional follow-on impact on private nonresidential construction, continues to underpin our expectations for future volume growth and earnings improvement.

 

In February 2012, our Board approved a Planned Asset Sales initiative with targeted net proceeds of approximately $500 million through the sale of non-core assets. To date, we have achieved $373.2 million of net proceeds including $204.6 million in the first nine months of 2013 as described in Note 16 to the condensed consolidated financial statements. The sales (actual and intended) are consistent with our strategic focus on building leading aggregates positions in markets with above-average long-term demand growth. The ultimate composition and timing of such transactions is difficult to project. The proceeds of these sales will be used to strengthen our balance sheet, unlock capital for more productive uses, improve our operating results and create value for shareholders.

 

We remain focused on our strategic initiatives to enhance our leading aggregates reserve positions in attractive markets. Year-to-date, we divested certain assets in lower margin, lower growth markets in the Midwest and added aggregates reserves and operations in attractive markets. Going forward, we will continue to look for opportunities to further enhance our strategic coast-to-coast footprint.

 

We have reduced debt $289.0 million in the last twelve months and we remain committed to strengthening our balance sheet, unlocking capital for more productive uses, improving our operating results and creating value for shareholders.

 

 

24

 


 

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

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

 

 

free cash flow

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30

 

in millions

2013 

 

 

2012 

 

Net cash used for operating activities

$        260.0 

 

 

$          93.8 

 

Purchases of property, plant & equipment

(117.3)

 

 

(49.5)

 

Free cash flow

$        142.7 

 

 

$          44.3 

 

 

 

cash gross profit

 

Cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization (DDA&A) to gross profit.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions, except per ton data

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Aggregates segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$        149.8 

 

 

$        124.9 

 

 

$        301.7 

 

 

$        270.8 

 

DDA&A

56.7 

 

 

59.6 

 

 

169.2 

 

 

183.7 

 

Aggregates segment cash gross profit

$        206.5 

 

 

$        184.5 

 

 

$        470.9 

 

 

$        454.5 

 

Unit shipments - tons

42.8 

 

 

39.4 

 

 

110.2 

 

 

107.6 

 

Aggregates segment cash gross profit per ton

$          4.83 

 

 

$          4.69 

 

 

$          4.27 

 

 

$          4.23 

 

Concrete segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$           (3.9)

 

 

$           (8.5)

 

 

$         (19.8)

 

 

$         (29.9)

 

DDA&A

8.4 

 

 

10.5 

 

 

24.5 

 

 

32.1 

 

Concrete segment cash gross profit

$            4.5 

 

 

$            2.0 

 

 

$            4.7 

 

 

$            2.2 

 

Asphalt Mix segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$          13.6 

 

 

$          10.9 

 

 

$          24.8 

 

 

$          15.5 

 

DDA&A

2.2 

 

 

2.1 

 

 

6.4 

 

 

6.6 

 

Asphalt Mix segment cash gross profit

$          15.8 

 

 

$          13.0 

 

 

$          31.2 

 

 

$          22.1 

 

Cement segment

 

 

 

 

 

 

 

 

 

 

 

Gross profit

$           (0.5)

 

 

$           (0.4)

 

 

$            2.8 

 

 

$           (1.6)

 

DDA&A

5.4 

 

 

5.8 

 

 

13.8 

 

 

13.5 

 

Cement segment cash gross profit

$            4.9 

 

 

$            5.4 

 

 

$          16.6 

 

 

$          11.9 

 

25

 


 

EBITDA and adjusted ebitda

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in millions

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Net earnings (loss)

$          41.4 

 

 

$          14.3 

 

 

$          15.3 

 

 

$         (56.1)

 

Provision for (benefit from) income taxes

10.8 

 

 

(11.0)

 

 

(21.9)

 

 

(67.1)

 

Interest expense, net

49.1 

 

 

53.0 

 

 

152.8 

 

 

159.0 

 

(Earnings) loss on discontinued operations, net of taxes

0.8 

 

 

1.4 

 

 

(4.6)

 

 

(2.3)

 

Depreciation, depletion, accretion and amortization

78.3 

 

 

84.1 

 

 

230.8 

 

 

253.3 

 

EBITDA

$        180.4 

 

 

$        141.8 

 

 

$        372.4 

 

 

$        286.8 

 

Gain on sale of real estate and businesses

$           (9.2)

 

 

$            0.0 

 

 

$         (35.4)

 

 

$         (18.3)

 

Restructuring charges

0.0 

 

 

3.0 

 

 

1.5 

 

 

9.0 

 

Exchange offer costs

0.0 

 

 

1.2 

 

 

0.0 

 

 

43.4 

 

Adjusted EBITDA

$        171.2 

 

 

$        146.0 

 

 

$        338.5 

 

 

$        320.9 

 

 

 

26

 


 

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 consist 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

 

 

 

 

September 30

 

in millions, except per share data

2013 

 

 

2012 

 

 

2013 

 

 

2012 

 

Net sales

$        775.2 

 

 

$        687.6 

 

 

$     1,975.8 

 

 

$     1,836.4 

 

Cost of goods sold

616.2 

 

 

560.7 

 

 

1,666.3 

 

 

1,581.6 

 

Gross profit

$        159.0 

 

 

$        126.9 

 

 

$        309.5 

 

 

$        254.8 

 

Operating earnings

$          99.8 

 

 

$          55.9 

 

 

$        136.6 

 

 

$          29.2 

 

Earnings (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

$          52.9 

 

 

$            4.6 

 

 

$         (11.2)

 

 

$       (125.6)

 

Earnings (loss) from continuing operations

$          42.2 

 

 

$          15.6 

 

 

$          10.7 

 

 

$         (58.4)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of taxes

(0.8)

 

 

(1.3)

 

 

4.6 

 

 

2.3 

 

Net earnings (loss)

$          41.4 

 

 

$          14.3 

 

 

$          15.3 

 

 

$         (56.1)

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$          0.32 

 

 

$          0.12 

 

 

$          0.08 

 

 

$         (0.45)

 

  Discontinued operations

0.00 

 

 

(0.01)

 

 

0.04 

 

 

0.02 

 

Basic net earnings (loss)

$          0.32 

 

 

$          0.11 

 

 

$          0.12 

 

 

$         (0.43)

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$          0.32 

 

 

$          0.12 

 

 

$          0.08 

 

 

$         (0.45)

 

  Discontinued operations

(0.01)

 

 

(0.01)

 

 

0.04 

 

 

0.02 

 

Basic net earnings (loss)

$          0.31 

 

 

$          0.11 

 

 

$          0.12 

 

 

$         (0.43)

 

EBITDA

$        180.4 

 

 

$        141.8 

 

 

$        372.4 

 

 

$        286.8 

 

Adjusted EBITDA

$        171.2 

 

 

$        146.0 

 

 

$        338.5 

 

 

$        320.9 

 

 

 

Third quarter 2013 Compared to third Quarter 2012

 

Third quarter 2013 net sales were $775.2 million, up 13% from the third quarter of 2012. Shipments and pricing, respectively, were up in all major products as follows: aggregates (+9% and +2%), ready-mixed concrete (+17% and +2%), asphalt mix (+4% and +0.2%) and cement (+10% and +5%).

 

Results for the third quarter of 2013 were net earnings of $41.4 million, or $0.31 per diluted share, compared to net earnings of $14.3 million, or $0.11 per diluted share, in the third quarter of 2012. Each period’s results were impacted by discrete items, as follows:

 

§

The third quarter of 2013 results include a pretax gain of $9.2 million related to the sale of reclaimed real estate

§

The third quarter of 2012 results include a pretax charge of $4.3 million related to restructuring charges and exchange offer costs

 

27

 


 

Continuing Operations — Changes in earnings from continuing operations before income taxes for the third quarter of 2013 versus the third quarter of 2012 are summarized below:

 

earnings from continuing operations before income taxes

 

 

 

 

 

 

 

 

in millions

 

 

Third quarter 2012

$        4.6 

 

Higher aggregates gross profit due to

 

 

  Higher selling prices

11.1 

 

  Higher volumes

21.4 

 

  Higher costs and other items

(7.6)

 

Higher concrete gross profit

4.6 

 

Higher asphalt mix gross profit

2.7 

 

Lower cement gross profit

(0.1)

 

Higher selling, administrative and general expense

(0.4)

 

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

7.3 

 

Lower restructuring charges

3.1 

 

Exchange offer costs - 2012

1.2 

 

Lower interest expense

3.9 

 

All other

1.1 

 

Third quarter 2013

$      52.9 

 

 

Aggregates segment gross profit was $149.8 million, a $24.9 million increase from the prior year. This earnings improvement was due to volume growth in virtually all our markets and broad-based pricing gains. Aggregates shipments increased 9% compared to the prior year. On a same-store basis, aggregates shipments increased 10%. Many markets realized double-digit volume growth including a number of our key markets. Strong private construction demand in Florida led to an increase in shipments of more than 35% versus last year’s third quarter. Shipments in Texas also benefited from stronger demand, particularly large industrial projects, increasing nearly 30% versus the prior year. Increased private construction activity also benefited aggregates shipments in other key markets. Arizona, California, Georgia and North Carolina each increased more than 14%.

 

In the third quarter, aggregates sales volumes exceeded production levels, lowering Aggregates segment gross profit approximately $6.4 million. Additionally, cost of sales increased $1.8 million due to increased freight and distribution costs resulting from higher growth in aggregates shipments from sales yards along the Gulf Coast. Our current inventory levels provide opportunity for higher production levels and greater efficiencies as demand continues to improve.

 

Concrete segment gross profit was a loss of $3.9 million, an improvement of $4.6 million from the third quarter of 2012. This improvement was the result of increased shipments and pricing in each of our markets.

 

Asphalt Mix segment gross profit of $13.6 million increased 24% increase from the prior year, benefiting from better materials margins and a 4% increase in shipments.

 

Cement segment gross profit was a loss of $0.5 million compared to a loss of $0.4 million in the prior year.

 

Selling, administrative and general (SAG) expenses of $65.9 million were up $0.4 million, or 1%, compared with the prior year.

 

Gain on sale of property, plant & equipment and businesses was $9.3 million in the third quarter of 2013 compared to $2.0 million in the third quarter of 2012. As detailed in Note 16 to the condensed consolidated financial statements, divestitures in the third quarter of 2013 accounted for a $9.2 million pretax gain while there were no divestitures in the third quarter of 2012.

 

The current quarter included no restructuring charges or exchange offer costs compared to $3.1 million and $1.2 million, respectively, in the third quarter of 2012. See Note 1 to the condensed consolidated financial statements for an explanation of these prior period costs.

 

We recorded an income tax provision from continuing operations of $10.8 million in the third quarter of 2013 compared to an income tax benefit from continuing operations of $11.0 million in the third quarter of 2012. In the third quarter of 2013, income taxes were calculated based on the year-to-date effective tax rate. In the third quarter of 2012, income taxes were calculated based on the estimated annual effective tax rate (EAETR). Both the year-to-date effective tax rate and the EAETR are discussed in Note 3 to the condensed consolidated financial statements. After applying the statutory rate to the

28

 


 

pretax earnings, the decrease in the income tax benefit (to a provision) mainly relates to the different methodologies used to calculate income taxes in the two periods.

 

Earnings from continuing operations were $0.32 per diluted share compared to $0.12 per diluted share in the third quarter of 2012.

 

Discontinued Operations — The third quarter pretax losses on discontinued operations were $1.3 million in 2013 and $2.3 million in 2012. The pretax losses primarily reflect charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. For additional details, see Note 2 to the condensed consolidated financial statements.

 

 

year-to-date September 30, 2013 Compared to year-to-date september 30, 2012

 

Net sales for the first nine months of 2013 were $1,975.8 million, an increase of 8% from the $1,836.4 million in the first nine months of 2012. Shipments were higher in aggregates (+2%), ready-mixed concrete (+13%) and cement (+14%) while asphalt mix was in line with the prior year. Pricing was higher in all major product lines except asphalt mix which was down 1%.

 

Results for the first nine months of 2013 were net earnings of $15.3 million, or $0.12 per diluted share, compared to a net loss of $56.1 million, or $0.43 per diluted share, in the first nine months of 2012. Gross profit increased $54.7 million reflecting improved profitability in all four segments. Each period’s results were impacted by discrete items, as follows:

 

§

The first nine months of 2013 include a pretax gain of $35.4 million related to the sale of reclaimed real estate and businesses and a $1.5 million charge for restructuring

§

The first nine months of 2012 results include a pretax charge of $43.3 million related to the unsolicited exchange offer, an $18.3 million gain related to the sale of real estate and mitigation credits, and $9.0 million of restructuring charges

 

Continuing Operations — Changes in earnings from continuing operations before income taxes for year-to-date September 30, 2013 versus year-to-date September 30, 2012 are summarized below:

 

earnings from continuing operations before income taxes

 

 

 

 

 

 

 

 

in millions

 

 

Year-to-date September 30, 2012

$    (125.6)

 

Higher aggregates gross profit due to

 

 

  Higher selling prices

38.5 

 

  Higher volumes

16.1 

 

  Higher costs and other items

(23.7)

 

Higher concrete gross profit

10.1 

 

Higher asphalt mix gross profit

9.3 

 

Higher cement gross profit

4.4 

 

Higher selling, administrative and general expenses

(3.1)

 

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

15.2 

 

Lower restructuring charges

7.5 

 

Exchange offer costs - 2012

43.3 

 

Lower interest expense

6.2 

 

All other

(9.4)

 

Year-to-date September 30, 2013

$      (11.2)

 

 

Gross profit for the Aggregates segment was $301.7 million for the first nine months of 2013 compared to $270.8 million in 2012. As noted in the table above, this $30.9 million increase in gross profit resulted from higher selling prices and volumes slightly offset by higher costs. Despite a challenging first half of the year due to wet weather, aggregates shipments were up 3% through the first nine months of 2013, excluding the effects of the divestiture of our Wisconsin aggregates operations as well as acquisitions completed earlier this year. This year-to-date growth in aggregates demand was driven by improved private construction activity, particularly in several of our key states, including Arizona, California, Florida, Georgia and Texas. Through the first nine months of the year, aggregates shipments in these five states combined were up more than 16%. These five states have accounted for more than one-third of all U.S. housing starts in the trailing twelve months ending

29

 


 

September and 80% percent of contract awards for all U.S. private nonresidential buildings, measured in square feet, during the same period.

 

Year-to-date September, aggregates sales volumes exceeded production levels, lowering Aggregates segment gross profit approximately $8.7 million.

 

The Concrete segment gross profit was a loss of $19.8 million, an improvement of $10.1 million from the prior year. Ready-mixed concrete shipments increased 13% from the prior year and pricing increased 1%.

 

Asphalt Mix segment gross profit of $24.8 million was $9.3 million above the first nine months of 2012. Lower liquid asphalt costs drove much of the positive variance.

 

Cement segment gross profit of $2.8 million was $4.4 million above the first nine months of 2012. Shipments and pricing were up 14% and 6%, respectively, from the prior year.

 

SAG expenses for the first nine months of 2013 were up $3.1 million, or 2%, from the prior year.

 

Gain on sale of property, plant & equipment and businesses was $36.9 million for the first nine months of 2013 compared to $21.7 million in the first nine months of 2012. As detailed in Note 16 to the condensed consolidated financial statements, divestitures accounted for $35.4 million of the 2013 pretax gain compared to $18.3 million of pretax gain for the first nine months of 2012.

 

For details of the restructuring charges of $1.5 million and $9.0 million in the first nine months of 2013 and 2012, respectively, see Note 1 to the condensed consolidated financial statements.

 

The $43.3 million of exchange offer costs in the prior year’s first nine months reflects legal, professional and other costs incurred in response to an unsolicited exchange offer. For additional details, see Note 1 to the condensed consolidated financial statements.

 

Net interest expense was $152.8 million in the first nine months of 2013 compared to $159.0 in comparable 2012. The decrease in interest costs resulted from intervening payments on current maturities of long term debt.

 

We recorded income tax benefits from continuing operations of $21.9 million for the nine months ended September 30, 2013, compared to $67.1 million for the nine months ended September 30, 2012. For the nine months ended September 30, 2013, income taxes were calculated based on the year-to-date effective tax rate. For the nine months ended September 30, 2012, income taxes were calculated based on the EAETR. Both the year-to-date effective tax rate and the EAETR are discussed in Note 3 to the condensed consolidated financial statements. After applying the statutory rate to the pretax losses, the decrease in the income tax benefit mainly relates to the different methodologies used to calculate income taxes in the two periods.

 

Results from continuing operations were earnings of $0.08 per diluted share compared to a loss of $0.45 per diluted share in the first nine months of 2012.

 

Discontinued Operations — Year-to-date September pretax earnings on discontinued operations were $7.7 million in 2013 and $3.9 million in 2012. The 2013 pretax earnings include an $11.7 million 5CP earn-out gain (net of transaction costs) while the 2012 earnings include a $10.2 million 5CP earn-out gain (net of transaction costs). These gains were partially offset by general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. For additional details, see Note 2 to the condensed consolidated financial statements.

 

 

 

30

 


 

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 financial resources 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

 

 

Cash

 

Included in our September 30, 2013 cash and cash equivalents balance of $245.8 million is $67.8 million of cash held at one of our foreign subsidiaries. The majority of this $67.8 million of cash relates to earnings prior to January 1, 2012 that are permanently reinvested offshore. Use of this permanently reinvested cash is limited to our foreign operations.

 

cash from operating activities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

September 30

 

in millions

2013 

 

 

2012 

 

Net earnings (loss)

$           15.3 

 

 

$          (56.1)

 

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

230.9 

 

 

253.4 

 

Net earnings before noncash deductions for DDA&A

$         246.2 

 

 

$         197.3 

 

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

(48.6)

 

 

(31.9)

 

Proceeds from sale of future production, net of transaction cost

153.1 

 

 

0.0 

 

Other operating cash flows, net

(90.7)

 

 

(71.6)

 

Net cash provided by operating activities

$         260.0 

 

 

$           93.8 

 

 

Net cash provided by operating activities of $260.0 million during the nine months ended September 30, 2013, increased $166.2 million compared to the same period of 2012 due primarily to the sale of future production. In September 2013, we sold a percentage of future production from aggregates reserves resulting in net cash proceeds of $153.1 million (see Note 4 to the condensed consolidated financial statements). Additionally, as noted in the table above, net earnings before noncash deductions for depreciation, depletion, accretion and amortization increased $48.9 million in the first nine months of 2013 compared with the same period of 2012.

 

31

 


 

cash flows from investing activities

 

Net cash used for investing activities of $140.7 million during the nine months ended September 30, 2013, increased $131.8 million compared to the prior year. This increase resulted largely from a $157.8 million increase in the purchase of property, plant & equipment and businesses partially offset by a $27.0 million increase in proceeds from the sale of property, plant & equipment and businesses. During the first nine months of 2013, we acquired three aggregates production facilities and four ready-mixed concrete facilities for approximately $90.0 million. In the same period, we sold five aggregates production facilities, one replacement reserve site and reclaimed land associated with a former site of a ready-mixed concrete facility for approximately $51.1 million. These transactions are consistent with our strategic focus on disposing non-core assets and building aggregates positions in markets with above average long-term demand growth.

 

cash flows from financing activities

 

Net cash used for financing activities of $149.0 million increased $151.4 million during the nine months ended September 30, 2013, compared to the same period of 2012. This increase in cash used for financing activities was primarily attributable to scheduled debt payments. During the first nine months of 2013, we made scheduled debt payments of $10.0 million in January to retire the 8.70% medium-term note and $140.4 million in June to retire the 6.30% notes.

 

 

debt

 

Certain debt measures are outlined below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

dollars in millions

2013 

 

 

2012 

 

 

2012 

 

Debt

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$            0.2 

 

 

$        150.6 

 

 

$        285.2 

 

Long-term debt

2,523.4 

 

 

2,526.4 

 

 

2,527.4 

 

Total debt

$     2,523.6 

 

 

$     2,677.0 

 

 

$     2,812.6 

 

Capital

 

 

 

 

 

 

 

 

Total debt

$     2,523.6 

 

 

$     2,677.0 

 

 

$     2,812.6 

 

Equity

3,862.9 

 

 

3,761.1 

 

 

3,767.2 

 

Total capital

$     6,386.5 

 

 

$     6,438.1 

 

 

$     6,579.8 

 

Total Debt as a Percentage of Total Capital

39.5% 

 

 

41.6% 

 

 

42.7% 

 

Weighted-average Effective Interest Rates

 

 

 

 

 

 

 

 

  Long-term debt

7.72% 

 

 

7.71% 

 

 

7.65% 

 

Fixed versus Floating Interest Rate Debt

 

 

 

 

 

 

 

 

  Fixed-rate debt

99.5% 

 

 

99.5% 

 

 

99.5% 

 

  Floating-rate debt

0.5% 

 

 

0.5% 

 

 

0.5% 

 

 

 

Scheduled debt payments during the first nine months of 2013 included $10.0 million in January to retire the 8.70% medium-term note and $140.4 million in June to retire the 6.30% notes.

 

Our $0.2 million of current maturities of long-term debt as of September 30, 2013 is due as follows:

 

 

 

 

 

 

 

 

 

Current

 

in millions

Maturities

 

Fourth quarter 2013

$
0.2 

 

First quarter 2014

0.0 

 

Second quarter 2014

0.0 

 

Third quarter 2014

0.0 

 

 

We expect to retire the current maturities using existing cash.

 

In March 2013, we proactively amended our bank line of credit to extend its term from December 15, 2016 to March 12, 2018 and to reduce its capacity from $600.0 million to $500.0 million. The line of credit 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 $500.0 million at any point in time. As of September 30, 2013, our eligible borrowing capacity was $435.3 million.

32

 


 

Utilization of the eligible borrowing capacity under our line of credit as of September 30, 2013:

 

§

none was drawn

§

$55.0 million 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 1.50% to 2.00% 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 LIBOR borrowings plus 0.125%.  As of September 30, 2013, the applicable margin for LIBOR based borrowing was 1.75%.

 

debt ratings

 

Our debt ratings and outlooks as of September 30, 2013 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rating/Outlook

 

Date

 

 

Description

Senior Secured Line of Credit (Short-term Debt)

 

 

 

Moody's

Ba2/negative

 

7/12/2012

 

2

downgraded from Ba1/new

Senior Unsecured (Long-term Debt) 1

 

 

 

 

 

Moody's

Ba3/negative

 

7/12/2012

 

2

downgraded from Ba2/negative

Standard & Poor's

BB/stable

 

6/11/2012

 

3

outlook changed from watch positive to stable

 

 

 

Not all of our long-term debt is rated.

Rating/outlook reaffirmed July 3, 2013.

Rating/outlook reaffirmed June 27, 2013.

 

 

Equity

 

Our common stock issuances are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2013 

 

 

2012 

 

 

2012 

 

Common stock shares at beginning of year,

 

 

 

 

 

 

 

 

 issued and outstanding

129,721 

 

 

129,245 

 

 

129,245 

 

Common Stock Issuances

 

 

 

 

 

 

 

 

Acquisitions

 

 

61 

 

 

61 

 

Share-based compensation plans

268 

 

 

415 

 

 

290 

 

Common stock shares at end of period,

 

 

 

 

 

 

 

 

 issued and outstanding

129,989 

 

 

129,721 

 

 

129,596 

 

 

During 2012, we issued 60,855 shares of common stock as a final payment for a  2011 business acquisition.

 

There were no shares held in treasury as of September 30, 2013, December 31, 2012 and September 30, 2012. There were 3,411,416 shares remaining under the current purchase authorization of the Board of Directors as of September 30, 2013.

 

 

 

33

 


 

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 8 to the condensed consolidated financial statements.

 

 

Cash Contractual Obligations

 

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

 

 

CRITICAL ACCOUNTING POLICIES

 

We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our Annual Report on Form 10-K for the year ended December 31, 2012 (Form 10-K).

 

We prepare these financial statements to conform with accounting principles generally accepted in the United States of America. These principles require us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. We base our estimates on historical experience, current conditions and various other assumptions we believe reasonable under existing circumstances and evaluate these estimates and judgments on an ongoing basis. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.

 

We believe that the accounting policies described in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of our Form 10-K require the most significant judgments and estimates used in the preparation of our financial statements, so we consider these to be our critical accounting policies.

 

As a result of increased uncertainties regarding recovery of our tax assets, we have expanded our disclosure surrounding deferred tax assets and liabilities in our critical accounting policy for income tax. We consider our policy on income taxes to be a critical accounting policy due to the significant level of estimates, assumptions and judgments and its potential impact on our consolidated financial statements. We have included below a description of our accounting policy for income taxes, which reflects the expanded disclosure surrounding our deferred tax assets and liabilities.

 

 

34

 


 

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. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.

 

Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. A summary of our deferred tax assets is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

On an annual basis, we perform a complete analysis of all forms of positive and negative evidence based on year end results. During each interim period, we update our annual analysis for significant changes in the positive and negative evidence.

 

At December 31, 2012, we identified the following forms of negative evidence:

 

§

we were in a cumulative loss position based on financial results for the trailing three years (our foreign operations were profitable during this period, but not to the extent to overcome the cumulative loss position)

§

certain of our deferred tax assets were carryforwards and had a relatively brief period before expiration (see table below)

§

significant levels of interest expense were forecasted related to our long-term debt

§

the aggregates industry had not fully recovered from the most recent economic downturn

 

Most positive evidence can be categorized into one of the four sources of taxable income sequentially. These are (from least to most subjective):

 

§

taxable income in prior years, if carryback is permitted under tax law (source one)

§

future reversals of existing temporary differences (source two)

§

tax planning strategies (source three)

§

future taxable income exclusive of reversing existing temporary differences and carryforwards (source four)

 

We have a financial model to quantify and analyze the four sources of taxable income. If a single source of taxable income is sufficient to eliminate the need for a valuation allowance, other sources do not need to be considered. However, if a valuation allowance is necessary after considering all four sources, we consider the weight of each source of taxable income, from least to most subjective, to determine the amount of valuation allowance to be recorded.

 

In prior years we exhausted all material forms of carryback potential (source one), and therefore, our analysis at December 31, 2012 focused on sources two, three and four. Our projection of the reversal of our existing temporary differences (source two) generated significant taxable income. This taxable income provided sufficient positive evidence to conclude that it was more likely than not that we will realize all of: (1) our deferred tax assets without expiration periods and (2) our federal net operating loss carryforward. However, this source of taxable income was not sufficient to project full utilization of our charitable contribution, foreign tax credit and state net operating loss carryforwards. The amount of these deferred tax asset carryforwards at December 31, 2012, along with their expiration periods is listed below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred

 

 

Expiration

 

in thousands

Tax Assets

 

 

Periods

 

Charitable contribution carryforwards

$        9,953 

 

 

2014 - 2017

 

Foreign tax credit carryforwards

22,409 

 

 

2018 - 2021

 

State net operating loss carryforwards

45,929 

 

 

2014 - 2032

 

 

35

 


 

To assess the realizability of these remaining deferred tax asset carryforwards, we looked to sources three and four of taxable income. In evaluating tax planning strategies (source three), we believe it would be both prudent and feasible, if necessary, to convert from LIFO to FIFO as our basis for valuing inventory for tax purposes. The financial model contemplated implementing this tax planning strategy during the year where it would be most beneficial in utilizing our remaining carryforwards.

 

Because we are in a trailing three-year cumulative loss position, we were prevented from considering future domestic taxable income (part of source four). However, our foreign operations have a long history of profitability, even during the most recent three years. Therefore, our financial model included future foreign taxable income (also part of source four), repatriated during the years where it would be most beneficial in utilizing our remaining carryforwards. Additionally, we ensured that our domestic cash needs were not impaired by the planned timing of such repatriation.

 

The taxable income generated from the third and fourth sources of taxable income was sufficient to project utilization of our charitable contribution and foreign tax credit carryforwards prior to their respective expiration periods. Therefore, based on this positive evidence, we determined that it was more likely than not that we will realize the benefit of these two deferred tax asset carryforwards.

 

Our analysis indicated that we should provide a valuation allowance of $38,837,000 against our state net operating loss deferred tax asset carryforward balance of $45,929,000. This was an increase of $9,080,000 from the 2011 valuation allowance.

 

Of the $38,837,000 valuation allowance, $36,712,000 related to an Alabama net operating loss deferred tax asset carryforward. The remaining valuation allowance of $2,125,000 related to other state net operating loss deferred tax asset carryforwards. Based on the following reasons, we do not believe it is more likely than not these carryforwards will be realized:

 

§

the required filing groups in many states are different from the federal filing group

§

certain states have short expiration periods or other limitations on the usage of a net operating loss

§

we no longer file in certain states for which we have net operating loss carryforwards

 

In the future, if we determine that realization is more likely than not for deferred tax assets with a valuation allowance, the related valuation allowance will be reduced and we will record a benefit to earnings. Conversely, if we determine that it is more likely than not that we will not be able to realize a portion of our deferred tax assets, we will increase the valuation allowance and record a charge 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.

 

 

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.

 

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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 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 included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2012. The deduction for statutory depletion does not necessarily change proportionately to changes in pretax earnings.

 

 

new Accounting standards

 

For a discussion of the accounting standards recently adopted or pending adoption and the affect such accounting changes will have on our results of operations, financial position or liquidity, see Note 17 to the condensed consolidated financial statements.

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FORWARD-LOOKING STATEMENTS

 

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

 

§

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

§

the effects of the sequestration on demand for our products in markets that may be subject to decreases in federal spending

§

changes in our effective tax rate

§

the increasing reliance on information technology infrastructure for our ticketing, procurement, financial statements and other processes can adversely affect 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 the 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

§

the potential impact of future legislation or regulations relating to climate change or greenhouse gas emissions or the definition of minerals

§

other assumptions, risks and uncertainties detailed from time to time in our periodic reports

 

All forward-looking statements are made as of the date of filing. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Investors are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented in our filings, and are advised to consult any of our future disclosures in filings made with the Securities and Exchange Commission and our press releases with regard to our business and consolidated financial position, results of operations and cash flows.

 

 

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INVESTOR information

 

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

 

§

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 (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

 

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.

 

 

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

MARKET RISK

 

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

 

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

 

At September 30, 2013, the estimated fair value of our long-term debt instruments including current maturities was $2,795.8 million compared to a book value of $2,523.6 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 $137.0 million.

 

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

 

 

ITEM 4

controls and procedures

 

 

disclosure controls and procedures

 

We maintain a system of controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. These disclosure controls and procedures (as defined in the Securities and Exchange Act of 1934 Rules 13a - 15(e) or 15d - 15(e)), include, without limitation, controls and procedures designed to ensure that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer, with the participation of other management officials, evaluated the effectiveness of the design and operation of the disclosure controls and procedures as of September 30, 2013. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

We are in the process of replacing our legacy information technology systems and have completed implementation of new financial reporting software, which is a major component of the replacement. In addition, we have substantially completed implementing a new quote to cash software system, which is another significant component of the replacement. The new information technology systems were a source for most of the information presented in this Quarterly Report on Form 10-Q. We are continuing to work towards full implementation of the new information technology systems.

 

No other changes were made to our internal controls over financial reporting or other factors that could materially affect these controls during the third quarter of 2013.

 

 

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part Ii   other information

ITEM 1

legal proceedings

 

 

Certain legal proceedings in which we are involved are discussed in Note 12 to the consolidated financial statements and Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2012, and in Note 8 to the condensed consolidated financial statements and Part II, Item 1 of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2013 and June 30, 2013. See Note 8 to the condensed consolidated financial statements of this Form 10-Q for a discussion of certain recent developments concerning our legal proceedings.

 

 

ITEM 1A

risk factors

 

 

There were no material changes to the risk factors disclosed in Item 1A of Part I in our Form 10-K for the year ended December 31, 2012.

 

 

ITEM 4

MINE SAfETY DISCLOSURES

 

 

The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this report.

 

 

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ITEM 6

exhibits

 

 

 

 

Exhibit 31(a)

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

Exhibit 31(b)

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

Exhibit 32(a)

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

Exhibit 32(b)

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

Exhibit 95

MSHA Citations and Litigation

Exhibit 101.INS

XBRL Instance Document

Exhibit 101.SCH

XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB

XBRL Taxonomy Extension Label Linkbase Document

Exhibit 101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

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SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

VULCAN MATERIALS COMPANY

 

 

 

 

 

Date       November 5, 2013

/s/ Ejaz A. Khan

Ejaz A. Khan

Vice President, Controller and Chief Information Officer

(Principal Accounting Officer)

 

 

 

 

 

Date       November 5, 2013

/s/ Daniel F. Sansone

Daniel F. Sansone

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

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