20140930 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

(Mark One)

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


For the quarterly period ended September 30, 2014


OR

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 No

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

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


Accelerated filer 


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


Smaller reporting company


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


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, 2014      
131,703,076

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED SEPTEMBER  30, 2014

 

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

 

 

25

 

Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

43

 

Item 4.

Controls and Procedures

43

 

 

 

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

44

 

Item 1A.

Risk Factors

44

 

Item 4.

Mine Safety Disclosures

44

 

Item 6.

Exhibits

45

 

 

 

Signatures

 

 

46

 

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

 

 

 

1

 


 

 

 

 

part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unaudited, except for December 31

September 30

 

 

December 31

 

 

September 30

 

in thousands, except per share data

2014 

 

 

2013 

 

 

2013 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$         91,868 

 

 

$       193,738 

 

 

$       245,813 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

485,176 

 

 

344,475 

 

 

450,642 

 

  Less: Allowance for doubtful accounts

(5,428)

 

 

(4,854)

 

 

(5,412)

 

   Accounts and notes receivable, net

479,748 

 

 

339,621 

 

 

445,230 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

254,931 

 

 

270,603 

 

 

255,047 

 

  Raw materials

22,987 

 

 

29,996 

 

 

29,480 

 

  Products in process

1,331 

 

 

6,613 

 

 

6,385 

 

  Operating supplies and other

27,335 

 

 

37,394 

 

 

37,267 

 

   Inventories

306,584 

 

 

344,606 

 

 

328,179 

 

Current deferred income taxes

41,745 

 

 

40,423 

 

 

39,326 

 

Prepaid expenses

34,673 

 

 

22,549 

 

 

31,854 

 

Assets held for sale

 

 

10,559 

 

 

10,559 

 

Total current assets

954,618 

 

 

951,496 

 

 

1,100,961 

 

Investments and long-term receivables

42,117 

 

 

42,387 

 

 

43,275 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

6,608,342 

 

 

6,933,602 

 

 

6,792,470 

 

  Reserve for depreciation, depletion & amortization

(3,539,772)

 

 

(3,621,585)

 

 

(3,578,010)

 

   Property, plant & equipment, net

3,068,570 

 

 

3,312,017 

 

 

3,214,460 

 

Goodwill

3,095,317 

 

 

3,081,521 

 

 

3,081,521 

 

Other intangible assets, net

758,863 

 

 

697,578 

 

 

697,655 

 

Other noncurrent assets

172,053 

 

 

174,144 

 

 

172,184 

 

Total assets

$    8,091,538 

 

 

$    8,259,143 

 

 

$    8,310,056 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$              145 

 

 

$              170 

 

 

$              163 

 

Trade payables and accruals

167,837 

 

 

139,345 

 

 

154,451 

 

Other current liabilities

196,830 

 

 

159,620 

 

 

204,029 

 

Total current liabilities

364,812 

 

 

299,135 

 

 

358,643 

 

Long-term debt

2,005,968 

 

 

2,522,243 

 

 

2,523,389 

 

Noncurrent deferred income taxes

733,613 

 

 

701,075 

 

 

673,135 

 

Deferred revenue

216,205 

 

 

219,743 

 

 

225,863 

 

Other noncurrent liabilities

569,841 

 

 

578,841 

 

 

666,115 

 

Total liabilities

3,890,439 

 

 

4,321,037 

 

 

4,447,145 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Issued 131,703,  130,200 and 129,989 shares, respectively

131,703 

 

 

130,200 

 

 

129,989 

 

Capital in excess of par value

2,719,169 

 

 

2,611,703 

 

 

2,598,744 

 

Retained earnings

1,441,742 

 

 

1,295,834 

 

 

1,288,054 

 

Accumulated other comprehensive loss

(91,515)

 

 

(99,631)

 

 

(153,876)

 

Total equity

4,201,099 

 

 

3,938,106 

 

 

3,862,911 

 

Total liabilities and equity

$    8,091,538 

 

 

$    8,259,143 

 

 

$    8,310,056 

 

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

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Total revenues

$       873,579 

 

 

$       813,568 

 

 

$    2,239,142 

 

 

$    2,090,463 

 

Cost of revenues

664,537 

 

 

654,585 

 

 

1,821,220 

 

 

1,780,930 

 

  Gross profit

209,042 

 

 

158,983 

 

 

417,922 

 

 

309,533 

 

Selling, administrative and general expenses

66,074 

 

 

65,854 

 

 

199,808 

 

 

195,411 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses, net

1,002 

 

 

9,350 

 

 

238,527 

 

 

36,869 

 

Restructuring charges

(750)

 

 

 

 

(750)

 

 

(1,509)

 

Other operating expense, net

(2,889)

 

 

(2,712)

 

 

(17,645)

 

 

(12,907)

 

  Operating earnings

140,331 

 

 

99,767 

 

 

438,246 

 

 

136,575 

 

Other nonoperating income (expense), net

(593)

 

 

2,310 

 

 

4,030 

 

 

4,968 

 

Interest expense, net

40,891 

 

 

49,134 

 

 

201,531 

 

 

152,757 

 

Earnings (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

98,847 

 

 

52,943 

 

 

240,745 

 

 

(11,214)

 

Provision for (benefit from) income taxes

31,066 

 

 

10,793 

 

 

71,947 

 

 

(21,874)

 

Earnings from continuing operations

67,781 

 

 

42,150 

 

 

168,798 

 

 

10,660 

 

Earnings (loss) on discontinued operations, net of tax

(842)

 

 

(787)

 

 

(1,896)

 

 

4,640 

 

Net earnings

$         66,939 

 

 

$         41,363 

 

 

$       166,902 

 

 

$         15,300 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Reclassification adjustment for cash flow hedges

598 

 

 

679 

 

 

4,167 

 

 

2,368 

 

  Adjustment for funded status of benefit plans

 

 

 

 

2,943 

 

 

60,299 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

1,114 

 

 

2,111 

 

 

1,006 

 

 

8,974 

 

Other comprehensive income

1,712 

 

 

2,790 

 

 

8,116 

 

 

71,641 

 

Comprehensive income

$         68,651 

 

 

$         44,153 

 

 

$       175,018 

 

 

$         86,941 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.51 

 

 

$             0.32 

 

 

$             1.29 

 

 

$             0.08 

 

  Discontinued operations

0.00 

 

 

0.00 

 

 

(0.02)

 

 

0.04 

 

  Net earnings

$             0.51 

 

 

$             0.32 

 

 

$             1.27 

 

 

$             0.12 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.51 

 

 

$             0.32 

 

 

$             1.27 

 

 

$             0.08 

 

  Discontinued operations

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

0.04 

 

  Net earnings

$             0.50 

 

 

$             0.31 

 

 

$             1.26 

 

 

$             0.12 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

131,797 

 

 

130,266 

 

 

131,256 

 

 

130,234 

 

  Assuming dilution

133,369 

 

 

131,320 

 

 

132,759 

 

 

131,368 

 

Cash dividends per share of common stock

$             0.06 

 

 

$             0.01 

 

 

$             0.16 

 

 

$             0.03 

 

Depreciation, depletion, accretion and amortization

$         71,157 

 

 

$         78,320 

 

 

$       208,858 

 

 

$       230,877 

 

Effective tax rate from continuing operations

31.4% 

 

 

20.4% 

 

 

29.9% 

 

 

195.1% 

 

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

2014 

 

 

2013 

 

Operating Activities

 

 

 

 

 

Net earnings

$       166,902 

 

 

$         15,300 

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

208,858 

 

 

230,877 

 

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

(238,527)

 

 

(48,597)

 

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

 

 

153,095 

 

  Contributions to pension plans

(4,115)

 

 

(3,535)

 

  Share-based compensation

18,425 

 

 

16,789 

 

  Excess tax benefits from share-based compensation

(3,375)

 

 

(896)

 

  Deferred tax provision (benefit)

13,158 

 

 

(25,862)

 

  Cost of debt purchase

72,949 

 

 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(89,888)

 

 

(78,947)

 

Other, net

5,339 

 

 

1,788 

 

Net cash provided by operating activities

$       149,726 

 

 

$       260,012 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(169,220)

 

 

(117,310)

 

Proceeds from sale of property, plant & equipment

21,320 

 

 

14,974 

 

Proceeds from sale of businesses, net of transaction costs

719,089 

 

 

51,604 

 

Payment for businesses acquired, net of acquired cash

(268,604)

 

 

(89,951)

 

Other, net

 

 

 

Net cash provided by (used for) investing activities

$       302,585 

 

 

$     (140,681)

 

Financing Activities

 

 

 

 

 

Proceeds from line of credit

70,000 

 

 

156,000 

 

Payment of current maturities, long-term debt and line of credit

(649,711)

 

 

(306,493)

 

Proceeds from issuance of common stock

30,620 

 

 

 

Dividends paid

(20,973)

 

 

(3,890)

 

Proceeds from exercise of stock options

12,513 

 

 

4,491 

 

Excess tax benefits from share-based compensation

3,375 

 

 

896 

 

Other, net

(5)

 

 

 

Net cash used for financing activities

$     (554,181)

 

 

$     (148,996)

 

Net decrease in cash and cash equivalents

(101,870)

 

 

(29,665)

 

Cash and cash equivalents at beginning of year

193,738 

 

 

275,478 

 

Cash and cash equivalents at end of period

$         91,868 

 

 

$       245,813 

 

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 and a major producer of asphalt mix and ready-mixed concrete.

 

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, 2013 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, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. 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 2014 presentation.

 

REVENUE

 

Total revenues include sales of products to customers, net of any discounts and taxes, and freight and delivery revenues billed to customers. Related freight and delivery costs are included in cost of revenues. Freight and delivery revenues included in total revenues are as follows: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Product sales

$     795,096 

 

 

$     746,392 

 

 

$  2,034,521 

 

 

$  1,915,032 

 

Freight and delivery revenues

78,483 

 

 

67,176 

 

 

204,621 

 

 

175,431 

 

Total revenues

$     873,579 

 

 

$     813,568 

 

 

$  2,239,142 

 

 

$  2,090,463 

 

 

RESTRUCTURING CHARGES

 

In 2014, we announced changes to our executive management team, and a new divisional organization structure that will be effective January 1, 2015. This new structure enables us to pursue growth and profitability while further leveraging the actions we undertook in 2012 as noted below. During the three and nine months ended September 30, 2014, we incurred $750,000 of severance costs related to these initiatives. We are currently unable to estimate the amount of future related 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, we incurred $1,509,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan. We did not incur any additional charges in 2014 and do not anticipate any future material charges related to this Profit Enhancement Plan.

 

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

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

131,797 

 

 

130,266 

 

 

131,256 

 

 

130,234 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock options/SOSARs

661 

 

 

405 

 

 

671 

 

 

449 

 

  Other stock compensation plans

911 

 

 

649 

 

 

832 

 

 

685 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

133,369 

 

 

131,320 

 

 

132,759 

 

 

131,368 

 

 

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. 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

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Antidilutive common stock equivalents

2,355 

 

 

2,899 

 

 

2,355 

 

 

2,899 

 

 

 

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. In March 2013, we received the final earn-out payment in the amount of $13,031,000. We were liable for a cash transaction bonus payable annually to certain former key Chemicals employees based on the prior years earn-out results. During the first nine months of 2013, the transaction bonus payment totaled $1,303,000.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax loss

$       (1,393)

 

 

$       (1,302)

 

 

$       (3,132)

 

 

$       (4,063)

 

Gain on disposal, net of transaction bonus

 

 

 

 

 

 

11,728 

 

Income tax (provision) benefit

551 

 

 

515 

 

 

1,236 

 

 

(3,025)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of income taxes

$          (842)

 

 

$          (787)

 

 

$       (1,896)

 

 

$        4,640 

 

 

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.

 

 

6

 


 

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 between book and tax accounting such as percentage depletion, and tax planning alternatives available in the various jurisdictions in which we operate. For interim financial reporting, 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 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 for the full year are 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 using the year-to-date effective tax rate. This method results in an income tax provision based solely on the year-to-date pretax book earnings as adjusted for permanent differences on a pro rata basis. In the third quarter of 2014, income taxes were calculated based on the EAETR. In the third quarter of 2013, income taxes were calculated based on the year-to-date effective tax rate.

 

We recorded an income tax provision from continuing operations of $31,066,000 in the third quarter of 2014 compared to $10,793,000 in the third quarter of 2013. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.

 

We recorded an income tax provision from continuing operations of $71,947,000 for the first nine months of 2014 compared to an income tax benefit from continuing operations of $21,874,000 for the first nine months of 2013. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.

 

We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. 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 tax benefits.

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement’s carrying amounts of assets and liabilities and the amounts used for income tax purposes. 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, 2013.

 

On an annual basis, we perform a comprehensive 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 2014 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 has been recorded. For 2014, we project a valuation allowance of $55,051,000 against our state net operating loss deferred tax asset carryforwards; an increase of $8,771,000 from the prior year-end. Of the $55,051,000 valuation allowance, $53,680,000 relates to our Alabama net operating loss carryforward. This change in the valuation allowance is reflected as a component of our income tax provision.

 

 

7

 


 

Note 4: deferred revenue

 

We have entered into two transactions (September 2013 and December 2012) through which we sold a percentage of the future production from aggregates reserves at eight quarries (seven owned and one leased). These sales were structured as volumetric production payments (VPPs). We received net cash proceeds of $153,282,000 and $73,644,000 for the 2013 and 2012 transactions, respectively. These proceeds were recorded as deferred revenue on the balance sheet and are amortized on a unit-of-sales basis to revenue over the terms of the VPPs. Concurrently, we entered into marketing agreements with the purchaser through which we are designated the exclusive sales agent for the purchaser’s percentage of future production. Acting as the purchaser’s agent, our consolidated total revenues exclude these sales.

 

The common key terms of both VPP transactions are:

 

§

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

§

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

§

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 the aforementioned marketing agreement

§

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

§

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; 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

 

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; 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

 

The impact to our total revenues and gross profit related to the VPPs is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Amortization of deferred revenue

$        1,384 

 

 

$           300 

 

 

$        3,725 

 

 

$           876 

 

Purchaser's proceeds from sale of production

(4,322)

 

 

(1,014)

 

 

(11,404)

 

 

(2,911)

 

Decrease to total revenues and gross profit

$       (2,938)

 

 

$          (714)

 

 

$       (7,679)

 

 

$       (2,035)

 

 

The balance of deferred revenue related to these VPP transactions is $221,205,000 at September 30, 2014. Based on expected aggregates sales from the specified quarries, we anticipate recognizing a range of $5,100,000 to $6,100,000 of deferred revenue during the 12-month period ending September 30, 2015.

 

 

 

8

 


 

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

2014 

 

 

2013 

 

 

2013 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       14,986 

 

 

$       15,255 

 

 

$       14,371 

 

 Equities

12,838 

 

 

12,828 

 

 

11,688 

 

Total

$       27,824 

 

 

$       28,083 

 

 

$       26,059 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Common/collective trust funds

$        1,367 

 

 

$        1,244 

 

 

$        1,365 

 

Total

$        1,367 

 

 

$        1,244 

 

 

$        1,365 

 

 

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).

 

Net gains of the Rabbi Trust investments were $2,571,000 and $2,620,000 for the nine months ended September 30, 2014 and 2013, respectively. The portions of the net gains related to investments still held by the Rabbi Trusts at September 30, 2014 and 2013 were $369,000 and $2,468,000,  respectively.

 

The carrying values of our cash equivalents, restricted cash, 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.

 

There were no assets or liabilities subject to fair value measurement on a nonrecurring basis in 2013. Assets that were subject to fair value measurement on a nonrecurring basis in 2014 are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014

 

 

 

 

 

Impairment

 

in thousands

Level 2

 

 

Charges

 

Fair Value Nonrecurring

 

 

 

 

 

Property, plant & equipment

$        2,280 

 

 

$        2,987 

 

Total

$        2,280 

 

 

$        2,987 

 

 

We recorded a $2,987,000 loss on impairment of long-lived assets in the first quarter of 2014 reducing the carrying value of these assets to their estimated fair value of $2,280,000. Fair value was estimated using a market approach (observed transactions involving comparable assets in similar locations).

 

 

9

 


 

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

 

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$          (989)

 

 

$       (1,127)

 

 

$       (6,892)

 

 

$       (3,928)

 

 

The loss reclassified from AOCI for the nine months ended September 30, 2014 includes the acceleration of a proportional amount of the deferred loss in the amount of $3,762,000 referable to the debt purchase as disclosed in Note 7.

 

For the 12-month period ending September  30, 2015, we estimate that $4,153,000 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 London Interbank Offered Rate (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 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

 

 

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Deferred Gain on Settlement

 

 

 

 

 

 

 

 

 

 

 

 

Amortized to earnings as a reduction

 

 

 

 

 

 

 

 

 

 

 

 

 to interest expense

 

$           493 

 

 

$        1,093 

 

 

$      10,171 

 

 

$        3,223 

 

 

 

10

 


 

The amortized deferred gain for the nine months ended September 30, 2014 includes the acceleration of a proportional amount of the deferred gain in the amount of $8,032,000 referable to the debt purchase as disclosed in Note 7.

 

 

Note 7: Debt

 

Debt is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Long-term Debt

 

 

 

 

 

 

 

 

10.125% notes due 2015 1

$        151,212 

 

 

$      151,897 

 

 

$      152,110 

 

6.50% notes due 2016 2

127,209 

 

 

511,627 

 

 

512,505 

 

6.40% notes due 2017 3

218,585 

 

 

349,907 

 

 

349,902 

 

7.00% notes due 2018 4

399,805 

 

 

399,772 

 

 

399,761 

 

10.375% notes due 2018 5

248,981 

 

 

248,843 

 

 

248,799 

 

7.50% notes due 2021 6

600,000 

 

 

600,000 

 

 

600,000 

 

7.15% notes due 2037 7

239,568 

 

 

239,561 

 

 

239,559 

 

Medium-term note 8

6,000 

 

 

6,000 

 

 

6,000 

 

Industrial revenue bond 9

14,000 

 

 

14,000 

 

 

14,000 

 

Other notes

753 

 

 

806 

 

 

916 

 

Total long-term debt including current maturities

$     2,006,113 

 

 

$   2,522,413 

 

 

$   2,523,552 

 

Less current maturities

145 

 

 

170 

 

 

163 

 

Total long-term debt

$     2,005,968 

 

 

$   2,522,243 

 

 

$   2,523,389 

 

Estimated fair value of long-term debt

$     2,259,218 

 

 

$   2,820,399 

 

 

$   2,795,661 

 

 

 

 

 

Includes an increase for the unamortized deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: September  30, 2014 — $1,330 thousand, December 31, 2013 — $2,082 thousand and September 30, 2013 — $2,315 thousand. Additionally, includes decreases for unamortized discounts, as follows: September  30, 2014 — $118 thousand, December 31, 2013 — $185 thousand and September 30, 2013 — $206 thousand. The effective interest rate for these notes is 9.58%.

Includes an increase for the unamortized deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: September  30, 2014 — $2,208 thousand, December 31, 2013 — $11,627 thousand and September  30, 2013 — $12,505 thousand. The effective interest rate for these notes is 6.00%.

Includes decreases for unamortized discounts, as follows: September 30, 2014 — $48 thousand, December 31, 2013 — $93 thousand and September 30, 2013 — $98 thousand. The effective interest rate for these notes is 7.41%.

Includes decreases for unamortized discounts, as follows: September 30, 2014 — $195 thousand, December 31, 2013 — $228 thousand and September 30, 2013 — $239 thousand. The effective interest rate for these notes is 7.87%.  

Includes decreases for unamortized discounts, as follows: September 30, 2014$1,019 thousand, December 31, 2013 — $1,157 thousand and September 30, 2013 — $1,201 thousand. The effective interest rate for these notes is 10.625%.

The effective interest rate for these notes is 7.75%.

Includes decreases for unamortized discounts, as follows: September 30, 2014 — $620 thousand, December 31, 2013 — $627 thousand and September 30, 2013 — $629 thousand. The effective interest rate for these notes is 8.05%.

This note matures in 2021, has a stated interest rate of 8.85% and an effective interest rate of 8.88%.

This variable-rate tax-exempt bond matures in November 2022 and is backed by a standby letter of credit.

 

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 their 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 comprehensively revalued since those dates.

 

11

 


 

Our long-term debt is unsecured and essentially all such debt agreements contain customary investment-grade type covenants that primarily limit the amount of secured debt we may incur without ratably securing the outstanding debt.  Our debt may be redeemed prior to maturity at the greater of par value and the make-whole value plus accrued and unpaid interest.

 

There were no material scheduled debt payments during the first nine months of 2014. However, as described below, we purchased $506,366,000 principal amount of outstanding debt through a tender offer in the first quarter of 2014. Scheduled debt payments during 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.

 

In March 2014, we purchased $506,366,000 principal amount of outstanding debt through a tender offer as follows: $374,999,000 of 6.50% notes due in 2016 and $131,367,000 of 6.40% notes due in 2017. This debt purchase was funded by the sale of our cement and concrete businesses in the Florida area as described in Note 16. The March 2014 debt purchases cost $579,659,000, including a $71,829,000 premium above the principal amount of the notes and transaction costs of $1,464,000.  The premium primarily reflects the trading prices of the notes relative to par prior to the tender offer commencement. Additionally, we recognized a net benefit of $344,000 associated with the acceleration of a proportional amount of unamortized discounts, deferred gains, deferred financing costs and amounts accumulated in OCI. The combined charge of $72,949,000 is presented in the accompanying Condensed Consolidated Statement of Comprehensive Income as a component of interest expense for the nine month period ended September 30, 2014.

 

Additionally, in  March 2014, we amended our $500,000,000 line of credit to, among other items, extend the term from March 12, 2018 to March 25, 2019. The line of credit is secured by accounts receivable and inventory, but will become unsecured upon the achievement of certain credit metrics and/or credit ratings. The line of credit also contains customary negative and financial covenants for a secured facility.

 

The negative covenants primarily limit our ability to: (1) incur secured debt, (2) make investments, (3) execute acquisitions and divestitures, and (4) make restricted payments, including dividends. Such limitations currently do not impact our ability to execute our strategic, operating and financial plans, and become less restrictive when the line of credit becomes unsecured as described above.

 

The line of credit contains two financial covenants: (1) a maximum ratio of debt to EBITDA that declines over time to 3.5:1 and (2) a minimum ratio of EBITDA to net cash interest expense that increases over time to 3.0:1.

 

As of September 30, 2014, we were in compliance with all of our long-term debt and line of credit covenants.

 

Borrowings on our line of credit are classified as short-term due to our intent to repay any borrowings within twelve months. As of September 30, 2014, our available borrowing capacity was $446,732,000. Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to LIBOR plus a margin ranging from 1.50% to 2.25%, or an alternative rate derived from the lender’s prime rate, based on our ratio of debt to EBITDA.  As of September 30, 2014, the applicable margin for LIBOR based borrowing was 1.75%.

 

Standby letters of credit issued under the line of credit reduce availability and are charged a fee equal to the margin for LIBOR based borrowings plus 0.175%. We also pay a commitment fee on the daily average unused amount of the line of credit. This commitment fee ranges from 0.25% to 0.40% based on our ratio of debt to EBITDA. Once the line of credit becomes unsecured, both the LIBOR margin range for borrowings and the commitment fee range will decline.

 

 

 

12

 


 

Note 8: Commitments and Contingencies

 

STANDBY LETTERS OF CREDIT

 

We provide, in the normal course of business, certain third party beneficiaries standby letters of credit to support our obligations to pay or perform according to the requirements of an underlying agreement. Such letters of credit typically have an initial term of one year, typically renew automatically, and can only be modified or cancelled with the approval of the beneficiary. All of our standby letters of credit are issued by banks that participate in our $500,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of September 30, 2014 are summarized by purpose in the table below:

 

 

 

 

 

 

 

 

in thousands

 

 

Standby Letters of Credit

 

 

Risk management insurance

$       32,839 

 

Industrial revenue bond

14,230 

 

Reclamation/restoration requirements

6,199 

 

Total

$       53,268 

 

 

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.

 

lower passaic river matter

 

§

Lower Passaic River Study Area (Superfund Site) — The Lower Passaic River Study Area is part of the Diamond Shamrock Superfund Site in New Jersey. Vulcan and approximately 70 other companies are parties 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 Passaic River (River). On April 11, 2014, the EPA issued a proposed Focused Feasibility Study (FFS) that calls for a bank-to-bank dredging remedy for the lower 8 miles of the River. The EPA estimates that the cost of implementing this proposal is approximately $950 million to $1.73 billion. The period for public comment on the proposed FFS is closed.  It is anticipated that the EPA will issue its final record of decision sometime in 2015.

 

At this time, we cannot reasonably estimate our ultimate liability related to this matter because the RI/FS and FFS are not final. Furthermore, the AOC does not obligate us to fund or perform the remedial action contemplated by either the RI/FS or the FFS. Vulcan formerly owned a chemicals operation near River Mile 0.1, which was sold in 1974. The Company has found no evidence that its former chemicals operation contributed any of the primary contaminants of concern to the River. Therefore, neither the ultimate remedial approach and associated costs (or range of costs), nor the parties who will participate in funding the remediation and their respective allocations, have been determined.

 

Based on the facts available at this time, we believe our liability related to any remedial actions will be immaterial.

 

13

 


 

OTHER LITIGATION

 

§

TEXAS BRINE MATTER — During the operation of its former Chemicals Division, Vulcan was the lessee under a salt lease from 1976 – 2005 in an underground salt dome formation in Assumption Parish, Louisiana. The Texas Brine Company operated this salt mine for the account of Vulcan. Vulcan sold its Chemicals Division in 2005 and assigned the lease to the purchaser, and Vulcan has had no association with the leased premises or Texas Brine Company since that time. In August 2012, a sinkhole developed near the salt dome and numerous lawsuits were filed in state court in Assumption Parish, Louisiana. Other lawsuits, including class action litigation, were also filed in August 2012 in federal court in the Eastern District of Louisiana in New Orleans. Certain of the plaintiffs and Texas Brine settled  the Federal Court class action for approximately $48.1 million. This settlement has been approved by the court, and the settlement process is now subject to the terms of the court’s order and settlement agreement.  Vulcan is named as a released party in the settlement agreement along with the other released parties, including  Texas Brine,  and its insurers. Texas Brine and its insurers did not, however, release Vulcan from any alleged claims, including claims for contribution and indemnity.

 

There are numerous defendants to the litigation in state and federal court. Vulcan was first brought into the litigation as a third-party defendant in August 2013 by the Texas Brine Company. Vulcan has since been added as a direct and third-party defendant by other parties, including a direct claim by the State of Louisiana. The damages alleged in the litigation range from individual plaintiffs’ claims for property damage, to the State of Louisiana’s claim for response costs, to claims for alleged physical damages to oil pipelines, to various alleged business interruption claims, and to claims for indemnity and contribution from Texas Brine. It is alleged that the sinkhole was caused, in whole or in part, by Vulcan’s negligent actions or failure to act. It is also alleged that Vulcan breached the salt lease, as well as an operating agreement with Texas Brine. Vulcan denies any liability in this matter and will vigorously defend the litigation. We cannot reasonably estimate any liability related to this matter.

 

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.

 

 

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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

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

ARO Operating Costs

 

 

 

 

 

 

 

 

 

 

 

Accretion

$        2,892 

 

 

$        2,908 

 

 

$        8,745 

 

 

$        7,731 

 

Depreciation

1,080 

 

 

886 

 

 

3,060 

 

 

2,495 

 

Total

$        3,972 

 

 

$        3,794 

 

 

$      11,805 

 

 

$      10,226 

 

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30

 

 

September 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Asset Retirement Obligations

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     225,117 

 

 

$     222,851 

 

 

$     228,234 

 

 

$     150,072 

 

  Liabilities incurred

3,604 

 

 

3,524 

 

 

3,604 

 

 

69,111 

 

  Liabilities settled

(7,684)

 

 

(2,328)

 

 

(20,527)

 

 

(8,839)

 

  Accretion expense

2,892 

 

 

2,908 

 

 

8,745 

 

 

7,731 

 

  Revisions up (down), net