Attached files

file filename
EX-31 - EX-31 - Vulcan Materials COvmc-20140630xex31.htm
EX-32 - EX-32 - Vulcan Materials COvmc-20140630xex32.htm
EX-95 - EX-95 - Vulcan Materials COvmc-20140630xex95.htm
EXCEL - IDEA: XBRL DOCUMENT - Vulcan Materials COFinancial_Report.xls

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 June  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 June 30, 2014      
130,910,161

 

 

 


 

 

 

 

 

 

 

 

VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED JUNE  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

 

 

23

 

Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

38

 

Item 4.

Controls and Procedures

38

 

 

 

PART II

OTHER INFORMATION

 

 

Item 1.

Legal Proceedings

39

 

Item 1A.

Risk Factors

39

 

Item 4.

Mine Safety Disclosures

39

 

Item 6.

Exhibits

40

 

 

 

Signatures

 

 

41

 

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

June 30

 

 

December 31

 

 

June 30

 

in thousands, except per share data

2014 

 

 

2013 

 

 

2013 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$       227,684 

 

 

$       193,738 

 

 

$         86,979 

 

Restricted cash

62,087 

 

 

 

 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

439,938 

 

 

344,475 

 

 

410,021 

 

  Less: Allowance for doubtful accounts

(5,606)

 

 

(4,854)

 

 

(5,339)

 

   Accounts and notes receivable, net

434,332 

 

 

339,621 

 

 

404,682 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

260,111 

 

 

270,603 

 

 

266,489 

 

  Raw materials

20,458 

 

 

29,996 

 

 

29,863 

 

  Products in process

1,104 

 

 

6,613 

 

 

5,415 

 

  Operating supplies and other

28,041 

 

 

37,394 

 

 

38,720 

 

   Inventories

309,714 

 

 

344,606 

 

 

340,487 

 

Current deferred income taxes

40,858 

 

 

40,423 

 

 

39,275 

 

Prepaid expenses

27,309 

 

 

22,549 

 

 

27,300 

 

Assets held for sale

 

 

10,559 

 

 

12,926 

 

Total current assets

1,101,984 

 

 

951,496 

 

 

911,649 

 

Investments and long-term receivables

42,128 

 

 

42,387 

 

 

43,194 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

6,396,658 

 

 

6,933,602 

 

 

6,735,203 

 

  Reserve for depreciation, depletion & amortization

(3,494,896)

 

 

(3,621,585)

 

 

(3,519,862)

 

   Property, plant & equipment, net

2,901,762 

 

 

3,312,017 

 

 

3,215,341 

 

Goodwill

3,081,521 

 

 

3,081,521 

 

 

3,081,521 

 

Other intangible assets, net

633,442 

 

 

697,578 

 

 

698,471 

 

Other noncurrent assets

173,061 

 

 

174,144 

 

 

170,048 

 

Total assets

$    7,933,898 

 

 

$    8,259,143 

 

 

$    8,120,224 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

$              158 

 

 

$              170 

 

 

$              161 

 

Short-term debt

 

 

 

 

100,000 

 

Trade payables and accruals

178,239 

 

 

139,345 

 

 

128,142 

 

Other current liabilities

171,008 

 

 

159,620 

 

 

163,466 

 

Total current liabilities

349,405 

 

 

299,135 

 

 

391,769 

 

Long-term debt

2,006,379 

 

 

2,522,243 

 

 

2,524,420 

 

Noncurrent deferred income taxes

704,544 

 

 

701,075 

 

 

664,967 

 

Deferred revenue

217,589 

 

 

219,743 

 

 

73,068 

 

Other noncurrent liabilities

569,794 

 

 

578,841 

 

 

652,480 

 

Total liabilities

3,847,711 

 

 

4,321,037 

 

 

4,306,704 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Issued 130,910, 130,200 and 129,963 shares, respectively

130,910 

 

 

130,200 

 

 

129,963 

 

Capital in excess of par value

2,665,793 

 

 

2,611,703 

 

 

2,592,239 

 

Retained earnings

1,382,711 

 

 

1,295,834 

 

 

1,247,984 

 

Accumulated other comprehensive loss

(93,227)

 

 

(99,631)

 

 

(156,666)

 

Total equity

4,086,187 

 

 

3,938,106 

 

 

3,813,520 

 

Total liabilities and equity

$    7,933,898 

 

 

$    8,259,143 

 

 

$    8,120,224 

 

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

 

 

Six Months Ended

 

Unaudited

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands, except per share data

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Net sales

$       756,289 

 

 

$       696,078 

 

 

$    1,304,785 

 

 

$    1,200,632 

 

Delivery revenues

34,854 

 

 

42,655 

 

 

60,778 

 

 

76,263 

 

  Total revenues

791,143 

 

 

738,733 

 

 

1,365,563 

 

 

1,276,895 

 

Cost of goods sold

581,501 

 

 

563,183 

 

 

1,095,904 

 

 

1,050,082 

 

Delivery costs

34,854 

 

 

42,655 

 

 

60,778 

 

 

76,263 

 

  Cost of revenues

616,355 

 

 

605,838 

 

 

1,156,682 

 

 

1,126,345 

 

  Gross profit

174,788 

 

 

132,895 

 

 

208,881 

 

 

150,550 

 

Selling, administrative and general expenses

67,615 

 

 

64,902 

 

 

133,733 

 

 

129,557 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses, net

1,162 

 

 

23,410 

 

 

237,526 

 

 

27,520 

 

Restructuring charges

 

 

 

 

 

 

(1,509)

 

Other operating expense, net

(5,089)

 

 

(4,537)

 

 

(14,758)

 

 

(10,196)

 

  Operating earnings

103,246 

 

 

86,866 

 

 

297,916 

 

 

36,808 

 

Other nonoperating income, net

1,798 

 

 

286 

 

 

4,622 

 

 

2,658 

 

Interest expense, net

40,551 

 

 

50,873 

 

 

160,639 

 

 

103,623 

 

Earnings (loss) from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

64,493 

 

 

36,279 

 

 

141,899 

 

 

(64,157)

 

Provision for (benefit from) income taxes

17,982 

 

 

6,151 

 

 

40,882 

 

 

(32,666)

 

Earnings (loss) from continuing operations

46,511 

 

 

30,128 

 

 

101,017 

 

 

(31,491)

 

Earnings (loss) on discontinued operations, net of tax

(544)

 

 

(1,356)

 

 

(1,054)

 

 

5,427 

 

Net earnings (loss)

$         45,967 

 

 

$         28,772 

 

 

$         99,963 

 

 

$       (26,064)

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Reclassification adjustment for cash flow hedges

584 

 

 

835 

 

 

3,569 

 

 

1,689 

 

  Adjustment for funded status of benefit plans

 

 

60,299 

 

 

2,943 

 

 

60,299 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

1,115 

 

 

3,431 

 

 

(108)

 

 

6,863 

 

Other comprehensive income

1,699 

 

 

64,565 

 

 

6,404 

 

 

68,851 

 

Comprehensive income

$         47,666 

 

 

$         93,337 

 

 

$       106,367 

 

 

$         42,787 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.35 

 

 

$             0.23 

 

 

$             0.77 

 

 

$           (0.24)

 

  Discontinued operations

0.00 

 

 

(0.01)

 

 

(0.01)

 

 

0.04 

 

  Net earnings (loss)

$             0.35 

 

 

$             0.22 

 

 

$             0.76 

 

 

$           (0.20)

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.35 

 

 

$             0.23 

 

 

$             0.76 

 

 

$           (0.24)

 

  Discontinued operations

0.00 

 

 

(0.01)

 

 

(0.01)

 

 

0.04 

 

  Net earnings (loss)

$             0.35 

 

 

$             0.22 

 

 

$             0.75 

 

 

$           (0.20)

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

131,149 

 

 

130,250 

 

 

130,980 

 

 

130,219 

 

  Assuming dilution

132,876 

 

 

131,332 

 

 

132,468 

 

 

130,219 

 

Cash dividends per share of common stock

$             0.05 

 

 

$             0.01 

 

 

$             0.10 

 

 

$             0.02 

 

Depreciation, depletion, accretion and amortization

$         68,323 

 

 

$         76,961 

 

 

$       137,702 

 

 

$       152,557 

 

Effective tax rate from continuing operations

27.9% 

 

 

17.0% 

 

 

28.8% 

 

 

50.9% 

 

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

 

 

3

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Unaudited

 

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

Operating Activities

 

 

 

 

 

Net earnings (loss)

$         99,963 

 

 

$       (26,064)

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

137,702 

 

 

152,557 

 

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

(237,526)

 

 

(40,550)

 

  Contributions to pension plans

(2,791)

 

 

(2,308)

 

  Share-based compensation

11,928 

 

 

11,102 

 

  Excess tax benefits from share-based compensation

(3,242)

 

 

(888)

 

  Deferred tax provision (benefit)

24 

 

 

(31,581)

 

  Cost of debt purchase

72,949 

 

 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(59,893)

 

 

(108,295)

 

Other, net

3,786 

 

 

682 

 

Net cash provided by (used for) operating activities

22,900 

 

 

(45,345)

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(116,312)

 

 

(60,041)

 

Proceeds from sale of property, plant & equipment

20,454 

 

 

2,517 

 

Proceeds from sale of businesses, net of transaction costs

719,089 

 

 

52,908 

 

Payment for businesses acquired, net of acquired cash

(207)

 

 

(89,951)

 

Increase in restricted cash

(62,087)

 

 

 

Other, net

 

 

 

Net cash provided by (used for) investing activities

560,937 

 

 

(94,565)

 

Financing Activities

 

 

 

 

 

Proceeds from line of credit

 

 

111,000 

 

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

(579,694)

 

 

(161,477)

 

Proceeds from issuance of common stock

27,539 

 

 

 

Dividends paid

(13,074)

 

 

(2,598)

 

Proceeds from exercise of stock options

12,095 

 

 

3,598 

 

Excess tax benefits from share-based compensation

3,242 

 

 

888 

 

Other, net

 

 

 

Net cash used for financing activities

$     (549,891)

 

 

$       (48,589)

 

Net increase (decrease) in cash and cash equivalents

33,946 

 

 

(188,499)

 

Cash and cash equivalents at beginning of year

193,738 

 

 

275,478 

 

Cash and cash equivalents at end of period

$       227,684 

 

 

$         86,979 

 

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 six month periods ended June 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.

 

RESTRICTED CASH

 

Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.

 

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 half of 2013, we incurred $1,509,000 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.

 

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

 

Six Months Ended

 

 

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

131,149 

 

 

130,250 

 

 

130,980 

 

 

130,219 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock options/SOSARs

663 

 

 

442 

 

 

677 

 

 

 

  Other stock compensation plans

1,064 

 

 

640 

 

 

811 

 

 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

132,876 

 

 

131,332 

 

 

132,468 

 

 

130,219 

 

 

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: six months ended June 30, 20131,113,000.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Antidilutive common stock equivalents

2,356 

 

 

2,899 

 

 

2,356 

 

 

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. As of June  30, 2013, we had accrued $1,303,000 for the 2013 transaction bonus which was subsequently paid in 2013.

 

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

 

 

Six Months Ended

 

 

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax loss

$          (897)

 

 

$       (2,221)

 

 

$       (1,739)

 

 

$       (2,761)

 

Gain on disposal, net of transaction bonus

 

 

 

 

 

 

11,728 

 

Income tax (provision) benefit

353 

 

 

865 

 

 

685 

 

 

(3,540)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of income taxes

$          (544)

 

 

$       (1,356)

 

 

$       (1,054)

 

 

$        5,427 

 

 

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 second quarter of 2014, income taxes were calculated based on the EAETR. In the second 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 $17,982,000 in the second quarter of 2014 compared to $6,151,000 in the second 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 $40,882,000 for the six months ended June 30, 2014 compared to an income tax benefit from continuing operations of $32,666,000 for the six months ended June 30, 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 second 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 year-end 2014, we project a valuation allowance of $54,855,000 against our state net operating loss deferred tax asset carryforwards; an increase of $8,575,000 from the prior year-end. Of the $54,855,000 valuation allowance, $53,433,000 relates to our Alabama net operating loss carryforward. The remaining valuation allowance of $1,422,000 relates to other state net operating loss carryforwards. 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 proceeds.

 

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 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; 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 net sales and gross margin related to the VPPs is outlined as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Amortization of deferred revenue

$        1,357 

 

 

$           324 

 

 

$        2,341 

 

 

$           576 

 

Purchaser's proceeds from sale of production

(4,137)

 

 

(1,069)

 

 

(7,081)

 

 

(1,898)

 

Decrease to net sales and gross margin

$       (2,780)

 

 

$          (745)

 

 

$       (4,740)

 

 

$       (1,322)

 

 

Based on expected aggregates sales from the specified quarries, we anticipate recognizing a range of $4,800,000 to $5,800,000 of deferred revenue during the 12-month period ending June 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

 

June 30

 

 

December 31

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       14,365 

 

 

$       15,255 

 

 

$       13,689 

 

 Equities

14,052 

 

 

12,828 

 

 

10,638 

 

Total

$       28,417 

 

 

$       28,083 

 

 

$       24,327 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2

 

June 30

 

 

December 31

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Common/collective trust funds

$        1,349 

 

 

$        1,244 

 

 

$        1,507 

 

Total

$        1,349 

 

 

$        1,244 

 

 

$        1,507 

 

 

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 $3,428,000 and $1,093,000 for the six months ended June  30, 2014 and 2013, respectively. The portions of the net gains related to investments still held by the Rabbi Trusts at June  30, 2014 and 2013 were $1,480,000 and $941,000,  respectively.

 

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.

 

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 June 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

 

 

Six Months Ended

 

 

Location on

 

June 30

 

 

June 30

 

in thousands

Statement

 

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$          (969)

 

 

$       (1,386)

 

 

$       (5,903)

 

 

$       (2,801)

 

 

The 2014 loss reclassified from AOCI 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 June  30, 2015, we estimate that $4,073,000 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 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

 

 

Six Months Ended

 

 

 

 

June 30

 

 

June 30

 

in thousands

 

 

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

Deferred Gain on Settlement

 

 

 

 

 

 

 

 

 

 

 

 

Amortized to earnings as a reduction

 

 

 

 

 

 

 

 

 

 

 

 

 to interest expense

 

$           484 

 

 

$        1,074 

 

 

$        9,678 

 

 

$        2,131 

 

 

10

 


 

The amortized deferred gain for the six months ended June 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30

 

 

December 31

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2013 

 

Short-term Debt

 

 

 

 

 

 

 

 

Bank line of credit

$                  0 

 

 

$                0 

 

 

$     100,000 

 

Total short-term debt

$                  0 

 

 

$                0 

 

 

$     100,000 

 

Long-term Debt

 

 

 

 

 

 

 

 

10.125% notes due 2015 1

$       151,446 

 

 

$     151,897 

 

 

$     152,317 

 

6.50% notes due 2016 2

127,445 

 

 

511,627 

 

 

513,369 

 

6.40% notes due 2017 3

218,582 

 

 

349,907 

 

 

349,897 

 

7.00% notes due 2018 4

399,794 

 

 

399,772 

 

 

399,751 

 

10.375% notes due 2018 5

248,934 

 

 

248,843 

 

 

248,757 

 

7.50% notes due 2021 6

600,000 

 

 

600,000 

 

 

600,000 

 

7.15% notes due 2037 7

239,566 

 

 

239,561 

 

 

239,557 

 

Medium-term notes

6,000 

 

 

6,000 

 

 

6,000 

 

Industrial revenue bonds

14,000 

 

 

14,000 

 

 

14,000 

 

Other notes

770 

 

 

806 

 

 

933 

 

Total long-term debt including current maturities

$    2,006,537 

 

 

$  2,522,413 

 

 

$  2,524,581 

 

Less current maturities

158 

 

 

170 

 

 

161 

 

Total long-term debt

$    2,006,379 

 

 

$  2,522,243 

 

 

$  2,524,420 

 

Estimated fair value of long-term debt

$    2,312,178 

 

 

$  2,820,399 

 

 

$  2,756,202 

 

 

 

 

 

Includes an increase for the unamortized deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: June  30, 2014 — $1,587 thousand, December 31, 2013 — $2,082 thousand and June 30, 2013 — $2,543 thousand. Additionally, includes decreases for unamortized discounts, as follows: June  30, 2014 — $141 thousand, December 31, 2013 — $185 thousand and June 30, 2013 — $226 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: June  30, 2014 — $2,444 thousand, December 31, 2013 — $11,627 thousand and June  30, 2013 — $13,369 thousand. The effective interest rate for these notes is 6.00%.

Includes decreases for unamortized discounts, as follows: June  30, 2014 — $51 thousand, December 31, 2013 — $93 thousand and June 30, 2013 — $103 thousand. The effective interest rate for these notes is 7.41%.

Includes decreases for unamortized discounts, as follows: June 30, 2014 — $206 thousand, December 31, 2013 — $228 thousand and June 30, 2013 — $249 thousand. The effective interest rate for these notes is 7.87%.  

Includes decreases for unamortized discounts, as follows: June 30, 2014 — $1,066 thousand, December 31, 2013 — $1,157 thousand and June 30, 2013 — $1,243 thousand. The effective interest rate for these notes is 10.63%.

The effective interest rate for these notes is 7.75%.

Includes decreases for unamortized discounts, as follows: June 30, 2014 — $622 thousand, December 31, 2013 — $627 thousand and June 30, 2013 — $631 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 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.

 

There were no material scheduled debt payments during the first six 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

11

 


 

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 six month period ended June 30, 2014.

 

Additionally, in  March 2014, we amended our $500,000,000 line of credit to, among other things, extend the term from March 2018 to March 2019, eliminate the borrowing capacity governor of eligible accounts receivable and eligible inventory, and provide for the line of credit to become unsecured upon achievement of certain credit metrics and/or credit ratings. Until such metrics/ratings are achieved, the line of credit is secured by accounts receivable and inventory. As of June 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 the lower of 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 total debt to EBITDA ratio. Borrowings on our line of credit are classified as short-term due to our intent to repay any borrowings within twelve months. As of June 30, 2014, the applicable margin for LIBOR based borrowing was 2.00%.

 

  

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 margin (ranges from 1.50% to 2.25%) applicable to LIBOR based borrowings under the line of credit, plus 0.175%. Our standby letters of credit as of June 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.

 

12

 


 

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).  As an interim step related to the 2007 AOC, on June 18, 2012 Vulcan and 69 other companies voluntarily entered into an Administrative Settlement Agreement and Order on Consent with the EPA for remediation actions focused at River Mile 10.9. 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 the remediation action at River Mile 10.9.  This remedial action is now complete, and we will not report on it further.

 

Separately, 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 remains open. After the comments are received, the EPA will issue its final record of decision, probably 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.

 

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. The plaintiffs in the Federal court class action and Texas Brine have recently announced a proposed settlement for $48.1 million. This proposed settlement is still subject to certain court procedures, including notice to the class, before it can be approved and finalized. We understand that Vulcan will be named as a released party in the settlement agreement, although Texas Brine and its insurers are not themselves releasing Vulcan from their claims for contribution and indemnity against Vulcan.

 

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.

 

 

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 six month periods ended June 30, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands

2014 

 

 

2013 

 

 

2014 

 

 

2013 

 

ARO Operating Costs

 

 

 

 

 

 

 

 

 

 

 

Accretion

$        2,913 

 

 

$        2,817 

 

 

$        5,852 

 

 

$        4,823 

 

Depreciation

983 

 

 

830 

 

 

1,980 

 

 

1,609 

 

Total

$        3,896 

 

 

$        3,647 

 

 

$        7,832 

 

 

$        6,432 

 

 

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: