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EX-31 - EX-31 - Vulcan Materials COvmc-20150630xex31.htm
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EX-95 - EX-95 - Vulcan Materials COvmc-20150630xex95.htm

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, 2015


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 July  31, 2015      

133,186,371

 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED JUNE 30, 2015

 

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

 

 

24

 

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

June 30

 

 

December 31

 

 

June 30

 

in thousands, except per share data

2015 

 

 

2014 

 

 

2014 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$         74,736 

 

 

$       141,273 

 

 

$       227,684 

 

Restricted cash

 

 

 

 

62,087 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

495,781 

 

 

378,947 

 

 

439,938 

 

  Less: Allowance for doubtful accounts

(5,370)

 

 

(5,105)

 

 

(5,606)

 

   Accounts and notes receivable, net

490,411 

 

 

373,842 

 

 

434,332 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

292,932 

 

 

275,172 

 

 

260,111 

 

  Raw materials

21,610 

 

 

19,741 

 

 

20,458 

 

  Products in process

1,461 

 

 

1,250 

 

 

1,104 

 

  Operating supplies and other

25,825 

 

 

25,641 

 

 

28,041 

 

   Inventories

341,828 

 

 

321,804 

 

 

309,714 

 

Current deferred income taxes

39,562 

 

 

39,726 

 

 

40,858 

 

Prepaid expenses

75,663 

 

 

28,640 

 

 

27,309 

 

Assets held for sale

 

 

15,184 

 

 

 

Total current assets

1,022,200 

 

 

920,469 

 

 

1,101,984 

 

Investments and long-term receivables

41,603 

 

 

41,650 

 

 

42,128 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

6,752,916 

 

 

6,608,842 

 

 

6,396,658 

 

  Reserve for depreciation, depletion & amortization

(3,637,392)

 

 

(3,537,212)

 

 

(3,494,896)

 

   Property, plant & equipment, net

3,115,524 

 

 

3,071,630 

 

 

2,901,762 

 

Goodwill

3,094,824 

 

 

3,094,824 

 

 

3,081,521 

 

Other intangible assets, net

767,995 

 

 

758,243 

 

 

633,442 

 

Other noncurrent assets

153,737 

 

 

154,281 

 

 

150,001 

 

Total assets

$    8,195,883 

 

 

$    8,041,097 

 

 

$    7,910,838 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

14,124 

 

 

150,137 

 

 

158 

 

Short-term debt (line of credit)

138,500 

 

 

 

 

 

Trade payables and accruals

190,904 

 

 

145,148 

 

 

178,239 

 

Other current liabilities

163,112 

 

 

156,073 

 

 

171,008 

 

Liabilities of assets held for sale

 

 

520 

 

 

 

Total current liabilities

506,640 

 

 

451,878 

 

 

349,405 

 

Long-term debt

1,893,737 

 

 

1,834,642 

 

 

1,983,319 

 

Noncurrent deferred income taxes

686,171 

 

 

691,137 

 

 

704,544 

 

Deferred revenue

211,429 

 

 

213,968 

 

 

217,589 

 

Other noncurrent liabilities

670,949 

 

 

672,773 

 

 

569,794 

 

Total liabilities

$    3,968,926 

 

 

$    3,864,398 

 

 

$    3,824,651 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Issued 132,984, 131,907 and 130,910 shares, respectively

132,984 

 

 

131,907 

 

 

130,910 

 

Capital in excess of par value

2,791,232 

 

 

2,734,661 

 

 

2,665,793 

 

Retained earnings

1,453,752 

 

 

1,471,845 

 

 

1,382,711 

 

Accumulated other comprehensive loss

(151,011)

 

 

(161,714)

 

 

(93,227)

 

Total equity

$    4,226,957 

 

 

$    4,176,699 

 

 

$    4,086,187 

 

Total liabilities and equity

$    8,195,883 

 

 

$    8,041,097 

 

 

$    7,910,838 

 

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

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Total revenues

$       895,143 

 

 

$       791,143 

 

 

$    1,526,436 

 

 

$    1,365,563 

 

Cost of revenues

660,694 

 

 

616,355 

 

 

1,214,122 

 

 

1,156,682 

 

  Gross profit

234,449 

 

 

174,788 

 

 

312,314 

 

 

208,881 

 

Selling, administrative and general expenses

69,197 

 

 

67,615 

 

 

135,960 

 

 

133,733 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses, net

249 

 

 

1,162 

 

 

6,624 

 

 

237,526 

 

Restructuring charges

(1,280)

 

 

 

 

(4,098)

 

 

 

Other operating expense, net

(10,445)

 

 

(5,089)

 

 

(14,346)

 

 

(14,758)

 

  Operating earnings

153,776 

 

 

103,246 

 

 

164,534 

 

 

297,916 

 

Other nonoperating income (expense), net

(439)

 

 

1,798 

 

 

542 

 

 

4,622 

 

Interest expense, net

83,651 

 

 

40,551 

 

 

146,132 

 

 

160,639 

 

Earnings from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

69,686 

 

 

64,493 

 

 

18,944 

 

 

141,899 

 

Provision for income taxes

19,867 

 

 

17,982 

 

 

5,791 

 

 

40,882 

 

Earnings from continuing operations

49,819 

 

 

46,511 

 

 

13,153 

 

 

101,017 

 

Loss on discontinued operations, net of tax

(1,657)

 

 

(544)

 

 

(4,669)

 

 

(1,054)

 

Net earnings

$         48,162 

 

 

$         45,967 

 

 

$           8,484 

 

 

$         99,963 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Reclassification adjustment for cash flow hedges

3,077 

 

 

584 

 

 

5,325 

 

 

3,569 

 

  Adjustment for funded status of benefit plans

 

 

 

 

 

 

2,943 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

2,697 

 

 

1,115 

 

 

5,378 

 

 

(108)

 

Other comprehensive income

5,774 

 

 

1,699 

 

 

10,703 

 

 

6,404 

 

Comprehensive income

$         53,936 

 

 

$         47,666 

 

 

$         19,187 

 

 

$       106,367 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.37 

 

 

$             0.35 

 

 

$             0.10 

 

 

$             0.77 

 

  Discontinued operations

(0.01)

 

 

0.00 

 

 

(0.04)

 

 

(0.01)

 

  Net earnings

$             0.36 

 

 

$             0.35 

 

 

$             0.06 

 

 

$             0.76 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.37 

 

 

$             0.35 

 

 

$             0.10 

 

 

$             0.76 

 

  Discontinued operations

(0.01)

 

 

0.00 

 

 

(0.04)

 

 

(0.01)

 

  Net earnings

$             0.36 

 

 

$             0.35 

 

 

$             0.06 

 

 

$             0.75 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

133,103 

 

 

131,149 

 

 

132,882 

 

 

130,980 

 

  Assuming dilution

135,234 

 

 

132,876 

 

 

134,689 

 

 

132,468 

 

Cash dividends per share of common stock

$             0.10 

 

 

$             0.05 

 

 

$             0.20 

 

 

$             0.10 

 

Depreciation, depletion, accretion and amortization

$         68,384 

 

 

$         68,323 

 

 

$       135,108 

 

 

$       137,702 

 

Effective tax rate from continuing operations

28.5% 

 

 

27.9% 

 

 

30.6% 

 

 

28.8% 

 

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

2015 

 

 

2014 

 

Operating Activities

 

 

 

 

 

Net earnings

$          8,484 

 

 

$        99,963 

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

135,108 

 

 

137,702 

 

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

(6,624)

 

 

(237,526)

 

  Contributions to pension plans

(2,822)

 

 

(2,791)

 

  Share-based compensation

9,679 

 

 

11,928 

 

  Excess tax benefits from share-based compensation

(11,457)

 

 

(3,242)

 

  Deferred tax provision (benefit)

(11,656)

 

 

24 

 

  Cost of debt purchase

67,075 

 

 

72,949 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(109,790)

 

 

(59,893)

 

Other, net

(13,360)

 

 

3,786 

 

Net cash provided by operating activities

$        64,637 

 

 

$        22,900 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(148,721)

 

 

(116,312)

 

Proceeds from sale of property, plant & equipment

3,419 

 

 

20,454 

 

Proceeds from sale of businesses, net of transaction costs

 

 

719,089 

 

Payment for businesses acquired, net of acquired cash

(21,387)

 

 

(207)

 

Increase in restricted cash

 

 

(62,087)

 

Other, net

(334)

 

 

 

Net cash provided by (used for) investing activities

$    (167,023)

 

 

$      560,937 

 

Financing Activities

 

 

 

 

 

Proceeds from line of credit

284,000 

 

 

 

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

(676,445)

 

 

(579,694)

 

Proceeds from issuance of long-term debt

400,000 

 

 

 

Debt and line of credit issuance costs

(7,382)

 

 

 

Proceeds from issuance of common stock

 

 

27,539 

 

Dividends paid

(26,549)

 

 

(13,074)

 

Proceeds from exercise of stock options

50,769 

 

 

12,095 

 

Excess tax benefits from share-based compensation

11,457 

 

 

3,242 

 

Other, net

(1)

 

 

 

Net cash provided by (used for) financing activities

$        35,849 

 

 

$    (549,891)

 

Net increase (decrease) in cash and cash equivalents

(66,537)

 

 

33,946 

 

Cash and cash equivalents at beginning of year

141,273 

 

 

193,738 

 

Cash and cash equivalents at end of period

$        74,736 

 

 

$      227,684 

 

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, 2014 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, 2015 are not necessarily indicative of the results that may be expected for the year ended December 31, 2015. 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 2015 presentation. During the quarter ended June 30, 2015, we early adopted Accounting Standards Update (ASU) No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” resulting in adjustments to our prior financial statements. See Note 17 for additional information.

 

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 2014, we announced changes to our executive management team, and a new divisional organization structure that was effective January 1, 2015. During the three and six months ended June 30, 2015, we incurred $1,280,000 and $4,098,000, respectively, of costs related to these initiatives. Future related charges for these initiatives are estimated to be less than $2,000,000.

 

5

 


 

EARNINGS PER SHARE (EPS)

 

Earnings per share are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30

 

 

June 30

 

in thousands

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

133,103 

 

 

131,149 

 

 

132,882 

 

 

130,980 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock options/SOSARs

991 

 

 

663 

 

 

996 

 

 

677 

 

  Other stock compensation plans

1,140 

 

 

1,064 

 

 

811 

 

 

811 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

135,234 

 

 

132,876 

 

 

134,689 

 

 

132,468 

 

 

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. There were no excluded shares for the periods presented.

 

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

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Antidilutive common stock equivalents

556 

 

 

2,356 

 

 

556 

 

 

2,356 

 

 

 

Note 2: Discontinued Operations

 

In 2005, we sold substantially all the assets of our Chemicals business to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. The financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income for all periods presented. There were no 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

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax loss

$       (2,671)

 

 

$          (897)

 

 

$       (7,653)

 

 

$       (1,739)

 

Income tax benefit

1,014 

 

 

353 

 

 

2,984 

 

 

685 

 

Loss on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of income taxes

$       (1,657)

 

 

$          (544)

 

 

$       (4,669)

 

 

$       (1,054)

 

 

The 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 quarters of 2015 and 2014, income taxes were calculated based on the EAETR.

 

We recorded an income tax provision from continuing operations of $19,867,000 in the second quarter of 2015 compared to an income tax provision from continuing operations of $17,982,000 in the second quarter of 2014. The change in our income tax provision 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 $5,791,000 for the six months ended June 30, 2015 compared to an income tax provision from continuing operations of $40,882,000 for the six months ended June 30, 2014. The change in our income tax provision for the year resulted largely from applying the statutory rate to the decrease in our pretax book earnings.

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement 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.

 

Based on our second quarter 2015 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 2015, we currently project a valuation allowance of $60,920,000 against our state net operating loss carryforwards, an increase of $4,053,000 from the prior year end. This change in the valuation allowance is reflected as a component of our income tax provision.

 

Of the $60,920,000 valuation allowance, $59,781,000 relates to our Alabama net operating loss carryforward. During the second quarter of 2015, we restructured our legal entities. This restructuring, among other expected benefits, may allow for utilization of some or all of our Alabama net operating loss carryforward prior to its expiration. At this time, based on the weight of all available positive and negative evidence, we have concluded that it is more likely than not that the deferred tax asset will not be realized. Each quarter, we will reassess the positive and negative evidence to determine the likelihood of utilizing the Alabama net operating loss carryforward, and therefore, the appropriate amount of the valuation allowance.

 

We recognize a tax benefit associated with a tax position when, in our judgment, it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more likely than not recognition threshold, we measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. A liability is established for the unrecognized portion of any tax benefit. Our liability for unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation.

 

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, 2014.

 

 

 

7

 


 

Note 4: deferred revenue

 

We 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 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 to be 10.5% (approximately 15 million tons); the actual percentage may vary

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30

 

 

June 30

 

in thousands

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Deferred Revenue

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     218,987 

 

 

$     223,946 

 

 

$     219,968 

 

 

$     224,743 

 

 Cash received and revenue deferred

 

 

 

 

 

 

187 

 

 Amortization of deferred revenue

(1,558)

 

 

(1,357)

 

 

(2,539)

 

 

(2,341)

 

Balance at end of period

$     217,429 

 

 

$     222,589 

 

 

$     217,429 

 

 

$     222,589 

 

 

Based on expected aggregates sales from the specified quarries, we anticipate recognizing an estimated $6,000,000 of deferred revenue (reflected in other current liabilities in our 2015 Condensed Consolidated Balance Sheet) during the 12-month period ending June 30, 2016.

 

 

 

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

2015 

 

 

2014 

 

 

2014 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       14,488 

 

 

$       15,532 

 

 

$       14,365 

 

 Equities

12,274 

 

 

11,248 

 

 

14,052 

 

Total

$       26,762 

 

 

$       26,780 

 

 

$       28,417 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 2

 

June 30

 

 

December 31

 

 

June 30

 

in thousands

2015 

 

 

2014 

 

 

2014 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Common/collective trust funds

$        1,355 

 

 

$        1,415 

 

 

$        1,349 

 

Total

$        1,355 

 

 

$        1,415 

 

 

$        1,349 

 

 

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 trading gains of the Rabbi Trust investments were $184,000 and $3,428,000 for the six months ended June 30, 2015 and 2014, respectively. The portions of the net trading gains related to investments still held by the Rabbi Trusts at June 30, 2015 and 2014 were $22,000 and $1,480,000, respectively.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period ending June 30, 2015

 

 

Period ending June 30, 2014

 

 

 

 

 

Impairment

 

 

 

 

 

Impairment

 

in thousands

Level 2 

 

 

Charges

 

 

Level 2

 

 

Charges

 

Fair Value Nonrecurring

 

 

 

 

 

 

 

 

 

 

 

Property, plant & equipment, net

$              0 

 

 

$       2,176 

 

 

$       2,280 

 

 

$       2,987 

 

Other intangible assets, net

 

 

2,858 

 

 

 

 

 

Other assets

 

 

156 

 

 

 

 

 

Total

$              0 

 

 

$       5,190 

 

 

$       2,280 

 

 

$       2,987 

 

 

9

 


 

We recorded $5,190,000 and $2,987,000 of losses on impairment of long-lived assets for the six months ended June 30, 2015 and 2014, respectively, reducing the carrying value of these assets to their estimated fair values of $0 and $2,280,000. Fair value was estimated using a market approach (observed transactions involving comparable assets in similar locations).

 

 

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

 

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$       (5,094)

 

 

$          (969)

 

 

$       (8,815)

 

 

$       (5,903)

 

 

The loss reclassified from AOCI for the six months ended June 30, 2015 and 2014 includes the acceleration of a proportional amount of the deferred loss in the amount of $7,208,000 and $3,762,000, respectively, referable to the debt purchases as disclosed in Note 7.

 

For the 12-month period ending June 30, 2016, we estimate that $2,008,000 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.

 

10

 


 

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

 

 

2015 

 

 

2014 

 

 

2015 

 

 

2014 

 

Deferred Gain on Settlement

 

 

 

 

 

 

 

 

 

 

 

 

Amortized to earnings as a reduction

 

 

 

 

 

 

 

 

 

 

 

 

 to interest expense

 

$        2,000 

 

 

$           484 

 

 

$        2,513 

 

 

$        9,678 

 

 

The amortized deferred gain for the six months ended June 30, 2015 and 2014 includes the acceleration of a proportional amount of the deferred gain in the amount of $1,642,000 and $8,032,000, respectively, referable to the debt purchases as disclosed in Note 7.

 

 

Note 7: Debt

 

Debt is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effective

 

June 30

 

 

December 31

 

 

June 30

 

in thousands

Interest Rate

 

2015 

 

 

2014 

 

 

2014 

 

Short-term Debt

 

 

 

 

 

 

 

 

 

 

Bank line of credit (expires 2020) 1

1.75% 

 

$        138,500 

 

 

$                0 

 

 

$                0 

 

Total short-term debt

 

 

$        138,500 

 

 

$                0 

 

 

$                0 

 

Long-term Debt

 

 

 

 

 

 

 

 

 

 

10.125% notes due 2015 2

9.575% 

 

$        150,000 

 

 

$     150,000 

 

 

$     150,000 

 

6.50% notes due 2016

n/a

 

 

 

125,001 

 

 

125,001 

 

6.40% notes due 2017

n/a

 

 

 

218,633 

 

 

218,633 

 

7.00% notes due 2018

7.87% 

 

272,512 

 

 

400,000 

 

 

400,000 

 

10.375% notes due 2018

10.625% 

 

250,000 

 

 

250,000 

 

 

250,000 

 

7.50% notes due 2021

7.75% 

 

600,000 

 

 

600,000 

 

 

600,000 

 

8.85% notes due 2021

8.88% 

 

6,000 

 

 

6,000 

 

 

6,000 

 

Industrial revenue bond due 2022 3

0.14% 

 

14,000 

 

 

14,000 

 

 

14,000 

 

4.50% notes due 2025

4.65% 

 

400,000 

 

 

 

 

 

7.15% notes due 2037

8.05% 

 

240,188 

 

 

240,188 

 

 

240,188 

 

Other notes 4

6.21% 

 

613 

 

 

637 

 

 

769 

 

Unamortized discounts and debt issuance costs

n/a

 

(25,975)

 

 

(22,716)

 

 

(25,146)

 

Unamortized deferred interest rate swap gain 5

n/a

 

523 

 

 

3,036 

 

 

4,032 

 

Total long-term debt including current maturities 6

 

 

$     1,907,861 

 

 

$  1,984,779 

 

 

$  1,983,477 

 

Less current maturities

 

 

14,124 

 

 

150,137 

 

 

158 

 

Total long-term debt

 

 

$     1,893,737 

 

 

$  1,834,642 

 

 

$  1,983,319 

 

Estimated fair value of long-term debt

 

 

$     2,140,942 

 

 

$  2,092,673 

 

 

$  2,289,118 

 

 

 

 

 

Borrowings are shown as short-term due to our intent to repay within twelve months. The effective interest rate reflects the margin added to LIBOR for LIBOR-based borrowings. We also pay fees for unused borrowing capacity and standby letters of credit.

The 10.125% notes due 2015 are classified as long-term debt (not current maturities) as of June 30, 2015 due to our intent and ability to refinance these notes at maturity using our line of credit.

As of June 30, 2015, we had initiated prepayment; as such, this debt is classified as current maturities of long-term debt.

Non-publicly traded debt.

The unamortized deferred gain was realized upon the August 2011 settlement of interest rate swaps as discussed in Note 6.

The debt balances as of December 31, 2014 and June 30, 2014 have been adjusted to reflect our early adoption of ASU 2015-03 and related election as disclosed in Note 17.

 

11

 


 

Our total debt is presented in the table above net of unamortized discounts from par, unamortized deferred debt issuance costs and unamortized deferred interest rate swap settlement gains from fair value hedges. Discounts, deferred debt issuance costs and deferred swap settlement gains are amortized using the effective interest method over the terms of the respective notes resulting in $2,067,000 of net interest expense for these items for the six months ended June 30, 2015.

 

The estimated fair value of our debt presented in the table above was determined by: (1) averaging several asking price quotes for the publicly traded notes and (2) assuming par value for the remainder of the debt. The fair value estimates for the publicly traded notes were based on Level 2 information (as defined in Note 5) as of their respective balance sheet dates.

 

LINE OF CREDIT

 

In June 2015, we cancelled our secured $500,000,000 line of credit and entered into an unsecured $750,000,000 line of credit that expires in June 2020.

 

The line of credit contains affirmative, negative and financial covenants customary for an unsecured facility. The primary negative covenant limits our ability to incur secured debt. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5:1 through September 2016 and 3.25:1 thereafter,  and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of June 30, 2015, we were in compliance with the line of credit covenants.

 

Borrowings bear interest at either LIBOR plus a credit margin ranging from 1.00% to 2.00%, or SunTrust Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.00% to 1.00%. The credit margin for both LIBOR and base rate borrowings is determined by our ratio of debt to EBITDA. Standby letters of credit, which are issued under the line of credit and reduce availability, are charged a fee equal to the credit margin for LIBOR borrowings plus 0.175%. We also pay a commitment fee on the daily average unused amount of the line of credit that ranges from 0.10% to 0.35% based on our ratio of debt to EBITDA. As of June 30, 2015, the credit margin for LIBOR borrowings was 1.75%, the credit margin for base rate borrowings was 0.75% and the commitment fee was 0.25%.

 

As of June 30, 2015, our available borrowing capacity was $558,281,000 and usage was as follows:

 

§

$138,500,000 was borrowed

§

$53,219,000 was used to provide support for outstanding standby letters of credit

 

The current borrowings on our line of credit are shown as short-term due to our intent to repay within twelve months.

 

TERM DEBT

 

All of our term debt is unsecured. All such debt, other than the $14,000,000 industrial revenue bond and the $613,000 of other notes, is governed by two essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in both indentures limits the amount of secured debt we may incur without ratably securing such debt. As of June 30, 2015, we were in compliance with all of the term debt covenants.

 

The industrial revenue bond is supported by a standby letter of credit issued under our line of credit. As such, the primary covenants pertaining to the industrial revenue bond are those contained in our line of credit agreement. In June 2015 we issued a notice of our intent to repay the debt in August 2015 (such repayment will not incur any prepayment penalties). As such, the industrial revenue bond is classified as current maturities of long-term debt in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2015.

 

In March 2015, we issued $400,000,000 of 4.50% senior notes due 2025. Proceeds (net of underwriter fees and other transaction costs) of $395,207,000 were partially used to fund the March 30, 2015 purchase, via tender offer, of $127,303,000 principal amount (32%) of the 7.00% notes due 2018. The March 2015 debt purchase cost $145,899,000, including an $18,140,000 premium above the principal amount of the notes and transaction costs of $456,000. The premium primarily reflects the trading price of the notes relative to par prior to the tender offer commencement. Additionally, we recognized $3,138,000 of non-cash costs associated with the acceleration of a proportional amount of unamortized discounts, deferred debt issuance costs, and deferred interest rate swap settlement gains and losses. The combined first quarter charge of $21,734,000 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, 2015.

 

12

 


 

The remaining net proceeds from the March 2015 debt issuance, together with cash on hand and borrowings under our line of credit, funded: (1) the April 2015 redemption of $218,633,000 principal amount (100%) of the 6.40% notes due 2017, (2) the April 2015 redemption of $125,001,000 principal amount (100%) of the 6.50% notes due 2016 and (3) the April 2015 purchase, via the tender offer commenced in March 2015 of  $185,000 principal amount (less than 1%) of the 7.00% notes due 2018. The April 2015 debt purchases cost $385,024,000, including a $41,153,000 premium above the principal amount of the notes and transaction costs of $52,000. The premium primarily reflects the make-whole value of the 2016 notes and the 2017 notes. Additionally, we recognized $4,136,000 of non-cash costs associated with the acceleration of unamortized discounts, deferred debt issuance costs, and deferred interest rate swap settlement gains and losses. The combined second quarter charge of $45,341,000 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, 2015.

 

Consistent with our intent and ability to refinance the 10.125% notes due 2015 via borrowing on our line of credit, such notes are classified as long-term debt in the accompanying Condensed Consolidated Balance Sheet as of June 30, 2015.

 

In March 2014, we purchased $506,366,000 principal amount of 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 price 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 debt issuance costs, and deferred interest rate swap settlement gains and losses. 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.

 

 

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 $750,000,000 line o