UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

For the transition period from                 to

 

Commission File Number 001-33841

 

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

 

 

 

 

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part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

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VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

 

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VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

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notes to condensed consolidated financial statements

 

Note 1: summary of significant accounting policies

 

NATURE OF OPERATIONS

 

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

 

BASIS OF PRESENTATION

 

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

 

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

 

RECLASSIFICATIONS

 

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

 

RESTRUCTURING CHARGES

 

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

 

EXCHANGE OFFER COSTS

 

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

 

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

 

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

 

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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:

 

 

 

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

 

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

 

 

 

 

Note 2: Discontinued Operations

 

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

 

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

 

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

 

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

 

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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:

 

 

 

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

 

 

Note 3: Income Taxes

 

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

 

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

 

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

 

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

 

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

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.

 

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

 

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

 

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

 

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

 

 

Note 4: deferred revenue

 

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

 

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

 

 

 

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

 

The common key terms of both VPP transactions are:

 

 

The key terms specific to the 2013 VPP transaction are:

 

 

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The key terms specific to the 2012 VPP transaction are:

 

 

 

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:

 

 

 

 

 

 

 

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

 

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

 

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

 

 

 

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

 

 

Note 6: Derivative Instruments

 

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

 

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

 

CASH FLOW HEDGES

 

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

 

 

 

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

 

FAIR VALUE HEDGES

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

 

 

 

 

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Note 7: Debt

 

Debt is summarized as follows:

 

 

 

 

 

 

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

 

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

 

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

 

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In December 2011, we entered into a $600,000,000 bank line of credit expiring on December 15, 2016. In March 2013, we proactively amended this line of credit to reduce its capacity to $500,000,000 and extend its term to March 12, 2018. The line of credit is secured by certain domestic accounts receivable and inventory. Borrowing capacity fluctuates with the level of eligible accounts receivable and inventory and may be less than $500,000,000 at any point in time. As of September 30, 2013, our available borrowing capacity was $380,289,000 (net of the $55,032,000 backing for standby letters of credit).

 

Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to the lower of LIBOR plus a margin ranging from 1.50% to 2.00% based on the level of utilization, or an alternative rate derived from the lender’s prime rate. Borrowings on our line of credit are classified as short-term due to our intent to repay within twelve months. As of September 30, 2013, the applicable margin for LIBOR based borrowing was 1.75%.

 

 

Note 8: Commitments and Contingencies

 

LETTERS OF CREDIT

 

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

 

 

 

LITIGATION AND ENVIRONMENTAL MATTERS

 

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

 

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

 

Perchloroethylene cases

 

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

 

 

 

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lower passaic river matter

 

 

 

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

 

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

 

 

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Note 9: Asset Retirement Obligations

 

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

 

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

 

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

 

 

 

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:

 

 

 

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

 

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

 

 

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Note 10: Benefit Plans

 

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

 

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

 

 

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

 

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

 

 

 

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

 

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

 

 

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Note 11: other Comprehensive Income

 

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

 

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

 

 

 

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

 

 

 

 

Amounts reclassified from AOCI to earnings, are as follows:

 

 

 

 

 

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Note 12: Equity

 

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

 

 

 

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

 

 

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Note 13: Segment Reporting

 

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

 

segment financial disclosure

 

 

 

 

 

 

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Note 14: Supplemental Cash Flow Information

 

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

 

 

 

 

Note 15: Goodwill

 

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

 

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

 

GOODWILL

 

 

 

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

 

 

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Note 16: Acquisitions and Divestitures

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

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During the first nine months of 2012, we sold:

 

 

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

 

 

Note 17: New Accounting Standards

 

ACCOUNTING STANDARDS RECENTLY ADOPTED

 

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

 

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

 

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

 

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ACCOUNTING STANDARDS PENDING ADOPTION

 

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

 

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

 

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

 

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

 

 

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ITEM 2

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

 

 

GENERAL COMMENTS

 

Overview

 

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

 

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

 

We operate primarily in the United States and our principal product — aggregates — is used in virtually all types of public and private construction projects and in the production of asphalt mix and ready-mixed concrete. Aggregates have a high weight-to-value ratio and, in most cases, must be produced near where they are used; if not, transportation can cost more than the materials. Exceptions to this typical market structure include areas along the U.S. Gulf Coast and the Eastern Seaboard where there are limited supplies of locally available high quality aggregates. We serve these markets from inland quarries — shipping by barge and rail — and from our quarry on Mexico's Yucatan Peninsula. We transport aggregates from Mexico to the U.S. principally on our three Panamax-class, self-unloading ships.

 

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

 

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

 

Seasonality and cyclical nature of our business

 

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

 

 

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EXECUTIVE SUMMARY

 

Financial highlights for Third Quarter 2013

 

 

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

 

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

 

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

 

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

 

 

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

 

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

 

 

free cash flow

 

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

 

 

 

 

cash gross profit

 

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

 

 

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EBITDA and adjusted ebitda

 

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

 

 

 

 

 

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RESULTS OF OPERATIONS

 

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

 

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

 

consolidated operating Results

 

 

 

 

Third quarter 2013 Compared to third Quarter 2012

 

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

 

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

 

 

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

 

earnings from continuing operations before income taxes

 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

 

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

 

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

 

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

 

 

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

 

earnings from continuing operations before income taxes

 

 

 

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

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

 

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LIQUIDITY AND FINANCIAL RESOURCES

 

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

 

 

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

 

 

 

Cash

 

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

 

cash from operating activities

 

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

 

 

 

 

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

 

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cash flows from investing activities

 

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

 

cash flows from financing activities

 

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

 

 

debt

 

Certain debt measures are outlined below:

 

 

 

 

 

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

 

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

 

 

 

We expect to retire the current maturities using existing cash.

 

In March 2013, we proactively amended our bank line of credit to extend its term from December 15, 2016 to March 12, 2018 and to reduce its capacity from $600.0 million to $500.0 million. The line of credit is secured by certain domestic accounts receivable and inventory. Borrowing capacity fluctuates with the level of eligible accounts receivable and inventory and may be less than $500.0 million at any point in time. As of September 30, 2013, our eligible borrowing capacity was $435.3 million.

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

 

 

Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to the lower of the London Interbank Offered Rate (LIBOR) plus a margin ranging from 1.50% to 2.00% based on the level of utilization, or an alternative rate derived from the lender’s prime rate. Letters of credit issued under the line of credit are charged a fee equal to the applicable margin for LIBOR borrowings plus 0.125%.  As of September 30, 2013, the applicable margin for LIBOR based borrowing was 1.75%.

 

debt ratings

 

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

 

 

 

 

 

 

Equity

 

Our common stock issuances are summarized below:

 

 

 

 

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

 

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

 

 

 

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off-balance sheet arrangements

 

We have no off-balance sheet arrangements, such as financing or unconsolidated variable interest entities, that either have or are reasonably likely to have a current or future material effect on our:

 

 

 

Standby Letters of Credit

 

For a discussion of our standby letters of credit see Note 8 to the condensed consolidated financial statements.

 

 

Cash Contractual Obligations

 

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

 

 

CRITICAL ACCOUNTING POLICIES

 

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

 

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

 

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

 

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

 

 

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iNCOME tAXES

 

how we determine Our deferred tax assets and liabilities

 

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

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.

 

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

 

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

 

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

 

 

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

 

 

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

 

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

 

 

 

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

 

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

 

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

 

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

 

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

 

 

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

 

 

foreign earnings

 

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

 

 

Unrecognized income tax benefits

 

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

 

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

 

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We consider an issue to be resolved at the earlier of settlement of an examination, the expiration of the statute of limitations, or when the issue is "effectively settled." Our liability for unrecognized income tax benefits is generally presented as noncurrent. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current. We classify interest and penalties recognized on the liability for unrecognized income tax benefits as income tax expense.

 

 

Statutory depletion

 

Our largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The impact of statutory depletion on the effective tax rate is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2012. The deduction for statutory depletion does not necessarily change proportionately to changes in pretax earnings.

 

 

new Accounting standards

 

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

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FORWARD-LOOKING STATEMENTS

 

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

 

 

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

 

 

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INVESTOR information

 

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

 

 

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

 

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

 

We have a:

 

 

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

 

Our Board of Directors has also adopted:

 

 

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

 

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

 

 

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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

MARKET RISK

 

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

 

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

 

At September 30, 2013, the estimated fair value of our long-term debt instruments including current maturities was $2,795.8 million compared to a book value of $2,523.6 million. The estimated fair value was determined by discounting expected future cash flows based on credit-adjusted interest rates on U.S. Treasury bills, notes or bonds, as appropriate. The fair value estimate is based on information available as of the measurement date. Although we are not aware of any factors that would significantly affect the estimated fair value amount, it has not been comprehensively revalued since the measurement date. The effect of a decline in interest rates of one percentage point would increase the fair value of our liability by $137.0 million.

 

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

 

 

ITEM 4

controls and procedures

 

 

disclosure controls and procedures

 

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

 

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

 

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

 

 

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part Ii   other information

ITEM 1

legal proceedings

 

 

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

 

 

ITEM 1A

risk factors

 

 

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

 

 

ITEM 4

MINE SAfETY DISCLOSURES

 

 

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

 

 

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ITEM 6

exhibits

 

 

 

 

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SIGNATURES

 

 

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

 

 

 

 

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