10-Q 1 vmc-20170930x10q.htm 10-Q 20170930 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q

(Mark One)

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


For the quarterly period ended September 30, 2017


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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,  a  smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer  


Accelerated filer  


Smaller reporting company  


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


Emerging growth company 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    


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 October 31, 2017      

132,284,484

 



 

 

 

 

 



 


 

 





 

 

 



VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2017

 

Contents





 

 

 



 

 

Page

PART I

FINANCIAL INFORMATION

 



Item 1.

Financial Statements

Condensed Consolidated Balance Sheets

Condensed Consolidated Statements of Comprehensive Income

Condensed Consolidated Statements of Cash Flows

Notes to Condensed Consolidated Financial Statements

 

 

 2

 3

 4

 5



Item 2.

Management’s Discussion and Analysis of Financial

   Condition and Results of Operations

 

 

25



Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

44



Item 4.

Controls and Procedures

44



 

 

PART II

OTHER INFORMATION

 



Item 1.

Legal Proceedings

45



Item 1A.

Risk Factors

45



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45



Item 4.

Mine Safety Disclosures

45



Item 6.

Exhibits

46



 

 

Signatures

 

 

47



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





 

 

1

 


 







part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED BALANCE SHEETS





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Unaudited, except for December 31

September 30

 

 

December 31

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2016 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$       701,163 

 

 

$       258,986 

 

 

$       135,365 

 

Restricted cash

 

 

9,033 

 

 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

582,105 

 

 

494,634 

 

 

536,242 

 

  Less: Allowance for doubtful accounts

(2,903)

 

 

(2,813)

 

 

(4,260)

 

   Accounts and notes receivable, net

579,202 

 

 

491,821 

 

 

531,982 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

307,046 

 

 

293,619 

 

 

283,266 

 

  Raw materials

27,852 

 

 

22,648 

 

 

25,411 

 

  Products in process

1,652 

 

 

1,480 

 

 

2,753 

 

  Operating supplies and other

29,276 

 

 

27,869 

 

 

26,612 

 

   Inventories

365,826 

 

 

345,616 

 

 

338,042 

 

Prepaid expenses

100,781 

 

 

31,726 

 

 

71,370 

 

Total current assets

1,746,972 

 

 

1,137,182 

 

 

1,076,759 

 

Investments and long-term receivables

35,999 

 

 

39,226 

 

 

38,914 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

7,539,928 

 

 

7,185,818 

 

 

7,105,036 

 

  Allowances for depreciation, depletion & amortization

(4,002,227)

 

 

(3,924,380)

 

 

(3,876,743)

 

   Property, plant & equipment, net

3,537,701 

 

 

3,261,438 

 

 

3,228,293 

 

Goodwill

3,101,337 

 

 

3,094,824 

 

 

3,094,824 

 

Other intangible assets, net

835,269 

 

 

769,052 

 

 

753,314 

 

Other noncurrent assets

182,056 

 

 

169,753 

 

 

165,981 

 

Total assets

$    9,439,334 

 

 

$    8,471,475 

 

 

$    8,358,085 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

4,827 

 

 

138 

 

 

131 

 

Trade payables and accruals

181,207 

 

 

145,042 

 

 

163,139 

 

Other current liabilities

227,665 

 

 

227,064 

 

 

197,642 

 

Total current liabilities

413,699 

 

 

372,244 

 

 

360,912 

 

Long-term debt

2,809,966 

 

 

1,982,751 

 

 

1,983,639 

 

Deferred income taxes, net

716,165 

 

 

702,854 

 

 

706,715 

 

Deferred revenue

193,117 

 

 

198,388 

 

 

201,732 

 

Other noncurrent liabilities

621,253 

 

 

642,762 

 

 

601,117 

 

Total liabilities

$    4,754,200 

 

 

$    3,898,999 

 

 

$    3,854,115 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Outstanding 132,281, 132,339 and 132,309 shares, respectively

132,281 

 

 

132,339 

 

 

132,309 

 

Capital in excess of par value

2,803,106 

 

 

2,807,995 

 

 

2,805,355 

 

Retained earnings

1,886,006 

 

 

1,771,518 

 

 

1,685,412 

 

Accumulated other comprehensive loss

(136,259)

 

 

(139,376)

 

 

(119,106)

 

Total equity

$    4,685,134 

 

 

$    4,572,476 

 

 

$    4,503,970 

 

Total liabilities and equity

$    9,439,334 

 

 

$    8,471,475 

 

 

$    8,358,085 

 

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

 



2

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 

Unaudited

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands, except per share data

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

Total revenues

$    1,094,715 

 

 

$    1,008,140 

 

 

$    2,912,806 

 

 

$    2,719,693 

 

Cost of revenues

789,199 

 

 

703,931 

 

 

2,155,536 

 

 

1,958,581 

 

  Gross profit

305,516 

 

 

304,209 

 

 

757,270 

 

 

761,112 

 

Selling, administrative and general expenses

73,350 

 

 

76,311 

 

 

238,263 

 

 

235,460 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses

1,488 

 

 

2,023 

 

 

4,630 

 

 

2,934 

 

Business interruption claims recovery

 

 

690 

 

 

 

 

11,652 

 

Impairment of long-lived assets

 

 

 

 

 

 

(10,506)

 

Other operating expense, net

(4,167)

 

 

(3,535)

 

 

(27,763)

 

 

(23,949)

 

  Operating earnings

229,487 

 

 

227,076 

 

 

495,874 

 

 

505,783 

 

Other nonoperating income, net

1,784 

 

 

990 

 

 

5,677 

 

 

325 

 

Interest expense, net

82,041 

 

 

33,126 

 

 

154,572 

 

 

100,192 

 

Earnings from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

149,230 

 

 

194,940 

 

 

346,979 

 

 

405,916 

 

Income tax expense

39,080 

 

 

49,803 

 

 

81,557 

 

 

91,575 

 

Earnings from continuing operations

110,150 

 

 

145,137 

 

 

265,422 

 

 

314,341 

 

Earnings (loss) on discontinued operations, net of tax

(1,571)

 

 

(3,113)

 

 

8,217 

 

 

(7,451)

 

Net earnings

$       108,579 

 

 

$       142,024 

 

 

$       273,639 

 

 

$       306,890 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Reclassification adjustment for cash flow hedges

1,188 

 

 

307 

 

 

1,836 

 

 

902 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

427 

 

 

20 

 

 

1,281 

 

 

61 

 

Other comprehensive income

1,615 

 

 

327 

 

 

3,117 

 

 

963 

 

Comprehensive income

$       110,194 

 

 

$       142,351 

 

 

$       276,756 

 

 

$       307,853 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.83 

 

 

$             1.09 

 

 

$             2.00 

 

 

$             2.36 

 

  Discontinued operations

(0.01)

 

 

(0.02)

 

 

0.07 

 

 

(0.06)

 

  Net earnings

$             0.82 

 

 

$             1.07 

 

 

$             2.07 

 

 

$             2.30 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             0.82 

 

 

$             1.07 

 

 

$             1.97 

 

 

$             2.31 

 

  Discontinued operations

(0.01)

 

 

(0.02)

 

 

0.06 

 

 

(0.05)

 

  Net earnings

$             0.81 

 

 

$             1.05 

 

 

$             2.03 

 

 

$             2.26 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

132,484 

 

 

133,019 

 

 

132,510 

 

 

133,418 

 

  Assuming dilution

134,765 

 

 

135,823 

 

 

134,853 

 

 

135,932 

 

Cash dividends per share of common stock

$             0.25 

 

 

$             0.20 

 

 

$             0.75 

 

 

$             0.60 

 

Depreciation, depletion, accretion and amortization

$         79,636 

 

 

$         72,049 

 

 

$       227,974 

 

 

$       213,362 

 

Effective tax rate from continuing operations

26.2% 

 

 

25.5% 

 

 

23.5% 

 

 

22.6% 

 

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

 



3

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





 

 

 

 

 



 

 

 

 

 



Nine Months Ended

 

Unaudited

 

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

Operating Activities

 

 

 

 

 

Net earnings

$       273,639 

 

 

$       306,890 

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

227,974 

 

 

213,362 

 

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

(4,630)

 

 

(2,934)

 

  Contributions to pension plans

(17,638)

 

 

(7,126)

 

  Share-based compensation expense

19,953 

 

 

15,645 

 

  Deferred tax expense (benefit)

11,298 

 

 

25,094 

 

  Cost of debt purchase

43,048 

 

 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(162,849)

 

 

(145,548)

 

Other, net

8,740 

 

 

(774)

 

Net cash provided by operating activities

$       399,535 

 

 

$       404,609 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(366,845)

 

 

(287,440)

 

Proceeds from sale of property, plant & equipment

10,403 

 

 

5,865 

 

Payment for businesses acquired, net of acquired cash

(210,562)

 

 

(1,611)

 

Decrease in restricted cash

9,033 

 

 

1,150 

 

Other, net

405 

 

 

2,488 

 

Net cash used for investing activities

$     (557,566)

 

 

$     (279,548)

 

Financing Activities

 

 

 

 

 

Proceeds from line of credit

5,000 

 

 

3,000 

 

Payment of line of credit

(5,000)

 

 

(3,000)

 

Payment of current maturities and long-term debt

(800,572)

 

 

(14)

 

Proceeds from issuance of long-term debt

1,600,000 

 

 

 

Debt discounts and issuance costs

(15,046)

 

 

 

Purchases of common stock

(60,303)

 

 

(161,463)

 

Dividends paid

(99,263)

 

 

(79,865)

 

Share-based compensation, shares withheld for taxes

(24,608)

 

 

(32,414)

 

Net cash provided by (used for) financing activities

$       600,208 

 

 

$     (273,756)

 

Net increase (decrease) in cash and cash equivalents

442,177 

 

 

(148,695)

 

Cash and cash equivalents at beginning of year

258,986 

 

 

284,060 

 

Cash and cash equivalents at end of period

$       701,163 

 

 

$       135,365 

 

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 supplier of construction aggregates (primarily crushed stone, sand and gravel) and a major producer of asphalt mix and ready-mixed concrete.



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. We serve markets in twenty states, Washington D.C., and the local markets surrounding our operations in Mexico and the Bahamas. Our primary focus is serving metropolitan markets in the United States that are expected to experience the most significant growth in population, households and employment. These three demographic factors are significant drivers of demand for aggregates. While aggregates is our focus and primary business, we produce and sell asphalt mix and/or ready-mixed concrete in our mid-Atlantic, Georgia, Southwestern, Tennessee and Western markets.



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, 2016 was derived from the audited financial statement, but it does not include all disclosures required by accounting principles generally accepted in the United States of America. 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, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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 described in Note 2, the results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.



SHARE-BASED COMPENSATION – ACCOUNTING STANDARDS UPDATE



We adopted Accounting Standards Update (ASU) 2016-09, “Improvement to Employee Share-Based Payment Accounting,” in the fourth quarter of 2016. The provisions of this standard were applied as of the beginning of the year of adoption resulting in revisions to our 2016 interim financial statements.



Under ASU 2016-09, tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are reflected as discrete income tax benefits in the period of exercise or issuance. Before the adoption of this standard, excess tax benefits were recorded directly to equity (APIC). Net excess tax benefits are reflected as a reduction to our income tax expense for the three and nine months ended September 30, 2017 ($4,001,000 and $20,759,000, respectively) and revised three and nine months ended September 30, 2016 ($2,259,000 and $24,451,000, respectively). As a result, we also revised our September 30, 2016 diluted share calculation to exclude the assumption that proceeds from excess tax benefits would be used to purchase shares, resulting in an increase in dilutive shares of 790,000 for the quarter and 740,000 year-to-date.



Under ASU 2016-09, gross excess tax benefits are classified as operating cash flows rather than financing cash flows. As a result, for the nine months ended September 30, 2016 we increased our operating cash flows and decreased our financing cash flows by $26,747,000. Additionally, this ASU requires cash paid for shares withheld to satisfy statutory income tax withholding obligations be classified as financing activities rather than operating activities. As a result, for the nine months ended September 30, 2016 we increased our operating cash flows and decreased our financing cash flows by $32,414,000.



5

 


 

RECLASSIFICATIONS



Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2017 presentation.



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

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

132,484 

 

 

133,019 

 

 

132,510 

 

 

133,418 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock-Only Stock Appreciation Rights

1,249 

 

 

1,356 

 

 

1,305 

 

 

1,322 

 

  Other stock compensation plans

1,032 

 

 

1,448 

 

 

1,038 

 

 

1,192 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

134,765 

 

 

135,823 

 

 

134,853 

 

 

135,932 

 



All dilutive common stock equivalents are reflected 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 would be excluded.



Antidilutive common stock equivalents are not included in our earnings per share calculations. The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price is as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

Antidilutive common stock equivalents

79 

 

 

 

 

79 

 

 

234 

 

 

 

6

 


 

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

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax earnings (loss)

$       (1,282)

 

 

$       (5,135)

 

 

$      13,614 

 

 

$    (12,312)

 

Income tax (expense) benefit

(289)

 

 

2,022 

 

 

(5,397)

 

 

4,861 

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of tax

$       (1,571)

 

 

$       (3,113)

 

 

$        8,217 

 

 

$       (7,451)

 



Our discontinued operations include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The 2017 results noted above primarily reflect charges and related insurance recoveries, including those associated with the Texas Brine matter, as further discussed in Note 8.

 

 

Note 3: Income Taxes



Our estimated annual effective tax rate (EAETR) is based on full-year expectations of pretax 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, 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 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.



In the third quarter of 2017, we recorded income tax expense from continuing operations of $39,080,000 compared to income tax expense from continuing operations of $49,803,000 in the third quarter of 2016. The decrease in our income tax expense resulted largely from applying the statutory rate to the decrease in our pretax earnings.



For the first nine months of 2017, we recorded income tax expense from continuing operations of $81,557,000 compared to $91,575,000 for the first nine months of 2016. The decrease in our income tax expense resulted largely from applying the statutory rate to the decrease in our pretax earnings.



We recognize deferred tax assets and liabilities (which reflect our best assessment of the future taxes we will pay) based on the differences between the book basis and tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns while deferred tax liabilities represent items that will result in additional tax in future tax returns.



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.



7

 


 

Based on our third quarter 2017 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 certain state net operating loss carryforwards. For December 31, 2017, we project deferred tax assets related to state net operating loss carryforwards of $53,751,000, of which $52,552,000 relates to Alabama. The Alabama net operating loss carryforward, if not utilized, would expire in years 20232029. Before 2015, this Alabama deferred tax asset carried a full valuation allowance. During 2015, we restructured our legal entities which resulted in a partial release of the valuation allowance in the amount of $4,655,000. During the fourth quarter of 2016, we achieved three consecutive years of positive Alabama adjusted earnings which resulted in an additional partial release of the valuation allowance in the amount of $4,791,000. We expect one additional significant partial release of this valuation allowance once we have returned to sustained profitability, which we project will occur in the fourth quarter of 2017 (“Alabama adjusted earnings” and “sustained profitability” are defined in our most recent Annual Report on Form 10-K).



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, 2016.

 

 

Note 4: deferred revenue



In 2013 and 2012, we sold a percentage interest in future production structured as volumetric production payments (VPPs).



The VPPs:



§

relate to eight quarries in Georgia and South Carolina

§

provide the purchaser solely with a nonoperating percentage interest in the subject quarries’ future production from aggregates reserves

§

are both time and volume limited

§

contain no minimum annual or cumulative guarantees for production or sales volume, nor minimum sales price



Our consolidated total revenues exclude the sales of aggregates owned by the VPP purchaser.



We received net cash proceeds from the sale of the VPPs 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 to revenue on a unit-of-sales basis over the terms of the VPPs (expected to be approximately 25 years, limited by volume rather than time).



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







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

Deferred Revenue

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     203,100 

 

 

$     210,200 

 

 

$     206,468 

 

 

$     214,060 

 

 Amortization of deferred revenue

(1,903)

 

 

(2,068)

 

 

(5,271)

 

 

(5,928)

 

Balance at end of period

$     201,197 

 

 

$     208,132 

 

 

$     201,197 

 

 

$     208,132 

 



Based on expected sales from the specified quarries, we expect to recognize approximately $8,080,000 of deferred revenue as income during the 12-month period ending September 30, 2018 (reflected in other current liabilities in our 2017 Condensed Consolidated Balance Sheet).

 

 

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 Fair Value



September 30

 

 

December 31

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2016 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$        7,431 

 

 

$        6,883 

 

 

$        6,601 

 

 Equities

12,825 

 

 

10,033 

 

 

8,574 

 

Total

$      20,256 

 

 

$      16,916 

 

 

$      15,175 

 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Level 2 Fair Value



September 30

 

 

December 31

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2016 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Money market mutual fund

$           386 

 

 

$        1,705 

 

 

$        2,144 

 

Total

$           386 

 

 

$        1,705 

 

 

$        2,144 

 



We have 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 the fund (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).



Net gains of the Rabbi Trust investments were $1,950,000 and $1,379,000 for the nine months ended September 30, 2017 and 2016, respectively. The portions of the net gains related to investments still held by the Rabbi Trusts at September 30, 2017 and 2016 were $1,424,000 and $273,000,  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.



9

 


 

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







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Period ended September 30, 2017

 

 

Period ended September 30, 2016

 



 

 

 

Impairment

 

 

 

 

 

Impairment

 

in thousands

Level 2 

 

 

Charges

 

 

Level 2

 

 

Charges

 

Fair Value Nonrecurring

 

 

 

 

 

 

 

 

 

 

 

Property, plant & equipment, net

$              0 

 

 

$              0 

 

 

$              0 

 

 

$       1,359 

 

Other intangible assets, net

 

 

 

 

 

 

8,180 

 

Other assets

 

 

 

 

 

 

967 

 

Total

$              0 

 

 

$              0 

 

 

$              0 

 

 

$     10,506 

 



We recorded $10,506,000 of losses on impairment of long-lived assets for the nine  months ended September  30, 2016, reducing the carrying value of these Aggregates segment assets to their estimated fair value  of  $0. 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 interest rates, foreign currency exchange rates and commodity prices. From time to time, and consistent with our risk management policies, we use derivative instruments to balance the cost and risk of such exposure. We do not use 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 lock agreements described below were designated as cash flow hedges. The changes in fair value of our 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.



CASH FLOW HEDGES



During 2007, we entered into fifteen forward starting interest rate locks on $1,500,000,000 of future debt issuances to hedge the risk of higher interest rates. Upon the 2007 and 2008 issuances of the related fixed-rate debt, underlying interest rates were lower than the rate locks and we terminated and settled these forward starting locks for cash payments of $89,777,000. This amount was booked to AOCI and is being amortized to interest expense over the term of the related debt.



This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:







 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended

 

 

Nine Months Ended

 



Location on

 

September 30

 

 

September 30

 

in thousands

Statement

 

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

Cash Flow Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$       (1,955)

 

 

$          (507)

 

 

$       (3,022)

 

 

$       (1,490)

 



The 2017 losses reclassified from AOCI include the acceleration of deferred losses in the amount of $1,405,000 referable to the July debt purchases as described in Note 7.



For the 12-month period ending September  30, 2018, we estimate that $344,000 of the pretax loss in AOCI will be reclassified to earnings.

 

 

10

 


 

Note 7: Debt



Debt is detailed as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Effective

 

September 30

 

 

December 31

 

 

September 30

 

in thousands

Interest Rates

 

2017 

 

 

2016 

 

 

2016 

 

Short-term Debt

 

 

 

 

 

 

 

 

 

 

Bank line of credit expires 2021 1, 2, 3

n/a

 

$                  0 

 

 

$                0 

 

 

$                0 

 

Total short-term debt

 

 

$                  0 

 

 

$                0 

 

 

$                0 

 

Long-term Debt

 

 

 

 

 

 

 

 

 

 

Bank line of credit expires 2021 1, 2, 3

n/a

 

$                  0 

 

 

$     235,000 

 

 

$     235,000 

 

7.00% notes due 2018

n/a

 

 

 

272,512 

 

 

272,512 

 

10.375% notes due 2018

n/a

 

 

 

250,000 

 

 

250,000 

 

Floating-rate notes due 2020

2.13% 

 

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 

 

Term loan due 2021 2, 3

2.49% 

 

250,000 

 

 

 

 

 

4.50% notes due 2025

4.65% 

 

400,000 

 

 

400,000 

 

 

400,000 

 

3.90% notes due 2027

4.00% 

 

400,000 

 

 

 

 

 

7.15% notes due 2037

8.05% 

 

240,188 

 

 

240,188 

 

 

240,188 

 

4.50% notes due 2047

4.59% 

 

700,000 

 

 

 

 

 

Other notes 3

6.31% 

 

353 

 

 

365 

 

 

484 

 

Total long-term debt - face value

 

 

$    2,846,541 

 

 

$  2,004,065 

 

 

$  2,004,184 

 

Unamortized discounts and debt issuance costs

 

 

(31,748)

 

 

(21,176)

 

 

(20,414)

 

Total long-term debt - book value

 

 

$    2,814,793 

 

 

$  1,982,889 

 

 

$  1,983,770 

 

Less current maturities

 

 

4,827 

 

 

138 

 

 

131 

 

Total long-term debt - reported value

 

 

$    2,809,966 

 

 

$  1,982,751 

 

 

$  1,983,639 

 

Estimated fair value of long-term debt

 

 

$    3,068,236 

 

 

$  2,243,213 

 

 

$  2,305,065 

 







 

Borrowings on the bank line of credit are classified as short-term debt if we intend to repay within twelve months and as long-term debt otherwise.

The effective interest rate is the spread over LIBOR as of the most recent balance sheet date.

Non-publicly traded debt.



Our total long-term debt - book value is presented in the table above net of unamortized discounts/premiums and unamortized deferred debt issuance costs. Discounts/premiums and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $4,473,000 of net interest expense for these items for the nine months ended September 30, 2017.



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 December 2016, among other favorable changes, we extended the maturity date of our unsecured $750,000,000 line of credit from June 2020 to December 2021. The credit agreement contains affirmative, negative and financial covenants customary for an unsecured investment-grade 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 (upon certain acquisitions, the maximum ratio can be 3.75:1 for three quarters), and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of September 30, 2017, we were in compliance with the line of credit covenants.



11

 


 

Borrowings on our line of credit are classified as short-term debt if we intend to repay within twelve months and as long-term debt if we have the intent and ability to extend repayment beyond twelve months. Borrowings bear interest, at our option, at either LIBOR plus a credit margin ranging from 1.00% to 1.75%, or SunTrust Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.00% to 0.75%. The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. 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 0.25% determined by our credit ratings. As of September 30, 2017, the credit margin for LIBOR borrowings was 1.25%, the credit margin for base rate borrowings was 0.25%, and the commitment fee for the unused amount was 0.15%.



As of September 30, 2017, our available borrowing capacity was $706,712,000. Utilization of the borrowing capacity was as follows:



§

none was borrowed

§

$43,288,000 was used to provide support for outstanding standby letters of credit





TERM DEBT



All of our term debt is unsecured. $2,596,188,000 of such debt 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. $250,000,000 of such debt is governed, as described below, by the same credit agreement that governs our line of credit. As of September 30, 2017, we were in compliance with all term debt covenants.



In June 2017, we issued $1,000,000,000 of debt composed of three issuances as follows: (1) $700,000,000 of 4.50% senior notes due June 2047, (2) $50,000,000 of 3.90% senior notes due April 2027 (these notes are a further issuance of, and form a single series with, the 3.90% notes issued in March 2017), and (3) $250,000,000 of floating-rate senior notes due June 2020. These issuances resulted in proceeds of $989,512,000 (net of original issue discounts/premiums, underwriter fees and other transaction costs). The proceeds will be used to partially finance the pending acquisition of Aggregates USA, LLC as described in Note 16 and were used to early retire the notes due in 2018 ($272,512,000 @ 7.00% and $250,000,000 @ 10.375%). This early retirement was completed in July at a cost of $565,560,000 including a $43,020,000 premium above the principal amount of the notes and transaction costs of $28,000. As a result, in the third quarter, we recognized $3,029,000 of net noncash expense associated with the acceleration of unamortized discounts, deferred debt issuance costs and deferred interest rate derivative settlement losses. The combined charge of $46,077,000 was a component of interest expense for the three and nine months ended September 30, 2017.



In June 2017, we drew the full $250,000,000 on the unsecured delayed draw term loan entered into in December 2016. These funds were used to repay the $235,000,000 borrowed on our line of credit and for general corporate purposes. Borrowings bear interest in the same manner as the line of credit. The term loan principal will be repaid quarterly beginning March 2018 as follows: quarters 5 - 8 @ $1,562,500/quarter; 9 - 12 @ $3,125,000/quarter; 13 - 19 @ $4,687,500/quarter and $198,437,500 for quarter 20 (December 2021). The term loan may be prepaid at any time without penalty. It is provided by the same group of banks that provides our line of credit, and is governed by the same credit agreement as the line of credit. As such, it is subject to the same affirmative, negative, and financial covenants.



In March 2017, we issued $350,000,000 of 3.90% senior notes due April 2027 for proceeds of $345,450,000 (net of original issue discounts, underwriter fees and other transaction costs). The proceeds were used for general corporate purposes. This series of notes now totals $400,000,000 due to the additional $50,000,000 of notes issued in June (as described above).





12

 


 

STANDBY LETTERS OF CREDIT



We provide, in the normal course of business, certain third-party beneficiaries with 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 of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of September 30, 2017 are summarized by purpose in the table below:







 

 



 

 

in thousands

 

 

Standby Letters of Credit

 

 

Risk management insurance

$       38,111 

 

Reclamation/restoration requirements

5,177 

 

Total

$       43,288 

 

 

 

Note 8: Commitments and Contingencies



As summarized by purpose directly above in Note 7, our standby letters of credit totaled $43,288,000 as of September 30, 2017.



As described in Note 9, our asset retirement obligations totaled $222,888,000 as of September 30, 2017.



LITIGATION AND ENVIRONMENTAL MATTERS



We are subject to occasional governmental proceedings and orders pertaining to occupational safety and health or to protection of the environment, such as proceedings or orders relating to noise abatement, air emissions or water discharges. As part of our continuing program of stewardship in safety, health and environmental matters, we have been able to resolve such proceedings and to comply with such orders without any material adverse effects on our business.



We have received notices from the United States Environmental Protection Agency (EPA) or similar state or local agencies that we are considered a potentially responsible party (PRP) at a limited number of sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state and local environmental laws. Generally, we share the cost of remediation at these sites with other PRPs or alleged PRPs in accordance with negotiated or prescribed allocations. There is inherent uncertainty in determining the potential cost of remediating a given site and in determining any individual party's share in that cost. As a result, estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, remediation methods, other PRPs and their probable level of involvement, and actions by or against governmental agencies or private parties.



We have reviewed the nature and extent of our involvement at each Superfund site, as well as potential obligations arising under other federal, state and local environmental laws. While ultimate resolution and financial liability is uncertain at a number of the sites, in our opinion based on information currently available, the ultimate resolution of claims and assessments related to these sites will not have a material effect on our consolidated results of operations, financial position or cash flows, although amounts recorded in a given period could be material to our results of operations or cash flows for that period.



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.



13

 


 

In addition to these lawsuits in which we are involved in the ordinary course of business, certain other material legal proceedings are more specifically described below:



§

Lower Passaic River Study Area (Superfund Site) — The Lower Passaic River Study Area is part of the Diamond Shamrock Superfund Site in New Jersey. Vulcan and approximately 70 other companies are parties (collectively the Cooperating Parties Group) to a May 2007 Administrative Order on Consent (AOC) with the EPA to perform a Remedial Investigation/Feasibility Study (draft RI/FS) of the lower 17 miles of the Passaic River (River). However, before the draft RI/FS was issued in final form, the EPA issued a record of decision (ROD) in March 2016 that calls for a bank-to-bank dredging remedy for the lower 8 miles of the River. The EPA estimates that the cost of implementing this proposal is $1.38 billion. In September 2016, the EPA entered into an Administrative Settlement Agreement and Order on Consent with Occidental Chemical Corporation (Occidental) in which Occidental agreed to undertake the remedial design for this bank-to-bank dredging remedy, and to reimburse the United States for certain response costs.



Efforts to remediate the River have been underway for many years and have involved hundreds of entities that have had operations on or near the River at some point during the past several decades. We formerly owned a chemicals operation near the mouth of the River, which was sold in 1974. The major risk drivers in the River have been identified as dioxins, PCBs, DDx and mercury. We did not manufacture any of these risk drivers and have no evidence that any of these were discharged into the River by Vulcan.



The AOC does not obligate us to fund or perform the remedial action contemplated by either the draft RI/FS or the ROD. Furthermore, the parties who will participate in funding the remediation and their respective allocations  have not been determined. We do not agree that a bank-to-bank remedy is warranted, and we are not obligated to fund any of the remedial action at this time; nevertheless, we previously estimated the cost to be incurred by us as a potential participant in a bank-to-bank dredging remedy and recorded an immaterial loss for this matter in 2015.



§

TEXAS BRINE MATTER — During the operation of its former Chemicals Division, Vulcan leased the right to mine salt out of an underground salt dome formation in Assumption Parish, Louisiana  from 1976 - 2005.  Throughout that period and for all times thereafter, the Texas Brine Company (Texas Brine) was the operator contracted by Vulcan to mine and deliver the salt. We sold our Chemicals Division in 2005 and transferred our rights and interests related to the salt and mining operations to the purchaser, a subsidiary of Occidental, and we have had no association with the leased premises or Texas Brine since that time. In August 2012, a sinkhole developed in the vicinity of the Texas Brine mining operations, and numerous lawsuits were filed in state court in Assumption Parish, Louisiana. Other lawsuits, including class action litigation, were also filed in federal court before the Eastern District of Louisiana in New Orleans.



There are numerous defendants, including Texas Brine and Occidental, to the litigation in state and federal court. Vulcan was first brought into the litigation as a third-party defendant in August 2013 by Texas Brine. We have since been added as a direct and third-party defendant by other parties, including a direct claim by the state of Louisiana. Damage categories encompassed within the litigation include individual plaintiffs’ claims for property damage, a claim by the state of Louisiana and Texas Brine for response costs, claims for physical damages to nearby oil and gas pipelines and storage facilities (pipelines),  and business interruption claims. In addition to the plaintiffs’ claims, we were also sued for contractual indemnity and comparative fault by both Texas Brine and Occidental. It is alleged that the sinkhole was caused, in whole or in part, by our negligent actions or failure to act. It is also alleged that we breached the salt lease with Occidental, as well as an operating agreement and related contracts with Texas Brine; that we are strictly liable for certain property damages in our capacity as a former lessee of the salt lease; and that we violated certain covenants and conditions in the agreement under which we sold our Chemicals Division to Occidental. We have likewise made claims for contractual indemnity and on a basis of comparative fault against Texas Brine and Occidental. Vulcan and Occidental have since dismissed all of their claims against one another. Texas Brine has claims that remain pending against Vulcan and against Occidental. Discovery remains ongoing in various cases.



In December 2016, we settled with plaintiffs in one of the cases involving individual property damages. During the first nine months of 2017, we settled with the plaintiffs in the cases involving physical damages to  pipelines. Our insurers have funded the settlements in excess of our self-insured retention amount. Each of the pipeline plaintiffs signed a release in favor of Vulcan and agreed that we would not be responsible to the pipelines for any amount beyond the settlement amount. A bench trial (judge only) began in September 2017 and ended in October in two of the three pipeline cases. The trial was limited in scope to the allocation of comparative fault or liability for causing the sinkhole, with a damages trial to be held at a later date. Vulcan participated in the trial, as it encompassed cross-party and third-party claims against us. The court ordered post-trial briefs to be filed early November 2017, and scheduled closing arguments for later that month.  We do not know at this time when the judge will issue his ruling.



We cannot reasonably estimate a range of liability pertaining to the open cases at this time.

14

 


 



§

HEWITT LANDFILL MATTER (SUPERFUND SITE) — In September 2015, the Los Angeles Regional Water Quality Control Board (RWQCB) issued a Cleanup and Abatement Order (CAO) directing Vulcan to assess, monitor, cleanup and abate wastes that have been discharged to soil, soil vapor, and/or groundwater at the former Hewitt Landfill in Los Angeles. The CAO followed a 2014 Investigative Order from the RWQCB that sought data and a technical evaluation regarding the Hewitt Landfill, and a subsequent amendment to the Investigative Order requiring us to provide groundwater monitoring results to the RWQCB and to create and implement a work plan for further investigation of the Hewitt Landfill. In April 2016, we submitted an interim remedial action plan (IRAP) to the RWQCB, proposing an on-site pilot test of a pump and treat system; testing and implementation of a leachate recovery system; and storm water capture and conveyance improvements.



Operation of the on-site  pilot-scale treatment system began in January 2017, and was completed in April 2017. With completion of the pilot testing and other investigative work to date, we submitted an amendment to the IRAP (AIRAP) to RWQCB in August 2017 proposing the use of a 300 gallon per minute pump, treat and reinjection system. Based on the preliminary design of this system, we accrued $14,216,000 in the second quarter of 2017 (reflected in other operating expense). We are currently responding to comments and planning for implementation of the AIRAP.



We are also engaged in an ongoing dialogue with the EPA, the Los Angeles Department of Water and Power, and other stakeholders regarding the potential contribution of the Hewitt Landfill to groundwater contamination in the North Hollywood Operable Unit (NHOU) of the San Fernando Valley Superfund Site. We are gathering and analyzing data and developing technical information to determine the extent of possible contribution by the Hewitt Landfill to the groundwater contamination in the area. This work is also intended to assist in identification of other PRPs that may have contributed to groundwater contamination in the area.



In July 2016, the EPA sent us a letter requesting that we enter into an AOC for remedial design work at the NHOU. We entered into an AOC and Statement of Work with the EPA in September 2017, for the design of two extraction wells south of the Hewitt Site to protect the North Hollywood West well field. The AOC provides for Vulcan to undertake a preliminary evaluation of the appropriateness of the two-well remedy. Estimated costs to comply with this AOC are immaterial and have been accrued. Until the remedial design work and evaluation of the two-well remedy is complete, we cannot identify an appropriate remedial action or reasonably estimate a loss pertaining to this matter.



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

 

 

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Note 9: Asset Retirement Obligations



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



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



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







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2017 

 

 

2016 

 

 

2017 

 

 

2016 

 

ARO Operating Costs

 

 

 

 

 

 

 

 

 

 

 

Accretion

$        2,857 

 

 

$        2,692 

 

 

$        8,620 

 

 

$        8,163 

 

Depreciation

1,494 

 

 

1,469 

 

 

4,741 

 

 

4,783 

 

Total

$        4,351 

 

 

$        4,161 

 

 

$      13,361 

 

 

$      12,946 

 



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



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







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended