10-Q 1 vmc-20180331x10q.htm 10-Q 20180331 Q1

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 March 31, 2018


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 April 30, 2018      

132,185,410

 



 

 

 



 



 


 

 





 

 

 



VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED MARCH 31, 2018

 

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

 

 

26



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

March 31

 

 

December 31

 

 

March 31

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$         38,141 

 

 

$       141,646 

 

 

$       286,957 

 

Restricted cash

8,373 

 

 

5,000 

 

 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

492,103 

 

 

590,986 

 

 

471,590 

 

  Less: Allowance for doubtful accounts

(2,667)

 

 

(2,649)

 

 

(2,757)

 

   Accounts and notes receivable, net

489,436 

 

 

588,337 

 

 

468,833 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

340,666 

 

 

327,711 

 

 

306,012 

 

  Raw materials

29,393 

 

 

27,152 

 

 

26,213 

 

  Products in process

1,303 

 

 

1,827 

 

 

1,314 

 

  Operating supplies and other

28,392 

 

 

27,648 

 

 

29,860 

 

   Inventories

399,754 

 

 

384,338 

 

 

363,399 

 

Prepaid expenses

75,495 

 

 

60,780 

 

 

38,573 

 

Total current assets

1,011,199 

 

 

1,180,101 

 

 

1,157,762 

 

Investments and long-term receivables

35,056 

 

 

35,115 

 

 

34,311 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

8,116,439 

 

 

7,969,312 

 

 

7,432,388 

 

  Allowances for depreciation, depletion & amortization

(4,090,574)

 

 

(4,050,381)

 

 

(3,980,567)

 

   Property, plant & equipment, net

4,025,865 

 

 

3,918,931 

 

 

3,451,821 

 

Goodwill

3,130,161 

 

 

3,122,321 

 

 

3,101,241 

 

Other intangible assets, net

1,060,831 

 

 

1,063,630 

 

 

829,114 

 

Other noncurrent assets

190,099 

 

 

184,793 

 

 

170,075 

 

Total assets

$    9,453,211 

 

 

$    9,504,891 

 

 

$    8,744,324 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

22 

 

 

41,383 

 

 

139 

 

Short-term debt

200,000 

 

 

 

 

 

Trade payables and accruals

188,163 

 

 

197,335 

 

 

175,906 

 

Other current liabilities

195,122 

 

 

204,154 

 

 

184,853 

 

Total current liabilities

583,307 

 

 

442,872 

 

 

360,898 

 

Long-term debt

2,775,687 

 

 

2,813,482 

 

 

2,329,248 

 

Deferred income taxes, net

479,430 

 

 

464,081 

 

 

703,491 

 

Deferred revenue

190,731 

 

 

191,476 

 

 

196,739 

 

Other noncurrent liabilities

510,846 

 

 

624,087 

 

 

633,187 

 

Total liabilities

$    4,540,001 

 

 

$    4,535,998 

 

 

$    4,223,563 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Outstanding 132,290, 132,324 and 132,222 shares, respectively

132,290 

 

 

132,324 

 

 

132,222 

 

Capital in excess of par value

2,787,848 

 

 

2,805,587 

 

 

2,792,720 

 

Retained earnings

2,138,885 

 

 

2,180,448 

 

 

1,734,448 

 

Accumulated other comprehensive loss

(145,813)

 

 

(149,466)

 

 

(138,629)

 

Total equity

$    4,913,210 

 

 

$    4,968,893 

 

 

$    4,520,761 

 

Total liabilities and equity

$    9,453,211 

 

 

$    9,504,891 

 

 

$    8,744,324 

 

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

 

Unaudited

 

 

 

March 31

 

in thousands, except per share data

2018 

 

 

2017 

 

Total revenues

$       854,474 

 

 

$       787,328 

 

Cost of revenues

695,140 

 

 

629,107 

 

  Gross profit

159,334 

 

 

158,221 

 

Selling, administrative and general expenses

78,340 

 

 

82,383 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 and businesses

4,164 

 

 

369 

 

Other operating expense, net

(3,975)

 

 

(5,828)

 

  Operating earnings

81,183 

 

 

70,379 

 

Other nonoperating income, net

5,083 

 

 

4,045 

 

Interest expense, net

37,774 

 

 

34,076 

 

Earnings from continuing operations

 

 

 

 

 

 before income taxes

48,492 

 

 

40,348 

 

Income tax benefit

(4,903)

 

 

(3,175)

 

Earnings from continuing operations

53,395 

 

 

43,523 

 

Earnings (loss) on discontinued operations, net of tax

(416)

 

 

1,398 

 

Net earnings

$         52,979 

 

 

$         44,921 

 

Other comprehensive income, net of tax

 

 

 

 

 

  Deferred gain on interest rate derivative

2,496 

 

 

 

  Amortization of prior interest rate derivative loss

66 

 

 

320 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

    cost for benefit plans

1,091 

 

 

427 

 

Other comprehensive income

3,653 

 

 

747 

 

Comprehensive income

$         56,632 

 

 

$         45,668 

 

Basic earnings per share

 

 

 

 

 

  Continuing operations

$             0.40 

 

 

$             0.33 

 

  Discontinued operations

0.00 

 

 

0.01 

 

  Net earnings

$             0.40 

 

 

$             0.34 

 

Diluted earnings (loss) per share

 

 

 

 

 

  Continuing operations

$             0.40 

 

 

$             0.32 

 

  Discontinued operations

(0.01)

 

 

0.01 

 

  Net earnings

$             0.39 

 

 

$             0.33 

 

Weighted-average common shares outstanding

 

 

 

 

 

  Basic

132,690 

 

 

132,636 

 

  Assuming dilution

134,359 

 

 

134,968 

 

Cash dividends per share of common stock

$             0.28 

 

 

$             0.25 

 

Depreciation, depletion, accretion and amortization

$         81,439 

 

 

$         71,563 

 

Effective tax rate from continuing operations

-10.1%

 

 

-7.9%

 

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



3

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





 

 

 

 

 



 

 

 

 

 



Three Months Ended

 

Unaudited

 

 

 

March 31

 

in thousands

2018 

 

 

2017 

 

Operating Activities

 

 

 

 

 

Net earnings

$         52,979 

 

 

$         44,921 

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

81,439 

 

 

71,563 

 

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

(4,164)

 

 

(369)

 

  Contributions to pension plans

(102,443)

 

 

(2,374)

 

  Share-based compensation expense

6,794 

 

 

6,488 

 

  Deferred tax expense (benefit)

7,968 

 

 

153 

 

  Cost of debt purchase

6,922 

 

 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

39,832 

 

 

(28,069)

 

Other, net

3,641 

 

 

1,839 

 

Net cash provided by operating activities

$         92,968 

 

 

$         94,152 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(128,688)

 

 

(133,022)

 

Proceeds from sale of property, plant & equipment

1,701 

 

 

1,239 

 

Proceeds from sale of businesses

11,256 

 

 

 

Payment for businesses acquired, net of acquired cash

(76,259)

 

 

(185,067)

 

Other, net

(34)

 

 

 

Net cash used for investing activities

$     (192,024)

 

 

$     (316,850)

 

Financing Activities

 

 

 

 

 

Proceeds from short-term debt

252,000 

 

 

 

Payment of short-term debt

(52,000)

 

 

 

Payment of current maturities and long-term debt

(892,038)

 

 

(5)

 

Proceeds from issuance of long-term debt

850,000 

 

 

350,000 

 

Debt issuance and exchange costs

(45,513)

 

 

(4,565)

 

Settlements of interest rate derivatives

3,378 

 

 

 

Purchases of common stock

(55,568)

 

 

(49,221)

 

Dividends paid

(37,176)

 

 

(33,152)

 

Share-based compensation, shares withheld for taxes

(24,159)

 

 

(21,421)

 

Net cash provided by (used for) financing activities

$         (1,076)

 

 

$       241,636 

 

Net increase (decrease) in cash and cash equivalents and restricted cash

(100,132)

 

 

18,938 

 

Cash and cash equivalents and restricted cash at beginning of year

146,646 

 

 

268,019 

 

Cash and cash equivalents and restricted cash at end of period

$         46,514 

 

 

$       286,957 

 

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 Alabama, mid-Atlantic, 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, 2017 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 month period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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.



RECLASSIFICATIONS



Certain items previously reported in specific financial statement captions have been reclassified to conform to the 2018 presentation. In the first quarter of 2018, we adopted Accounting Standards Update (ASU) 2017-07, “Improving the Presentation of Net Periodic Benefit Cost and Net Periodic Postretirement Benefit Cost,” resulting in the reclassification of certain benefit costs from operating income to nonoperating income as described in Note 17.



RESTRICTED CASH



Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements and cash reserved by other contractual agreements (such as asset purchase agreements) for a specified purpose and therefore is not available for use for other purposes. The escrow accounts are administered by an intermediary. Cash restricted pursuant to like-kind exchange agreements remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Restricted cash is included with cash and cash equivalents in the accompanying Condensed Consolidated Statements of Cash Flows.



5

 


 

EARNINGS PER SHARE (EPS)



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







 

 

 

 

 



 

 

 

 

 



Three Months Ended

 



March 31

 

in thousands

2018 

 

 

2017 

 

Weighted-average common shares

 

 

 

 

 

 outstanding

132,690 

 

 

132,636 

 

Dilutive effect of

 

 

 

 

 

  Stock-Only Stock Appreciation Rights

1,132 

 

 

1,334 

 

  Other stock compensation plans

537 

 

 

998 

 

Weighted-average common shares

 

 

 

 

 

 outstanding, assuming dilution

134,359 

 

 

134,968 

 



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

 



March 31

 

in thousands

2018 

 

 

2017 

 

Antidilutive common stock equivalents

157 

 

 

79 

 

 

 

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

 



March 31

 

in thousands

2018 

 

 

2017 

 

Discontinued Operations

 

 

 

 

 

Pretax earnings (loss)

$          (566)

 

 

$        2,092 

 

Income tax (expense) benefit

150 

 

 

(694)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 net of tax

$          (416)

 

 

$        1,398 

 



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 results noted above primarily reflect charges and related insurance recoveries, including those associated with the Texas Brine matter as further discussed in Note 8.

 

 

6

 


 

Note 3: Income Taxes



The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. The TCJA, among other changes, (1) reduces the U.S. federal corporate income tax rate from 35% to 21%, (2) allows for the immediate 100% deductibility of certain capital investments, (3) eliminates the alternative minimum tax (though allows for the future use of previously generated alternative minimum tax credits), (4) repeals the domestic production deduction, (5) requires a one-time “transition tax” on earnings of certain foreign subsidiaries that were previously tax deferred, (6) limits the deductibility of interest expense, (7) further limits the deductibility of certain executive compensation and (8) taxes global intangible low taxed income.



The SEC staff issued Staff Accounting Bulletin (SAB) 118 to provide guidance for companies that have not completed their accounting for the income tax effects of the TCJA in the period of enactment. SAB 118 provides a one-year measurement period from the TCJA enactment date for companies to complete their income tax accounting. In accordance with SAB 118, a company must reflect the income tax effects of those elements of the TCJA for which the income tax accounting is complete. To the extent that a company’s accounting for certain elements of the TCJA is incomplete but for which it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company is unable to determine a provisional estimate, it should account for its income taxes on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the TCJA.



Our accounting for certain elements of the TCJA is incomplete. As we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, we were able to make reasonable estimates, and therefore, recorded provisional estimates for the following elements. We have not made any measurement-period adjustments related to these items during the quarter.



§

DEEMED REPATRIATION TRANSITION TAX — The TCJA subjects companies to a one-time Deemed Repatriation Transition Tax (Transition Tax) on previously untaxed foreign accumulated earnings and profits. We recorded a provisional Transition Tax obligation of $12,301,000 at December 31, 2017.

§

DEDUCTIBILITY OF EXECUTIVE COMPENSATION — The TCJA eliminates the performance-based compensation exception from the limitation on covered employee remuneration. At this time, we believe that a portion of the performance-based remuneration accounted for in our deferred taxes will likely be non-deductible. As such, we included a provisional expense of $1,403,000 at December 31, 2017.



Our accounting for certain other elements of the TCJA is incomplete, and as we disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017, we were not yet able to make reasonable estimates of the effects. Therefore, no provisional estimates were recorded. We have not recorded any measurement-period adjustments related to these items during the first quarter of 2018.



§

OUTSIDE BASIS DIFFERENCE IN FOREIGN SUBSIDIARIES — For U.S. income tax purposes, the Transition Tax will greatly reduce outside basis differences in our foreign subsidiaries. Completing this calculation is dependent on first finalizing the Transition Tax liability. As a result, we are not yet able to reasonably estimate the outside basis difference remaining in our foreign subsidiaries after the Transition Tax, and therefore, continue to assert that our undistributed earnings from foreign subsidiaries are indefinitely reinvested.

§

GLOBAL INTANGIBLE LOW TAXED INCOME  We can make an accounting policy election of either (1) treating taxes due on the future U.S. inclusions in taxable income related to global intangible low taxed income (GILTI) as a current period expense when incurred (period cost method) or (2) factoring such amounts into our measurement of deferred taxes (deferred method). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. We have not recorded any amount of GILTI tax in our financial statements nor have we made a policy decision regarding whether to record deferred taxes on GILTI.



7

 


 

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 first quarter of 2018, we recorded an income tax benefit from continuing operations of $4,903,000 compared to an income tax benefit from continuing operations of $3,175,000 in the first quarter of 2017.  The increase in income tax benefit is largely due to the change in the U.S. statutory income tax rate to 21% in 2018 from 35% in 2017.



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.



At December 31, 2018, we project state net operating loss carryforward deferred tax assets  of  $71,159,000 ($67,546,000 relates to Alabama), against which we project to have a valuation allowance of $29,695,000 ($29,182,000 relates to Alabama).  The Alabama net operating loss carryforward, if not utilized, would expire in years 20232033.



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, 2017.

 

 

Note 4: revenueS



There have been no changes to the amount or timing of our revenue recognition as a result of our adoption of Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers” (Accounting Standards Codification Topic 606). Revenues are measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect are excluded from revenues. Costs to obtain and fulfill construction paving contracts are also immaterial and are expensed as incurred when the expected amortization period is one year or less.



Total revenues are primarily derived from our product sales of aggregates, asphalt mix and ready-mixed concrete, and include freight &  delivery costs that we pass along to our customers to deliver these products. We also generate revenues from our asphalt construction paving business (represents less than 10% of our Asphalt segment’s revenues) and services related to our aggregates business (represents less than 2% of our Aggregates segment’s revenues). 



Our products typically are sold to private industry and not directly to governmental entities. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly funded construction, such as highways, airports and government buildings, relatively insignificant sales are made directly to federal, state, county or municipal governments/agencies. Therefore, although reductions in state and federal funding can curtail publicly funded construction, our business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.



8

 


 

Our segment total revenues by geographic market for the current period are disaggregated as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended March 31, 2018

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     193,848 

 

 

$     11,729 

 

 

$     61,571 

 

 

$              0 

 

 

$      267,148 

 

Gulf Coast

383,941 

 

 

14,644 

 

 

25,199 

 

 

1,942 

 

 

425,726 

 

West

121,868 

 

 

77,462 

 

 

14,192 

 

 

 

 

213,522 

 

Segment sales

$     699,657 

 

 

$   103,835 

 

 

$   100,962 

 

 

$       1,942 

 

 

$      906,396 

 

Intersegment sales

(51,922)

 

 

 

 

 

 

 

 

(51,922)

 

Total revenues

$     647,735 

 

 

$   103,835 

 

 

$   100,962 

 

 

$       1,942 

 

 

$      854,474 

 





 

The geographic markets are defined by states/countries as follows:



 

East market — Arkansas, Delaware, Illinois, Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and Washington D.C.

Gulf Coast marketAlabama, Florida, Georgia,  Louisiana, Mexico, Mississippi, Oklahoma,  South Carolina, Texas and the Bahamas

West market — Arizona, California and New Mexico





PRODUCT AND SERVICE REVENUES



Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs at a point in time when our aggregates, asphalt mix and ready-mixed concrete are shipped/delivered and control passes to the customer. Revenue for our products and services is recorded at the fixed invoice amount and is due by the 15th day of the following monthwe do not offer discounts for early payment. Freight & delivery generally represents pass-through transportation we incur (including our administrative costs) and pay to third-party carriers to deliver our products to customers and are accounted for as a fulfillment activity.  Likewise, the cost related to freight &  delivery is included in cost of revenues.





CONSTRUCTION PAVING REVENUES



Revenue from our asphalt construction paving business is recognized over time using the percentage-of-completion method under the cost approach. The percentage of completion is determined by costs incurred to date as a percentage of total costs estimated for the project. Under this approach, recognized contract revenue equals the total estimated contract revenue multiplied by the percentage of completion. Our construction contracts are unit priced and an account receivable is recorded for amounts invoiced based on actual units produced. Variable consideration in our construction paving contracts is immaterial and consists of incentives and penalties based on the quality of work performed. Our construction paving contracts may contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from nine months to one year after project completion. Due to the nature of our construction paving projects, including contract owner inspections of the work during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties.





VOLUMETRIC PRODUCTION PAYMENT REVENUES



In 2013 and 2012, we sold a percentage interest in certain future aggregates production for net cash proceeds of $226,926,000.  These transactions, structured as volumetric production payments (VPPs):



§

relate to eight quarries in Georgia and South Carolina

§

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

§

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

§

are both volume and time limited (we expect the transactions will last approximately 25 years, limited by volume rather than time)





We are the exclusive sales agent for, and transmit quarterly to the purchaser the proceeds from the sale of, the purchaser’s share of future aggregates production.  Our consolidated total revenues exclude the revenue from the sale of the purchaser’s share of aggregates.



These proceeds we received from the sale of the percentage interest were recorded as deferred revenue on the balance sheet.  We recognize revenue on a unit-of-sales basis (as we sell the purchaser’s share of future production) relative to the

9

 


 

volume limitations of the transactions. Given the nature of the risks and potential rewards assumed by the buyer, the transactions do not reflect financing activities.



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







 

 

 

 

 



 

 

 

 

 



Three Months Ended

 



March 31

 

in thousands

2018 

 

 

2017 

 

Deferred Revenue

 

 

 

 

 

Balance at beginning of period

$     199,556 

 

 

$     206,468 

 

 Revenue recognized from deferred revenue

(1,355)

 

 

(1,649)

 

Balance at end of period

$     198,201 

 

 

$     204,819 

 



Based on expected sales from the specified quarries, we expect to recognize $7,470,000 of deferred revenue as income during the 12-month period ending March 31, 2019 (reflected in other current liabilities in our 2018 Condensed Consolidated Balance Sheet).

 

 

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



March 31

 

 

December 31

 

 

March 31

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       19,412 

 

 

$       20,348 

 

 

$         5,148 

 

 Equities

 

 

 

 

10,608 

 

Total

$       19,412 

 

 

$       20,348 

 

 

$       15,756 

 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Level 2 Fair Value



March 31

 

 

December 31

 

 

March 31

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Money market mutual fund

$        2,738 

 

 

$        1,203 

 

 

$        2,849 

 

Total

$        2,738 

 

 

$        1,203 

 

 

$        2,849 

 



10

 


 

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 (losses) of the Rabbi Trust investments were $(776,000) and $239,000 for the three months ended March 31, 2018 and 2017, respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at March 31, 2018 and 2017 were $(787,000) and  $(197,000), 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.

 

 

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 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.



We occasionally enter into interest rate locks of future debt issuances to hedge the risk of higher interest rates. The gain/loss upon settlement is deferred (recorded in AOCI) and 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

 



Location on

 

March 31

 

in thousands

Statement

 

2018 

 

 

2017 

 

Interest Rate Hedges

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 (effective portion)

expense

 

$           (89)

 

 

$         (528)

 



For the 12-month period ending March  31, 2019, we estimate that $291,000 of the pretax loss in AOCI will be reclassified to interest expense.

 

 

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Note 7: Debt



Debt is detailed as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Effective

 

March 31

 

 

December 31

 

 

March 31

 

in thousands

Interest Rates

 

2018 

 

 

2017 

 

 

2017 

 

Short-term Debt

 

 

 

 

 

 

 

 

 

 

Bank line of credit expires 2021 1, 2

1.25% 

 

$        200,000 

 

 

$                0 

 

 

$                0 

 

Total short-term debt

 

 

$        200,000 

 

 

$                0 

 

 

$                0 

 

Long-term Debt

 

 

 

 

 

 

 

 

 

 

Bank line of credit expires 2021 1, 2

 

 

$                   0 

 

 

$     250,000 

 

 

$     235,000 

 

Term loan due 2018 2, 3

 

 

 

 

350,000 

 

 

 

7.00% notes due 2018

 

 

 

 

 

 

272,512 

 

10.375% notes due 2018

 

 

 

 

 

 

250,000 

 

Floating-rate notes due 2020

2.50% 

 

250,000 

 

 

250,000 

 

 

 

Floating-rate notes due 2021

2.69% 

 

500,000 

 

 

 

 

 

7.50% notes due 2021

 

 

 

 

35,111 

 

 

600,000 

 

8.85% notes due 2021

8.88% 

 

6,000 

 

 

6,000 

 

 

6,000 

 

Term loan due 2021 2

 

 

 

 

250,000 

 

 

 

4.50% notes due 2025

4.65% 

 

400,000 

 

 

400,000 

 

 

400,000 

 

3.90% notes due 2027

4.00% 

 

400,000 

 

 

400,000 

 

 

350,000 

 

7.15% notes due 2037

8.05% 

 

129,239 

 

 

240,188 

 

 

240,188 

 

4.50% notes due 2047

4.59% 

 

700,000 

 

 

700,000 

 

 

 

4.70% notes due 2048

5.42% 

 

460,949 

 

 

 

 

 

Other notes 2

6.46% 

 

224 

 

 

230 

 

 

364 

 

Total long-term debt - face value

 

 

$     2,846,412 

 

 

$  2,881,529 

 

 

$  2,354,064 

 

Unamortized discounts and debt issuance costs

 

 

(70,703)

 

 

(26,664)

 

 

(24,677)

 

Total long-term debt - book value

 

 

$     2,775,709 

 

 

$  2,854,865 

 

 

$  2,329,387 

 

Less current maturities

 

 

22 

 

 

41,383 

 

 

139 

 

Total long-term debt - reported value

 

 

$     2,775,687 

 

 

$  2,813,482 

 

 

$  2,329,248 

 

Estimated fair value of long-term debt

 

 

$     2,843,943 

 

 

$  2,983,419 

 

 

$  2,605,379 

 







 

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.

Non-publicly traded debt.

This short-term loan was refinanced on a long-term basis in February 2018 as discussed below. Thus, it was classified as long-term debt as of December 31, 2017.



Discounts  and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $1,473,000 of net interest expense for these items for the three months ended March 31, 2018.





LINE OF CREDIT



Our unsecured $750,000,000 line of credit matures December 2021 and 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 March 31, 2018, we were in compliance with the line of credit covenants.



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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 March 31, 2018, 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 March 31, 2018, our available borrowing capacity was $506,761,000. Utilization of the borrowing capacity was as follows:



§

$200,000,000 was borrowed

§

$43,239,000 was used to provide support for outstanding standby letters of credit





TERM DEBT



All of our term debt is unsecured. $2,846,188,000 of such debt is governed by three essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in all three indentures limits the amount of secured debt we may incur without ratably securing such debt. As of March 31, 2018, we were in compliance with all term debt covenants.



In March 2018, we early retired via exchange offer $110,949,000 of the $240,188,000 7.15% notes due 2037 for: (1) a like amount of notes due 2048 (these notes are a further issuance of, and form a single series with, the $350,000,000 of notes due 2048 issued in February 2018 as described below) and (2) $38,164,000 of cash. The cash payment primarily reflects the trading price of the retired notes relative to par and will be amortized to interest expense over the term of the notes due 2048. We recognized transaction costs of $1,314,000 with this early retirement.



In February 2018, we issued $350,000,000 of 4.70% senior notes due 2048 (these notes now total $460,949,000 including the $110,949,000 issued in March as described above) and $500,000,000 of floating-rate senior notes due 2021. Total proceeds of $846,029,000 (net of discounts, transaction costs and an interest rate derivative settlement gain), together with cash on hand, were used to retire/repay without penalty or premium: (1) the $350,000,000 term loan due 2018, (2) the $250,000,000 term loan due 2021, and (3) the $250,000,000 bank line of credit borrowings. We recognized net noncash expense of $203,000 with the acceleration of unamortized deferred transaction costs.



In January 2018, we early retired via redemption the remaining $35,111,000 of the 7.50% senior notes due 2021 at a cost of $40,719,000 including a premium of $5,608,000 which was a component of interest expense for the three months ended March 31, 2018. Additionally, we recognized net noncash expense of $263,000 with the acceleration of unamortized deferred transaction costs.



As a result of the first quarter 2018 early debt retirements described above, we recognized premiums of $5,608,000, transaction costs of $1,314,000 and noncash expense (acceleration of unamortized deferred transaction costs) of $466,000. The combined charge of $7,388,000 was a component of interest expense for the three months ended March 31, 2018.



In December 2017, we early retired via tender offer, $564,889,000 of the $600,000,000 7.50% senior notes due 2021 at a cost of $662,613,000 including a premium of $96,167,000 and transaction costs of $1,558,000.  Additionally, we recognized net noncash expense of $4,228,000 with the acceleration of unamortized deferred transaction costs.



Also in December 2017, we entered into a 6-month $350,000,000 unsecured term loan with one of the banks that provides our line of credit. Proceeds were used for general corporate purposes. This term loan was prepaid, as described above, in February 2018 with the proceeds of the 4.70% senior notes due 2048.



In July 2017, we early retired via redemption: (1) the $272,512,000 7.00%  senior notes due 2018 and (2) the $250,000,000 10.375%  senior notes due 2018 —  at a combined cost of $565,560,000 including a premium of $43,020,000 and transaction costs of $28,000. Additionally, we recognized net noncash expense of $3,029,000 with the acceleration of unamortized deferred discounts, transaction costs and interest rate derivative settlement losses. Such redemptions were partially funded with the proceeds of the senior notes issued in June 2017 as described below.



13

 


 

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 2047, (2) $50,000,000 of 3.90% senior notes due 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 2020. Total proceeds of $989,512,000 (net of discounts/premiums and transaction costs) were used to partially finance an acquisition and to early retire the notes due in 2018 as described above.



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  line of credit borrowings and for general corporate purposes. This term loan was prepaid, as described above, in February 2018 with proceeds of the floating-rate senior notes due 2021.



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



As a result of the 2017 early debt retirements described above, we recognized premiums of $139,187,000,  transaction costs of $1,586,000 and net noncash expense (acceleration of unamortized deferred transaction costs) of $7,257,000. The combined charge of $148,030,000 was a component of interest expense for the year ended December 31, 2017 with none recognized in the three months ended March 31, 2017.





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 March 31, 2018 are summarized by purpose in the table below:







 

 



 

 

in thousands

 

 

Standby Letters of Credit

 

 

Risk management insurance

$       38,111 

 

Reclamation/restoration requirements

5,128 

 

Total

$       43,239 

 

 

 

Note 8: Commitments and Contingencies



As summarized by purpose directly above in Note 7, our standby letters of credit totaled $43,239,000 as of March 31, 2018.



As described in Note 9, our asset retirement obligations totaled $214,709,000 as of March 31, 2018.



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.



14

 


 

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.



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.



In August 2017, the EPA informed certain members of the Cooperating Parties Group, including Vulcan that it planned to use the services of a third-party allocator with the expectation of offering cash-out settlements to some parties in connection with the bank-to-bank remedy. This voluntary allocation process is intended to establish an impartial third-party expert recommendation that may be considered by the government and the participants as the basis of possible settlements. We have begun participating in this voluntary allocation process, which is likely to take several years.



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 (and later Occidental) 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 for response costs and civil penalties, claims by Texas Brine for response costs and lost profits,  claims for physical damages to nearby oil and gas pipelines and storage facilities (pipelines),  and business interruption claims.



15

 


 

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 2016, we settled with plaintiffs in one of the cases involving individual property damages. In 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 the pipeline cases. The trial was limited in scope to the allocation of comparative fault or liability for causing the sinkhole, with a damages phase of the trial to be held at a later date. Vulcan participated in the trial, as the liability finding could impact cross-party and third-party claims against us. In December 2017, the judge issued a ruling on the allocation of fault among the three defendants as follows: Occidental 50%, Texas Brine 35% and Vulcan 15%. It is likely that one or more parties will appeal the judge’s ruling.



Also in December 2017, we agreed to a settlement in a federal putative class action. It will take time to finalize this settlement due to required court proceedings relating to class action notice and approval. Our insurers participated in the settlement discussions and have agreed to fund the settlement. We have settled (for immaterial amounts) or are attempting to settle several other cases, all with the approval of our insurers.



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



§

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 follows 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 pump, treat and reinjection system. In December 2017, we submitted an addendum to the AIRAP, incorporating new data acquired since the prior submission. In February 2018, the AIRAP was approved by RWQCB. As a result of this approval, we will begin to implement the on-site source control activities described in the AIRAP. Based on the preliminary design of this system, we accrued $15,239,000 in 2017 (of which $1,326,000 was recorded to other operating expense in the first quarter of 2017).



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.



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The EPA and Vulcan entered into an AOC and Statement of Work having an effective date of September 2017, for the design of two extraction wells south of the Hewitt Site to protect the North Hollywood West well field. In November 2017, we submitted a Pre-Design Investigation Work Plan to the EPA, which sets forth the activities and schedule for our evaluation of the need for a 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.

 

 

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, including both owned properties and mineral leases. For the three month period ended March  31, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:







 

 

 

 

 



 

 

 

 

 



Three Months Ended

 



March 31

 

in thousands

2018 

 

 

2017 

 

ARO Operating Costs

 

 

 

 

 

Accretion

$        2,684 

 

 

$        2,882 

 

Depreciation

1,337 

 

 

1,632 

 

Total

$        4,021 

 

 

$        4,514 

 



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

 



March 31

 

in thousands

2018 

 

 

2017 

 

Asset Retirement Obligations

 

 

 

 

 

Balance at beginning of year

$     218,117 

 

 

$     223,872 

 

  Liabilities incurred

 

 

 

  Liabilities settled

(6,021)

 

 

(4,865)

 

  Accretion expense

2,684 

 

 

2,882 

 

  Revisions, net

(71)

 

 

4,123 

 

Balance at end of period

$     214,709 

 

 

$     226,012 

 



ARO liabilities settled during the first three months of 2018 and 2017 include $4,402,000 and $1,899,000, respectively, of reclamation activities required under a development agreement and conditional use permits at two adjacent aggregates sites on owned property in Southern California. The reclamation required under the reclamation agreement will result in the restoration and development of 90 acres of previously mined property suitable for retail and commercial development.

 

 

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Note 10: Benefit Plans



We sponsor three qualified, noncontributory defined benefit pension plans. These plans cover substantially all employees hired before July 2007, other than those covered by union-administered plans. Normal retirement age is 65, but the plans contain provisions for earlier retirement. Benefits for the Salaried Plan and the Chemicals Hourly Plan are generally based on salaries or wages and years of service; the Construction Materials Hourly Plan provides 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 2007, we amended our defined benefit pension plans to no longer accept new participants. Effective December 2013, we amended our defined benefit pension plans to freeze future benefit accruals for salaried pension participants. Effective December 31, 2015, we amended our defined benefit pension plans to freeze earnings for salaried pension participants.



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





 

 

 

 

 



 

 

 

 

 

PENSION BENEFITS

Three Months Ended

 



March 31

 

in thousands

2018 

 

 

2017 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

Service cost

$        1,429 

 

 

$        1,654 

 

Interest cost

8,876 

 

 

9,057 

 

Expected return on plan assets

(14,797)

 

 

(12,096)

 

Amortization of prior service cost

335 

 

 

335 

 

Amortization of actuarial loss

2,457 

 

 

1,824 

 

Net periodic pension benefit cost (credit)

$       (1,700)

 

 

$           774 

 

Pretax reclassifications from AOCI included in

 

 

 

 

 

 net periodic pension benefit cost

$        2,792 

 

 

$        2,159 

 



The contributions to pension plans for the three months ended March 31, 2018 and 2017, as reflected on the Condensed Consolidated Statements of Cash Flows, pertain to benefit payments under nonqualified plans and a first quarter 2018 discretionary qualified plan contribution of $100,000,000.



In addition to pension benefits, we provide certain healthcare and life insurance benefits for some retired employees. In 2012, we amended our postretirement healthcare plan to cap our portion of the medical coverage cost at the 2015 level. Substantially all our salaried employees and, where applicable, certain of our hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain service requirements. Generally, Company-provided healthcare benefits end 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 other postretirement benefit cost:







 

 

 

 

 



 

 

 

 

 

OTHER POSTRETIREMENT BENEFITS

Three Months Ended

 



March 31

 

in thousands

2018 

 

 

2017 

 

Components of Net Periodic Benefit Cost

 

 

 

 

 

Service cost

$           339 

 

 

$           292 

 

Interest cost

310 

 

 

315 

 

Amortization of prior service credit

(991)

 

 

(1,059)

 

Amortization of actuarial gain

(324)

 

 

(397)

 

Net periodic postretirement benefit credit

$          (666)

 

 

$          (849)

 

Pretax reclassifications from AOCI included in

 

 

 

 

 

 net periodic postretirement benefit credit

$       (1,315)

 

 

$       (1,456)

 



We present the service cost component of net periodic benefit cost in cost of revenues and selling, administrative and general expense consistent with employee compensation costs. The other components of net periodic benefit cost (credit) are reported within other nonoperating income in our accompanying Condensed Consolidated Statements of Comprehensive Income.

 

 

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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:







 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 



 

 

March 31

 

 

December 31

 

 

March 31

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

AOCI

 

 

 

 

 

 

 

 

Interest rate hedges

$        (8,876)