10-Q 1 vmc-20180630x10q.htm 10-Q 20180630 Q2

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q

(Mark One)

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


For the quarterly period ended June 30, 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 July 27, 2018      

132,268,189

 



 

 

 



 



 


 

 





 

 

 



VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED JUNE 30, 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

 

 

28



Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

47



Item 4.

Controls and Procedures

47



 

 

PART II

OTHER INFORMATION

 



Item 1.

Legal Proceedings

48



Item 1A.

Risk Factors

48



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48



Item 4.

Mine Safety Disclosures

48



Item 6.

Exhibits

49



 

 

Signatures

 

 

50



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





 

 

1

 


 







part I   financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED BALANCE SHEETS





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

Unaudited, except for December 31

June 30

 

 

December 31

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$         55,059 

 

 

$       141,646 

 

 

$    1,129,799 

 

Restricted cash

6,056 

 

 

5,000 

 

 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

640,742 

 

 

590,986 

 

 

573,029 

 

  Less: Allowance for doubtful accounts

(2,628)

 

 

(2,649)

 

 

(2,943)

 

   Accounts and notes receivable, net

638,114 

 

 

588,337 

 

 

570,086 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

343,948 

 

 

327,711 

 

 

318,465 

 

  Raw materials

29,684 

 

 

27,152 

 

 

27,106 

 

  Products in process

1,882 

 

 

1,827 

 

 

1,210 

 

  Operating supplies and other

28,250 

 

 

27,648 

 

 

28,148 

 

   Inventories

403,764 

 

 

384,338 

 

 

374,929 

 

Other current assets

80,209 

 

 

60,780 

 

 

109,998 

 

Total current assets

1,183,202 

 

 

1,180,101 

 

 

2,184,812 

 

Investments and long-term receivables

41,989 

 

 

35,115 

 

 

38,888 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

8,241,164 

 

 

7,969,312 

 

 

7,531,536 

 

  Allowances for depreciation, depletion & amortization

(4,134,750)

 

 

(4,050,381)

 

 

(3,992,728)

 

   Property, plant & equipment, net

4,106,414 

 

 

3,918,931 

 

 

3,538,808 

 

Goodwill

3,163,954 

 

 

3,122,321 

 

 

3,101,439 

 

Other intangible assets, net

1,156,898 

 

 

1,063,630 

 

 

834,971 

 

Other noncurrent assets

192,327 

 

 

184,793 

 

 

171,025 

 

Total assets

$    9,844,784 

 

 

$    9,504,891 

 

 

$    9,869,943 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

23 

 

 

41,383 

 

 

525,776 

 

Short-term debt

360,000 

 

 

 

 

 

Trade payables and accruals

231,913 

 

 

197,335 

 

 

202,753 

 

Other current liabilities

219,860 

 

 

204,154 

 

 

197,264 

 

Total current liabilities

811,796 

 

 

442,872 

 

 

925,793 

 

Long-term debt

2,776,906 

 

 

2,813,482 

 

 

2,809,293 

 

Deferred income taxes, net

545,756 

 

 

464,081 

 

 

706,726 

 

Deferred revenue

188,826 

 

 

191,476 

 

 

195,020 

 

Other noncurrent liabilities

500,870 

 

 

624,087 

 

 

631,007 

 

Total liabilities

$    4,824,154 

 

 

$    4,535,998 

 

 

$    5,267,839 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Outstanding 132,268, 132,324 and 132,181 shares, respectively

132,268 

 

 

132,324 

 

 

132,181 

 

Capital in excess of par value

2,788,486 

 

 

2,805,587 

 

 

2,797,269 

 

Retained earnings

2,244,545 

 

 

2,180,448 

 

 

1,810,528 

 

Accumulated other comprehensive loss

(144,669)

 

 

(149,466)

 

 

(137,874)

 

Total equity

$    5,020,630 

 

 

$    4,968,893 

 

 

$    4,602,104 

 

Total liabilities and equity

$    9,844,784 

 

 

$    9,504,891 

 

 

$    9,869,943 

 

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

 



2

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Six Months Ended

 

Unaudited

 

 

 

June 30

 

 

 

 

 

June 30

 

in thousands, except per share data

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Total revenues

$    1,200,151 

 

 

$    1,030,763 

 

 

$    2,054,625 

 

 

$    1,818,091 

 

Cost of revenues

876,967 

 

 

740,746 

 

 

1,572,106 

 

 

1,369,853 

 

  Gross profit

323,184 

 

 

290,017 

 

 

482,519 

 

 

448,238 

 

Selling, administrative and general expenses

89,043 

 

 

83,056 

 

 

167,383 

 

 

165,439 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses

2,106 

 

 

2,773 

 

 

6,270 

 

 

3,142 

 

Other operating expense, net

(5,994)

 

 

(17,768)

 

 

(9,969)

 

 

(23,595)

 

  Operating earnings

230,253 

 

 

191,966 

 

 

311,437 

 

 

262,346 

 

Other nonoperating income, net

3,339 

 

 

3,890 

 

 

8,421 

 

 

7,934 

 

Interest expense, net

33,244 

 

 

38,455 

 

 

71,018 

 

 

72,531 

 

Earnings from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

200,348 

 

 

157,401 

 

 

248,840 

 

 

197,749 

 

Income tax expense

40,046 

 

 

45,652 

 

 

35,143 

 

 

42,477 

 

Earnings from continuing operations

160,302 

 

 

111,749 

 

 

213,697 

 

 

155,272 

 

Earnings (loss) on discontinued operations, net of tax

(650)

 

 

8,390 

 

 

(1,066)

 

 

9,788 

 

Net earnings

$       159,652 

 

 

$       120,139 

 

 

$       212,631 

 

 

$       165,060 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Deferred gain on interest rate derivative

 

 

 

 

2,496 

 

 

 

  Amortization of prior interest rate derivative loss

52 

 

 

328 

 

 

118 

 

 

647 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

1,092 

 

 

427 

 

 

2,183 

 

 

855 

 

Other comprehensive income

1,144 

 

 

755 

 

 

4,797 

 

 

1,502 

 

Comprehensive income

$       160,796 

 

 

$       120,894 

 

 

$       217,428 

 

 

$       166,562 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             1.21 

 

 

$             0.84 

 

 

$             1.61 

 

 

$             1.17 

 

  Discontinued operations

0.00 

 

 

0.07 

 

 

(0.01)

 

 

0.08 

 

  Net earnings

$             1.21 

 

 

$             0.91 

 

 

$             1.60 

 

 

$             1.25 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             1.20 

 

 

$             0.83 

 

 

$             1.59 

 

 

$             1.15 

 

  Discontinued operations

(0.01)

 

 

0.06 

 

 

(0.01)

 

 

0.07 

 

  Net earnings

$             1.19 

 

 

$             0.89 

 

 

$             1.58 

 

 

$             1.22 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

132,437 

 

 

132,413 

 

 

132,563 

 

 

132,524 

 

  Assuming dilution

134,051 

 

 

134,735 

 

 

134,280 

 

 

134,925 

 

Cash dividends per share of common stock

$             0.28 

 

 

$             0.25 

 

 

$             0.56 

 

 

$             0.50 

 

Depreciation, depletion, accretion and amortization

$         85,633 

 

 

$         76,775 

 

 

$       167,072 

 

 

$       148,339 

 

Effective tax rate from continuing operations

20.0% 

 

 

29.0% 

 

 

14.1% 

 

 

21.5% 

 

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

 



3

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS





 

 

 

 

 



 

 

 

 

 



Six Months Ended

 

Unaudited

 

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

Operating Activities

 

 

 

 

 

Net earnings

$       212,631 

 

 

$       165,060 

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

167,072 

 

 

148,339 

 

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

(6,270)

 

 

(3,142)

 

  Contributions to pension plans

(104,794)

 

 

(4,744)

 

  Share-based compensation expense

14,763 

 

 

13,671 

 

  Deferred tax expense (benefit)

40,549 

 

 

2,901 

 

  Cost of debt purchase

6,922 

 

 

 

  Changes in assets and liabilities before initial effects of business acquisitions

 

 

 

 

 

    and dispositions

(55,415)

 

 

(170,701)

 

Other, net

302 

 

 

3,838 

 

Net cash provided by operating activities

$       275,760 

 

 

$       155,222 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(247,166)

 

 

(291,034)

 

Proceeds from sale of property, plant & equipment

8,523 

 

 

8,530 

 

Proceeds from sale of businesses

11,256 

 

 

 

Payment for businesses acquired, net of acquired cash

(218,996)

 

 

(210,562)

 

Other, net

(10,226)

 

 

405 

 

Net cash used for investing activities

$     (456,609)

 

 

$     (492,661)

 

Financing Activities

 

 

 

 

 

Proceeds from short-term debt

506,200 

 

 

5,000 

 

Payment of short-term debt

(146,200)

 

 

(5,000)

 

Payment of current maturities and long-term debt

(892,044)

 

 

(235,007)

 

Proceeds from issuance of long-term debt

850,000 

 

 

1,600,000 

 

Debt issuance and exchange costs

(45,513)

 

 

(15,046)

 

Settlements of interest rate derivatives

3,378 

 

 

 

Purchases of common stock

(74,921)

 

 

(60,303)

 

Dividends paid

(74,196)

 

 

(66,194)

 

Share-based compensation, shares withheld for taxes

(31,386)

 

 

(24,231)

 

Net cash provided by financing activities

$         95,318 

 

 

$    1,199,219 

 

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

(85,531)

 

 

861,780 

 

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

$         61,115 

 

 

$    1,129,799 

 

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. We prepared the accompanying condensed consolidated financial statements on the same basis as our annual financial statements, except for the adoption of new accounting standards as described in Note 17. 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 and six month periods ended June 30, 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

 

 

Six Months Ended

 



June 30

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

132,437 

 

 

132,413 

 

 

132,563 

 

 

132,524 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock-Only Stock Appreciation Rights

583 

 

 

1,317 

 

 

636 

 

 

1,330 

 

  Other stock compensation plans

1,031 

 

 

1,005 

 

 

1,081 

 

 

1,071 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

134,051 

 

 

134,735 

 

 

134,280 

 

 

134,925 

 



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

 

 

Six Months Ended

 



June 30

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Antidilutive common stock equivalents

157 

 

 

79 

 

 

155 

 

 

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

 

 

Six Months Ended

 



June 30

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax earnings (loss)

$          (883)

 

 

$      12,804 

 

 

$       (1,449)

 

 

$      14,896 

 

Income tax (expense) benefit

233 

 

 

(4,414)

 

 

383 

 

 

(5,108)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of tax

$          (650)

 

 

$        8,390 

 

 

$       (1,066)

 

 

$        9,788 

 



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  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 first half of 2018.



§

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 half 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 determining whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, the expected impact. We have not recorded any amount of GILTI tax in our financial statements nor have we made an accounting policy decision.



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 second quarter of 2018, we recorded income tax expense from continuing operations of $40,046,000 compared to income tax expense from continuing operations of $45,652,000 in the second quarter of 2017. The decrease in income tax expense was largely due to the change in the U.S. statutory income tax rate to 21% in 2018 from 35% in 2017.



For the first six months of 2018, we recorded income tax expense from continuing operations of $35,143,000 compared to income tax expense from continuing operations of $42,477,000 for the first six months of 2017. The decrease in income tax expense was 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 $71,812,000  ($67,611,000 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 significant 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 three and six month periods ended June 30, 2018 and 2017 are disaggregated as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended June 30, 2018

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     313,245 

 

 

$     49,339 

 

 

$     69,605 

 

 

$              0 

 

 

$      432,189 

 

Gulf Coast

493,696 

 

 

38,845 

 

 

18,354 

 

 

2,282 

 

 

553,177 

 

West

149,324 

 

 

123,644 

 

 

18,764 

 

 

 

 

291,732 

 

Segment sales

$     956,265 

 

 

$   211,828 

 

 

$   106,723 

 

 

$       2,282 

 

 

$   1,277,098 

 

Intersegment sales

(76,947)

 

 

 

 

 

 

 

 

(76,947)

 

Total revenues

$     879,318 

 

 

$   211,828 

 

 

$   106,723 

 

 

$       2,282 

 

 

$   1,200,151 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended June 30, 2017

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     281,304 

 

 

$     29,775 

 

 

$     59,647 

 

 

$              0 

 

 

$      370,726 

 

Gulf Coast

384,793 

 

 

24,444 

 

 

25,501 

 

 

1,971 

 

 

436,709 

 

West

151,489 

 

 

121,539 

 

 

20,065 

 

 

 

 

293,093 

 

Segment sales

$     817,586 

 

 

$   175,758 

 

 

$   105,213 

 

 

$       1,971 

 

 

$   1,100,528 

 

Intersegment sales

(69,765)

 

 

 

 

 

 

 

 

(69,765)

 

Total revenues

$     747,821 

 

 

$   175,758 

 

 

$   105,213 

 

 

$       1,971 

 

 

$   1,030,763 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30, 2018

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     496,459 

 

 

$     61,068 

 

 

$   131,175 

 

 

$              0 

 

 

$      688,702 

 

Gulf Coast

888,271 

 

 

53,488 

 

 

43,554 

 

 

4,224 

 

 

989,537 

 

West

271,192 

 

 

201,107 

 

 

32,956 

 

 

 

 

505,255 

 

Segment sales

$  1,655,922 

 

 

$   315,663 

 

 

$   207,685 

 

 

$       4,224 

 

 

$   2,183,494 

 

Intersegment sales

(128,869)

 

 

 

 

 

 

 

 

(128,869)

 

Total revenues

$  1,527,053 

 

 

$   315,663 

 

 

$   207,685 

 

 

$       4,224 

 

 

$   2,054,625 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Six Months Ended June 30, 2017

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     463,762 

 

 

$     39,154 

 

 

$   113,897 

 

 

$              0 

 

 

$      616,813 

 

Gulf Coast

752,006 

 

 

42,480 

 

 

51,807 

 

 

3,857 

 

 

850,150 

 

West

252,118 

 

 

189,900 

 

 

28,259 

 

 

 

 

470,277 

 

Segment sales

$  1,467,886 

 

 

$   271,534 

 

 

$   193,963 

 

 

$       3,857 

 

 

$   1,937,240 

 

Intersegment sales

(119,149)

 

 

 

 

 

 

 

 

(119,149)

 

Total revenues

$  1,348,737 

 

 

$   271,534 

 

 

$   193,963 

 

 

$       3,857 

 

 

$   1,818,091 

 





 

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





9

 


 

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. Contract assets for estimated earnings in excess of billings, contract assets related to retainage provisions and contract liabilities for billings in excess of costs are immaterial. 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 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

 

 

Six Months Ended

 



June 30

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Deferred Revenue

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     198,201 

 

 

$     204,819 

 

 

$     199,556 

 

 

$     206,468 

 

 Revenue recognized from deferred revenue

(1,905)

 

 

(1,719)

 

 

(3,260)

 

 

(3,368)

 

Balance at end of period

$     196,296 

 

 

$     203,100 

 

 

$     196,296 

 

 

$     203,100 

 



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 June 30, 2019 (reflected in other current liabilities in our June 30, 2018 Condensed Consolidated Balance Sheet).

 

 

10

 


 

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



June 30

 

 

December 31

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       20,698 

 

 

$       20,348 

 

 

$         5,348 

 

 Equities

 

 

 

 

11,785 

 

Total

$       20,698 

 

 

$       20,348 

 

 

$       17,133 

 







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Level 2 Fair Value



June 30

 

 

December 31

 

 

June 30

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Money market mutual fund

$        1,754 

 

 

$        1,203 

 

 

$        2,338 

 

Total

$        1,754 

 

 

$        1,203 

 

 

$        2,338 

 



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 $(428,000) and $848,000 for the six months ended June  30, 2018 and 2017, respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at June  30, 2018 and 2017 were $(430,000) and  $413,000, 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.

 

 

11

 


 

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 locks 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

 

 

Six Months Ended

 



Location on

 

June 30

 

 

June 30

 

in thousands

Statement

 

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Interest Rate Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$           (71)

 

 

$         (539)

 

 

$         (160)

 

 

$      (1,067)

 



For the 12-month period ending June  30, 2019, we estimate that $297,000 of the pretax loss in AOCI will be reclassified to interest expense.

 

 

12

 


 

Note 7: Debt



Debt is detailed as follows:









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

Effective

 

June 30

 

 

December 31

 

 

June 30

 

in thousands

Interest Rates

 

2018