10-Q 1 vmc-20180930x10q.htm 10-Q 20180930 Q3

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q

(Mark One)

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


For the quarterly period ended September 30, 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 every Interactive Data File required to be submitted 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 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. 


Large accelerated filer 


Accelerated filer 


Smaller reporting company 


Non-accelerated filer 


Emerging growth company 


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


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No


Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:


                  Class                  

Common Stock, $1 Par Value

 

Shares outstanding
      at October 29, 2018      

132,047,816

 



 

 

 



 



 


 

 





 

 

 



VULCAN MATERIALS COMPANY

 

FORM 10-Q

QUARTER ENDED SEPTEMBER 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

 

 

27



Item 3.

Quantitative and Qualitative Disclosures About

   Market Risk

 

 

46



Item 4.

Controls and Procedures

46



 

 

PART II

OTHER INFORMATION

 



Item 1.

Legal Proceedings

47



Item 1A.

Risk Factors

47



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47



Item 4.

Mine Safety Disclosures

47



Item 6.

Exhibits

48



 

 

Signatures

 

 

49



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

September 30

 

 

December 31

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$         38,026 

 

 

$       141,646 

 

 

$       701,163 

 

Restricted cash

5,043 

 

 

5,000 

 

 

 

Accounts and notes receivable

 

 

 

 

 

 

 

 

  Accounts and notes receivable, gross

648,009 

 

 

590,986 

 

 

582,105 

 

  Less: Allowance for doubtful accounts

(2,294)

 

 

(2,649)

 

 

(2,903)

 

   Accounts and notes receivable, net

645,715 

 

 

588,337 

 

 

579,202 

 

Inventories

 

 

 

 

 

 

 

 

  Finished products

346,940 

 

 

327,711 

 

 

307,046 

 

  Raw materials

29,078 

 

 

27,152 

 

 

27,852 

 

  Products in process

2,668 

 

 

1,827 

 

 

1,652 

 

  Operating supplies and other

29,966 

 

 

27,648 

 

 

29,276 

 

   Inventories

408,652 

 

 

384,338 

 

 

365,826 

 

Other current assets

78,476 

 

 

60,780 

 

 

100,781 

 

Total current assets

1,175,912 

 

 

1,180,101 

 

 

1,746,972 

 

Investments and long-term receivables

42,944 

 

 

35,115 

 

 

35,999 

 

Property, plant & equipment

 

 

 

 

 

 

 

 

  Property, plant & equipment, cost

8,386,315 

 

 

7,969,312 

 

 

7,539,928 

 

  Allowances for depreciation, depletion & amortization

(4,197,592)

 

 

(4,050,381)

 

 

(4,002,227)

 

   Property, plant & equipment, net

4,188,723 

 

 

3,918,931 

 

 

3,537,701 

 

Goodwill

3,169,615 

 

 

3,122,321 

 

 

3,101,337 

 

Other intangible assets, net

1,099,354 

 

 

1,063,630 

 

 

835,269 

 

Other noncurrent assets

199,087 

 

 

184,793 

 

 

182,056 

 

Total assets

$    9,875,635 

 

 

$    9,504,891 

 

 

$    9,439,334 

 

Liabilities

 

 

 

 

 

 

 

 

Current maturities of long-term debt

23 

 

 

41,383 

 

 

4,827 

 

Short-term debt

200,000 

 

 

 

 

 

Trade payables and accruals

233,885 

 

 

197,335 

 

 

181,207 

 

Other current liabilities

256,507 

 

 

204,154 

 

 

227,665 

 

Total current liabilities

690,415 

 

 

442,872 

 

 

413,699 

 

Long-term debt

2,778,129 

 

 

2,813,482 

 

 

2,809,966 

 

Deferred income taxes, net

581,026 

 

 

464,081 

 

 

716,165 

 

Deferred revenue

186,829 

 

 

191,476 

 

 

193,117 

 

Other noncurrent liabilities

493,447 

 

 

624,087 

 

 

621,253 

 

Total liabilities

$    4,729,846 

 

 

$    4,535,998 

 

 

$    4,754,200 

 

Other commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 Outstanding 132,045, 132,324 and 132,281 shares, respectively

132,045 

 

 

132,324 

 

 

132,281 

 

Capital in excess of par value

2,795,366 

 

 

2,805,587 

 

 

2,803,106 

 

Retained earnings

2,361,903 

 

 

2,180,448 

 

 

1,886,006 

 

Accumulated other comprehensive loss

(143,525)

 

 

(149,466)

 

 

(136,259)

 

Total equity

$    5,145,789 

 

 

$    4,968,893 

 

 

$    4,685,134 

 

Total liabilities and equity

$    9,875,635 

 

 

$    9,504,891 

 

 

$    9,439,334 

 

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

 



2

 


 

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 

Unaudited

 

 

 

September 30

 

 

 

 

 

September 30

 

in thousands, except per share data

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Total revenues

$    1,240,197 

 

 

$    1,094,715 

 

 

$    3,294,822 

 

 

$    2,912,806 

 

Cost of revenues

897,055 

 

 

790,957 

 

 

2,469,161 

 

 

2,160,810 

 

  Gross profit

343,142 

 

 

303,758 

 

 

825,661 

 

 

751,996 

 

Selling, administrative and general expenses

81,606 

 

 

73,612 

 

 

248,989 

 

 

239,051 

 

Gain on sale of property, plant & equipment

 

 

 

 

 

 

 

 

 

 

 

 and businesses

2,104 

 

 

1,488 

 

 

8,374 

 

 

4,630 

 

Other operating expense, net

(14,456)

 

 

(4,156)

 

 

(23,822)

 

 

(27,733)

 

  Operating earnings

249,184 

 

 

227,478 

 

 

561,224 

 

 

489,842 

 

Other nonoperating income, net

4,890 

 

 

3,793 

 

 

12,708 

 

 

11,709 

 

Interest expense, net

33,547 

 

 

82,041 

 

 

104,566 

 

 

154,572 

 

Earnings from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 before income taxes

220,527 

 

 

149,230 

 

 

469,366 

 

 

346,979 

 

Income tax expense

40,663 

 

 

39,080 

 

 

75,805 

 

 

81,557 

 

Earnings from continuing operations

179,864 

 

 

110,150 

 

 

393,561 

 

 

265,422 

 

Earnings (loss) on discontinued operations, net of tax

(713)

 

 

(1,571)

 

 

(1,778)

 

 

8,217 

 

Net earnings

$       179,151 

 

 

$       108,579 

 

 

$       391,783 

 

 

$       273,639 

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

  Deferred gain on interest rate derivative

 

 

 

 

2,496 

 

 

 

  Amortization of prior interest rate derivative loss

53 

 

 

1,188 

 

 

171 

 

 

1,836 

 

  Amortization of actuarial loss and prior service

 

 

 

 

 

 

 

 

 

 

 

    cost for benefit plans

1,091 

 

 

427 

 

 

3,274 

 

 

1,281 

 

Other comprehensive income

1,144 

 

 

1,615 

 

 

5,941 

 

 

3,117 

 

Comprehensive income

$       180,295 

 

 

$       110,194 

 

 

$       397,724 

 

 

$       276,756 

 

Basic earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             1.36 

 

 

$             0.83 

 

 

$             2.97 

 

 

$             2.00 

 

  Discontinued operations

(0.01)

 

 

(0.01)

 

 

(0.01)

 

 

0.07 

 

  Net earnings

$             1.35 

 

 

$             0.82 

 

 

$             2.96 

 

 

$             2.07 

 

Diluted earnings (loss) per share

 

 

 

 

 

 

 

 

 

 

 

  Continuing operations

$             1.34 

 

 

$             0.82 

 

 

$             2.94 

 

 

$             1.97 

 

  Discontinued operations

0.00 

 

 

(0.01)

 

 

(0.02)

 

 

0.06 

 

  Net earnings

$             1.34 

 

 

$             0.81 

 

 

$             2.92 

 

 

$             2.03 

 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

  Basic

132,392 

 

 

132,484 

 

 

132,505 

 

 

132,510 

 

  Assuming dilution

133,894 

 

 

134,765 

 

 

134,079 

 

 

134,853 

 

Depreciation, depletion, accretion and amortization

$         89,390 

 

 

$         79,636 

 

 

$       256,463 

 

 

$       227,974 

 

Effective tax rate from continuing operations

18.4% 

 

 

26.2% 

 

 

16.2% 

 

 

23.5% 

 

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





 

 

 

 

 



 

 

 

 

 



Nine Months Ended

 

Unaudited

 

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

Operating Activities

 

 

 

 

 

Net earnings

$       391,783 

 

 

$       273,639 

 

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

 

 

 

 

 

  Depreciation, depletion, accretion and amortization

256,463 

 

 

227,974 

 

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

(8,374)

 

 

(4,630)

 

  Contributions to pension plans

(107,202)

 

 

(17,638)

 

  Share-based compensation expense

21,650 

 

 

19,953 

 

  Deferred tax expense (benefit)

76,779 

 

 

11,298 

 

  Cost of debt purchase

6,922 

 

 

43,048 

 

  Changes in assets and liabilities before initial

 

 

 

 

 

    effects of business acquisitions and dispositions

(67,836)

 

 

(162,849)

 

Other, net

2,446 

 

 

8,740 

 

Net cash provided by operating activities

$       572,631 

 

 

$       399,535 

 

Investing Activities

 

 

 

 

 

Purchases of property, plant & equipment

(348,238)

 

 

(366,845)

 

Proceeds from sale of property, plant & equipment

12,838 

 

 

10,403 

 

Proceeds from sale of businesses

11,256 

 

 

 

Payment for businesses acquired, net of acquired cash

(213,138)

 

 

(210,562)

 

Other, net

(12,216)

 

 

405 

 

Net cash used for investing activities

$     (549,498)

 

 

$     (566,599)

 

Financing Activities

 

 

 

 

 

Proceeds from short-term debt

514,900 

 

 

5,000 

 

Payment of short-term debt

(314,900)

 

 

(5,000)

 

Payment of current maturities and long-term debt

(892,049)

 

 

(800,572)

 

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

(99,916)

 

 

(60,303)

 

Dividends paid

(111,192)

 

 

(99,263)

 

Share-based compensation, shares withheld for taxes

(31,418)

 

 

(24,608)

 

Net cash provided by (used for) financing activities

$     (126,710)

 

 

$       600,208 

 

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

(103,577)

 

 

433,144 

 

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

$         43,069 

 

 

$       701,163 

 

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 (GAAP) 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 GAAP. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three and nine month periods ended September 30, 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 including Accounting Standards Update (ASU) 2017-07, “Improving the Presentation of Net Periodic Benefit Cost and Net Periodic Postretirement Benefit Cost,” which resulted 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

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding

132,392 

 

 

132,484 

 

 

132,505 

 

 

132,510 

 

Dilutive effect of

 

 

 

 

 

 

 

 

 

 

 

  Stock-Only Stock Appreciation Rights

905 

 

 

1,249 

 

 

1,021 

 

 

1,305 

 

  Other stock compensation plans

597 

 

 

1,032 

 

 

553 

 

 

1,038 

 

Weighted-average common shares

 

 

 

 

 

 

 

 

 

 

 

 outstanding, assuming dilution

133,894 

 

 

134,765 

 

 

134,079 

 

 

134,853 

 



All dilutive common stock equivalents are reflected in our earnings per share calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation would be excluded.



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







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Antidilutive common stock equivalents

162 

 

 

79 

 

 

161 

 

 

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

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

Pretax earnings (loss)

$          (969)

 

 

$       (1,282)

 

 

$       (2,417)

 

 

$      13,614 

 

Income tax (expense) benefit

256 

 

 

(289)

 

 

639 

 

 

(5,397)

 

Earnings (loss) on discontinued operations,

 

 

 

 

 

 

 

 

 

 

 

 net of tax

$          (713)

 

 

$       (1,571)

 

 

$       (1,778)

 

 

$        8,217 

 



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 recorded any measurement-period adjustments related to these items during the first nine months 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. 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 nine months 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 third quarter of 2018, we recorded income tax expense from continuing operations of $40,663,000 compared to income tax expense from continuing operations of $39,080,000 in the third quarter of 2017. The small increase in income tax expense on a significant increase in pretax earnings was due to the lower tax rate from the TCJA and the recognition of $7,157,000 of previously unrecognized tax benefits due to the expiration of statute of limitations.



For the first nine months of 2018, we recorded income tax expense from continuing operations of $75,805,000 compared to income tax expense from continuing operations of $81,557,000 for the first nine months of 2017. The decrease in income tax expense was largely due to the lower rate resulting from the TCJA.



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 $72,160,000 ($67,688,000 relates to Alabama), against which we project to have a valuation allowance of $29,696,000 ($29,182,000 relates to Alabama). The Alabama net operating loss carryforward, if not utilized, would expire in years 2023 – 2033.



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 contracts (primarily asphalt construction paving contracts) are 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 service revenues from our asphalt construction paving business and other service revenues, such as landfill tipping fees, related to our aggregates business.  Our total service revenues were as follows: $70,385,000 and $35,628,000 for the three months ended September 30, 2018 and 2017, respectively, and $145,127,000 and $81,212,000 for the nine months ended September 30, 2018 and 2017, respectively. The increased service revenues resulted from acquisitions that included asphalt construction paving businesses in Alabama and Texas (see Note 16).



8

 


 

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 aggregates business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.



Our segment total revenues by geographic market for the three and nine month periods ended September 30, 2018 and 2017 are disaggregated as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended September 30, 2018

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     331,147 

 

 

$     52,263 

 

 

$     65,971 

 

 

$              0 

 

 

$      449,381 

 

Gulf Coast

489,299 

 

 

47,220 

 

 

14,441 

 

 

1,912 

 

 

552,872 

 

West

163,285 

 

 

132,217 

 

 

21,307 

 

 

 

 

316,809 

 

Segment sales

$     983,731 

 

 

$   231,700 

 

 

$   101,719 

 

 

$       1,912 

 

 

$   1,319,062 

 

Intersegment sales

(78,865)

 

 

 

 

 

 

 

 

(78,865)

 

Total revenues

$     904,866 

 

 

$   231,700 

 

 

$   101,719 

 

 

$       1,912 

 

 

$   1,240,197 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Three Months Ended September 30, 2017

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     317,363 

 

 

$     39,445 

 

 

$     66,573 

 

 

$              0 

 

 

$      423,381 

 

Gulf Coast

393,694 

 

 

21,571 

 

 

26,505 

 

 

1,965 

 

 

443,735 

 

West

147,642 

 

 

128,924 

 

 

22,407 

 

 

 

 

298,973 

 

Segment sales

$     858,699 

 

 

$   189,940 

 

 

$   115,485 

 

 

$       1,965 

 

 

$   1,166,089 

 

Intersegment sales

(71,374)

 

 

 

 

 

 

 

 

(71,374)

 

Total revenues

$     787,325 

 

 

$   189,940 

 

 

$   115,485 

 

 

$       1,965 

 

 

$   1,094,715 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Nine Months Ended September 30, 2018

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     827,605 

 

 

$    113,331 

 

 

$    197,146 

 

 

$               0 

 

 

$    1,138,082 

 

Gulf Coast

1,377,568 

 

 

100,708 

 

 

57,994 

 

 

6,136 

 

 

1,542,406 

 

West

434,480 

 

 

333,324 

 

 

54,264 

 

 

 

 

822,068 

 

Segment sales

$  2,639,653 

 

 

$    547,363 

 

 

$    309,404 

 

 

$        6,136 

 

 

$    3,502,556 

 

Intersegment sales

(207,734)

 

 

 

 

 

 

 

 

(207,734)

 

Total revenues

$  2,431,919 

 

 

$    547,363 

 

 

$    309,404 

 

 

$        6,136 

 

 

$    3,294,822 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

Nine Months Ended September 30, 2017

 

in thousands

Aggregates

 

 

Asphalt

 

 

Concrete

 

 

Calcium

 

 

Total

 

Total Revenues by Geographic Market 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East

$     781,125 

 

 

$     78,599 

 

 

$   180,470 

 

 

$              0 

 

 

$    1,040,194 

 

Gulf Coast

1,145,700 

 

 

64,051 

 

 

78,313 

 

 

5,822 

 

 

1,293,886 

 

West

399,760 

 

 

318,824 

 

 

50,665 

 

 

 

 

769,249 

 

Segment sales

$  2,326,585 

 

 

$   461,474 

 

 

$   309,448 

 

 

$       5,822 

 

 

$    3,103,329 

 

Intersegment sales

(190,523)

 

 

 

 

 

 

 

 

(190,523)

 

Total revenues

$  2,136,062 

 

 

$   461,474 

 

 

$   309,448 

 

 

$       5,822 

 

 

$    2,912,806 

 





 

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 costs related to freight & delivery are included in cost of revenues.



Freight & delivery revenues are as follows:







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Freight & Delivery Revenues

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$  1,240,197 

 

 

$  1,094,715 

 

 

$  3,294,822 

 

 

$  2,912,806 

 

  Freight & delivery revenues 1

(175,194)

 

 

(143,664)

 

 

(476,491)

 

 

(397,934)

 

Total revenues excluding freight & delivery

$  1,065,003 

 

 

$     951,051 

 

 

$  2,818,331 

 

 

$  2,514,872 

 





 

Includes freight & delivery to remote distribution sites.





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.



The 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.



10

 


 

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







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Three Months Ended

 

 

Nine Months Ended

 



September 30

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Deferred Revenue

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

$     196,296 

 

 

$     203,100 

 

 

$     199,556 

 

 

$     206,468 

 

 Revenue recognized from deferred revenue

(1,997)

 

 

(1,903)

 

 

(5,257)

 

 

(5,271)

 

Balance at end of period

$     194,299 

 

 

$     201,197 

 

 

$     194,299 

 

 

$     201,197 

 



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 September 30, 2019 (reflected in other current liabilities in our September 30, 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



September 30

 

 

December 31

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Mutual funds

$       21,504 

 

 

$       20,348 

 

 

$         7,431 

 

 Equities

 

 

 

 

12,825 

 

Total

$       21,504 

 

 

$       20,348 

 

 

$       20,256 

 





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



Level 2 Fair Value



September 30

 

 

December 31

 

 

September 30

 

in thousands

2018 

 

 

2017 

 

 

2017 

 

Fair Value Recurring

 

 

 

 

 

 

 

 

Rabbi Trust

 

 

 

 

 

 

 

 

 Money market mutual fund

$        1,332 

 

 

$        1,203 

 

 

$           386 

 

Total

$        1,332 

 

 

$        1,203 

 

 

$           386 

 



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 $(222,000) and $1,950,000 for the nine months ended September 30, 2018 and 2017, respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at September 30, 2018 and 2017 were $(214,000) and $1,424,000, respectively.



11

 


 

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 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.



In 2007 and 2018, we entered into interest rate locks of future debt issuances to hedge the risk of higher interest rates. The gain/loss upon settlement of the interest rate hedges 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

 

 

Nine Months Ended

 



Location on

 

September 30

 

 

September 30

 

in thousands

Statement

 

2018 

 

 

2017 

 

 

2018 

 

 

2017 

 

Interest Rate Hedges

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss reclassified from AOCI

Interest

 

 

 

 

 

 

 

 

 

 

 

 

 (effective portion)

expense

 

$           (72)

 

 

$      (1,955)

 

 

$         (232)

 

 

$      (3,022)

 



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



For the 12-month period ending September 30, 2019, we estimate that $302,000 of the pretax loss in AOCI will be reclassified to interest expense.

 

 

12

 


 

Note 7: Debt