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NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
NATURE OF OPERATIONS
Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation’s largest producer of construction aggregates, primarily crushed stone, sand and gravel; a major producer of asphalt mix and ready-mixed concrete and a leading producer of cement in Florida.
Due to the 2005 sale of our Chemicals business as described in Note 2, the operating results of the Chemicals business are presented as discontinued operations in the accompanying Consolidated Statements of Comprehensive Income.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vulcan Materials Company and all our majority or wholly-owned subsidiary companies. All intercompany transactions and accounts have been eliminated in consolidation.
RESTRUCTURING CHARGES
Costs associated with restructuring our operations include severance and related charges to eliminate a specified number of employee positions, costs to relocate employees, contract cancellation costs and charges to vacate facilities and consolidate operations. Relocation and contract cancellation costs and charges to vacate facilities are recognized in the period the liability is incurred. Severance charges for employees, who are required to render service beyond a minimum retention period, generally more than 60 days, are recognized ratably over the retention period; otherwise, the full severance charge is recognized on the date a detailed restructuring plan has been authorized by management and communicated to employees.
In 2011, we substantially completed the implementation of a multi-year project to replace our legacy information technology systems with new ERP and Shared Services platforms. These platforms are helping us streamline processes enterprise-wide and standardize administrative and support functions while providing enhanced flexibility to monitor and control costs. Leveraging this significant investment in technology allowed us to reduce overhead and administrative staff. Additionally, in December 2011, our Board of Directors approved a restructuring plan to consolidate our eight divisions into four regions as part of an ongoing effort to reduce overhead costs and increase operating efficiency. As a result of these two restructuring plans, we recognized $12,971,000 of severance and related charges in 2011. There were no significant charges related to these restructuring plans in 2012.
In 2012, our Board approved a Profit Enhancement Plan that further leverages our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During 2012, we incurred $9,557,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan, $8,038,000 of which was paid as of December 31, 2012. We do not expect to incur any future material charges related to this Profit Enhancement Plan.
EXCHANGE OFFER COSTS
In December 2011, Martin Marietta Materials, Inc. (Martin Marietta) commenced an unsolicited exchange offer for all outstanding shares of our common stock and indicated its intention to nominate a slate of directors to our Board. After careful consideration, including a thorough review of the offer with its financial and legal advisors, our Board unanimously determined that Martin Marietta’s offer was inadequate, substantially undervalued Vulcan, was not in the best interests of Vulcan and its shareholders and had substantial risk.
In May 2012, the Delaware Chancery Court ruled and the Delaware Supreme Court affirmed that Martin Marietta had breached two confidentiality agreements between the companies, and enjoined Martin Marietta through September 15, 2012 from pursuing its exchange offer for our shares, prosecuting its proxy contest, or otherwise taking steps to acquire control of our shares or assets and from any further violations of the two confidentiality agreements between the parties. As a result of the court ruling, Martin Marietta withdrew its exchange offer and its board nominees.
In response to Martin Marietta’s actions, we incurred legal, professional and other costs as follows: 2012 — $43,380,000 and 2011 — $2,227,000. As of December 31, 2012, $43,107,000 of the incurred costs was paid.
CASH EQUIVALENTS
We classify as cash equivalents all highly liquid securities with a maturity of three months or less at the time of purchase. The carrying amount of these securities approximates fair value due to their short-term maturities.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable from customers result from our extending credit to trade customers for the purchase of our products. The terms generally provide for payment within 30 days of being invoiced. On occasion, when necessary to conform to regional industry practices, we sell product under extended payment terms, which may result in either secured or unsecured short-term notes; or, on occasion, notes with durations of less than one year are taken in settlement of existing accounts receivable. Other accounts and notes receivable result from short-term transactions (less than one year) other than the sale of our products, such as interest receivable; insurance claims; freight claims; tax refund claims; bid deposits or rents receivable. Receivables are aged and appropriate allowances for doubtful accounts and bad debt expense are recorded. Bad debt expense for the years ended December 31 was as follows: 2012 — $2,505,000, 2011 — $1,644,000 and 2010 — $3,100,000. Write-offs of accounts receivables for the years ended December 31 were as follows: 2012 — $2,805,000, 2011 — $2,651,000 and 2010 — $4,317,000.
FINANCING RECEIVABLES
Financing receivables are included in accounts and notes receivable and/or investments and long-term receivables in the accompanying Consolidated Balance Sheets. Financing receivables are contractual rights to receive money on demand or on fixed or determinable dates. Trade receivables with normal credit terms are not considered financing receivables. Financing receivables were as follows: December 31, 2012 — $8,609,000 and December 31, 2011 — $7,471,000. Both of these balances include a related-party (Vulcan Materials Company Foundation) receivable in the amount of $1,550,000 due in 2014. None of our financing receivables are individually significant. We evaluate the collectibility of financing receivables on a periodic basis or whenever events or changes in circumstances indicate we may be exposed to credit losses. As of December 31, 2012 and 2011, no allowances were recorded for these receivables.
INVENTORIES
Inventories and supplies are stated at the lower of cost or market. We use the last-in, first-out (LIFO) method of valuation for most of our inventories because it results in a better matching of costs with revenues. Such costs include fuel, parts and supplies, raw materials, direct labor and production overhead. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Substantially all operating supplies inventory is carried at average cost. For additional information regarding our inventories see Note 3.
PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment are carried at cost less accumulated depreciation, depletion and amortization. The cost of properties held under capital leases, if any, is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease.
Capitalized software costs of $10,855,000 and $12,910,000 are reflected in net property, plant & equipment as of December 31, 2012 and 2011, respectively. We capitalized software costs for the years ended December 31 as follows: 2012— $408,000, 2011 — $3,746,000 and 2010 — $1,167,000. During the same periods, $2,463,000, $2,520,000 and $2,895,000, respectively, of previously capitalized costs were depreciated. For additional information regarding our property, plant & equipment see Note 4.
REPAIR AND MAINTENANCE
Repair and maintenance costs generally are charged to operating expense as incurred. Renewals and betterments that add materially to the utility or useful lives of property, plant & equipment are capitalized and subsequently depreciated. Actual costs for planned major maintenance activities, related primarily to periodic overhauls on our oceangoing vessels, are capitalized and amortized to the next overhaul.
DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION
Depreciation is generally computed by the straight-line method at rates based on the estimated service lives of the various classes of assets, which include machinery and equipment (3 to 30 years), buildings (10 to 20 years) and land improvements (7 to 20 years). Capitalized software costs are included in machinery and equipment and are depreciated on a straight-line basis beginning when the software project is substantially complete. Depreciation for our Newberry, Florida cement production facilities is computed by the unit-of-production method based on estimated output.
Cost depletion on depletable quarry land is computed by the unit-of-production method based on estimated recoverable units.
Accretion reflects the period-to-period increase in the carrying amount of the liability for asset retirement obligations. It is computed using the same credit-adjusted, risk-free rate used to initially measure the liability at fair value.
Amortization of intangible assets subject to amortization is computed based on the estimated life of the intangible assets. A significant portion of our intangible assets is contractual rights in place associated with zoning, permitting and other rights to access and extract aggregates reserves. Contractual rights in place associated with aggregates reserves are amortized using the unit-of-production method based on estimated recoverable units. Other intangible assets are amortized principally by the straight-line method.
Leaseholds are amortized over varying periods not in excess of applicable lease terms or estimated useful lives.
Depreciation, depletion, accretion and amortization expense for the years ended December 31 is outlined below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Depreciation, Depletion, Accretion and Amortization |
||||||||||||
Depreciation |
$301,146 | $328,072 | $349,460 | |||||||||
Depletion |
10,607 | 11,195 | 10,337 | |||||||||
Accretion |
7,956 | 8,195 | 8,641 | |||||||||
Amortization of leaseholds |
381 | 225 | 195 | |||||||||
Amortization of intangibles |
11,869 | 14,032 | 13,460 | |||||||||
Total |
$331,959 | $361,719 | $382,093 |
DERIVATIVE INSTRUMENTS
We periodically use derivative instruments to reduce our exposure to interest rate risk, currency exchange risk or price fluctuations on commodity energy sources consistent with our risk management policies. We do not use derivative financial instruments for speculative or trading purposes. Additional disclosures regarding our derivative instruments are presented in 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 at December 31 subject to fair value measurement on a recurring basis are summarized below:
Level 1 | ||||||||
in thousands | 2012 | 2011 | ||||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Mutual funds |
$13,349 | $13,536 | ||||||
Equities |
9,843 | 7,057 | ||||||
Total |
$23,192 | $20,593 | ||||||
Level 2 | ||||||||
in thousands | 2012 | 2011 | ||||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Common/collective trust funds |
$2,265 | $2,192 | ||||||
Total |
$2,265 | $2,192 |
We have established two Rabbi Trusts for the purpose of providing a level of security for the nonqualified employee 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. Investments in Level 2 common/collective trust funds are stated at estimated fair value based on the underlying investments in those funds. The underlying investments are comprised of short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit. Net trading gains (losses) of the Rabbi Trust investments were $8,564,000 and ($3,292,000) for the years ended December 31, 2012 and 2011, respectively. The portion of the net trading gains (losses) related to investments still held by the Rabbi Trusts at December 31, 2012 and 2011 were $9,012,000 and ($3,370,000), respectively.
The carrying values of our cash equivalents, accounts and notes receivable, current maturities of long-term debt, short-term borrowings, trade payables and accruals, and all 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 5 and 6, respectively.
There were no assets or liabilities subject to fair value measurement on a nonrecurring basis in 2011. Assets that were subject to fair value measurement on a nonrecurring basis as of December 31, 2012 are summarized below:
2012 | ||||||||
in thousands | Level 3 | Impairment Charges |
||||||
Fair Value Nonrecurring |
||||||||
Assets held for sale |
$10,559 | $1,738 | ||||||
Totals |
$10,559 | $1,738 |
The fair values of the assets classified as held for sale were estimated based on the negotiated transaction values. The loss on impairment represents the difference between the carrying value and the fair value less costs to sell of the impacted long-lived assets.
GOODWILL AND GOODWILL IMPAIRMENT
Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than its carrying amount. As of December 31, 2012, goodwill totaled $3,086,716,000, the same as at December 31, 2011. Total goodwill represents 38% of total assets at both December 31, 2012 and December 31, 2011.
Goodwill is tested for impairment annually, as of November 1, or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. In December 2011, we announced an organizational restructuring plan that led to changes in the manner in which our operations are managed. As a result, we reorganized our reporting unit structure and reassigned goodwill among our revised reporting units using a relative fair value approach. This reorganization led to an increase in reporting units from 13 to 19, of which 10 carry goodwill. The reporting units are evaluated using a two-step process.
The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is not required. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.
The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We have four operating segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. Within these four operating segments, we have identified 19 reporting units based primarily on geographic location. The carrying value of each reporting unit is determined by assigning assets and liabilities, including goodwill, to those reporting units as of the measurement date. We estimate the fair values of the reporting units by considering the indicated fair values derived from both an income approach, which involves discounting estimated future cash flows, and a market approach, which involves the application of revenue and EBITDA multiples of comparable companies. We consider market factors when determining the assumptions and estimates used in our valuation models. To substantiate the fair values derived from these valuations, we reconcile the reporting unit fair values to our market capitalization.
The results of the first step of the annual impairment tests performed as of November 1, 2012 indicated that the fair values of all reporting units with goodwill substantially exceeded their carrying values. The results of the first step of the annual impairment tests performed as of November 1, 2011 and 2010 indicated that the fair values of the reporting units with goodwill exceeded their carrying values. Accordingly, there were no charges for goodwill impairment in the years ended December 31, 2012, 2011 or 2010.
Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ materially from those estimates. Changes in key assumptions or management judgment with respect to a reporting unit or its prospects, which may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or significant underperformance relative to historical or projected future operating results, could result in a significantly different estimate of the fair value of our reporting units, which could result in an impairment charge in the future.
For additional information regarding goodwill see Note 18.
IMPAIRMENT OF LONG-LIVED ASSETS EXCLUDING GOODWILL
We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. As of December 31, 2012, net property, plant & equipment represents 39% of total assets, while net other intangible assets represents 9% of total assets. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value of the long-lived assets. Fair value is determined primarily by using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results. We periodically review the appropriateness of the estimated useful lives of our long-lived assets.
We test long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. As a result, our long-lived asset impairment test is at a significantly lower level than the level at which we test goodwill for impairment. In markets where we do not produce downstream products (e.g. ready-mixed concrete and asphalt mix), the lowest level of largely independent identifiable cash flows is at the individual aggregates operation or a group of aggregates operations collectively serving a local market. Conversely, in vertically integrated markets, the cash flows of our downstream and upstream businesses are not largely independently identifiable as the selling price of the upstream products (aggregates and cement) determines the profitability of the downstream business.
During 2012, we recorded a $2,034,000 loss on impairment of long-lived assets related primarily to assets classified as held for sale (see Note 19). Long-lived asset impairments during 2011 were immaterial and related to property abandonments. During 2010 we recorded a $3,936,000 loss on impairment of long-lived assets. We utilized an income approach to measure the fair value of the long-lived assets and determined that the carrying value of the assets exceeded the fair value. The loss on impairment represents the difference between the carrying value and the fair value of the impacted long-lived assets.
For additional information regarding long-lived assets and intangible assets see Notes 4 and 18.
COMPANY OWNED LIFE INSURANCE
We have Company Owned Life Insurance (COLI) policies for which the cash surrender values, loans outstanding and the net values included in other noncurrent assets in the accompanying Consolidated Balance Sheets as of December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Company Owned Life Insurance |
||||||||
Cash surrender value |
$41,351 | $38,300 | ||||||
Loans outstanding |
41,345 | 38,289 | ||||||
Net value included in noncurrent assets |
$6 | $11 |
REVENUE RECOGNITION
Revenue is recognized at the time the selling price is fixed, the product’s title is transferred to the buyer and collectibility of the sales proceeds is reasonably assured. Total revenues include sales of products to customers, net of any discounts and taxes, and third-party delivery revenues billed to customers.
Our 2012 revenue excludes proceeds from the sale of a volumetric production payment as described in Note 19 under the caption 2012 Divestitures. These proceeds are deferred until we meet our obligation to produce and deliver the product or market the product under the terms of the agreement. These proceeds were classified within the operating activities section of our Consolidated Statements of Cash Flows as the transaction essentially represents the prepayment of future production.
STRIPPING COSTS
In the mining industry, the costs of removing overburden and waste materials to access mineral deposits are referred to as stripping costs.
Stripping costs incurred during the production phase are considered costs of extracted minerals under our inventory costing system, inventoried, and recognized in cost of sales in the same period as the revenue from the sale of the inventory. The production stage is deemed to begin when the activities, including removal of overburden and waste material that may contain incidental saleable material, required to access the saleable product are complete. Stripping costs considered as production costs and included in the costs of inventory produced were $37,875,000 in 2012, $40,049,000 in 2011 and $40,842,000 in 2010.
Conversely, stripping costs incurred during the development stage of a mine (pre-production stripping) are excluded from our inventory cost. Pre-production stripping costs are capitalized and reported within other noncurrent assets in our accompanying Consolidated Balance Sheets. Capitalized pre-production stripping costs are expensed over the productive life of the mine using the unit-of-production method. Pre-production stripping costs included in other noncurrent assets were $18,887,000 as of December 31, 2012 and $17,860,000 as of December 31, 2011.
OTHER COSTS
Costs are charged to earnings as incurred for the start-up of new plants and for normal recurring costs of mineral exploration and research and development. Research and development costs totaled $0 in 2012, $1,109,000 in 2011 and $1,582,000 in 2010, and are included in selling, administrative and general expenses in the Consolidated Statements of Comprehensive Income.
SHARE-BASED COMPENSATION
We account for our share-based compensation awards using fair-value-based measurement methods. These result in the recognition of compensation expense for all share-based compensation awards, including stock options, based on their fair value as of the grant date. Compensation cost is recognized over the requisite service period.
We receive an income tax deduction for share-based compensation equal to the excess of the market value of our common stock on the date of exercise or issuance over the exercise price. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows. The $267,000, $121,000 and $808,000 in excess tax benefits classified as financing cash inflows for the years ended December 31, 2012, 2011 and 2010, respectively, in the accompanying Consolidated Statements of Cash Flows relate to the exercise of stock options and issuance of shares under long-term incentive plans.
A summary of the estimated future compensation cost (unrecognized compensation expense) as of December 31, 2012 related to share-based awards granted to employees under our long-term incentive plans is presented below:
dollars in thousands | Unrecognized Compensation Expense |
Expected Weighted-average Recognition (Years) |
||||||
Share-based Compensation |
||||||||
SOSARs 1 |
$2,698 | 1.5 | ||||||
Performance shares |
17,488 | 2.7 | ||||||
Total/weighted-average |
$20,186 | 2.5 |
1 |
Stock-Only Stock Appreciation Rights (SOSARs) |
Pretax compensation expense related to our employee share-based compensation awards and related income tax benefits for the years ended December 31 are summarized below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Employee Share-based Compensation Awards |
||||||||||||
Pretax compensation expense |
$15,491 | $17,537 | $19,746 | |||||||||
Income tax benefits |
6,011 | 6,976 | 7,968 |
For additional information regarding share-based compensation, see Note 11 under the caption Share-based Compensation Plans.
RECLAMATION COSTS
Reclamation costs resulting from normal use of long-lived assets are recognized over the period the asset is in use only if there is a legal obligation to incur these costs upon retirement of the assets. Additionally, reclamation costs resulting from normal use under a mineral lease are recognized over the lease term only if there is a legal obligation to incur these costs upon expiration of the lease. The obligation, which cannot be reduced by estimated offsetting cash flows, is recorded at fair value as a liability at the obligating event date and is accreted through charges to operating expenses. This fair value is also capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. If the obligation is settled for other than the carrying amount of the liability, a gain or loss is recognized on settlement.
To determine the fair value of the obligation, we estimate the cost for a third party to perform the legally required reclamation tasks including a reasonable profit margin. This cost is then increased for both future estimated inflation and an estimated market risk premium related to the estimated years to settlement. Once calculated, this cost is discounted to fair value using present value techniques with a credit-adjusted, risk-free rate commensurate with the estimated years to settlement.
In estimating the settlement date, we evaluate the current facts and conditions to determine the most likely settlement date. If this evaluation identifies alternative estimated settlement dates, we use a weighted-average settlement date considering the probabilities of each alternative.
We review reclamation obligations at least annually for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date. Examples of events that would trigger a change in the cost include a new reclamation law or amendment of an existing mineral lease. Examples of events that would trigger a change in the estimated settlement date include the acquisition of additional reserves or the closure of a facility.
The carrying value of these obligations was $150,072,000 as of December 31, 2012 and $153,979,000 as of December 31, 2011. For additional information regarding reclamation obligations (referred to in our financial statements as asset retirement obligations) see Note 17.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Accounting for pension and postretirement benefits requires that we make significant assumptions regarding the valuation of benefit obligations and the performance of plan assets. The primary assumptions are as follows:
¡ | DISCOUNT RATE — The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future |
¡ | EXPECTED RETURN ON PLAN ASSETS — We project the future return on plan assets based principally on prior performance and our expectations for future returns for the types of investments held by the plan as well as the expected long-term asset allocation of the plan. These projected returns reduce the recorded net benefit costs |
¡ | RATE OF COMPENSATION INCREASE — For salary-related plans only, we project employees’ annual pay increases, which are used to project employees’ pension benefits at retirement |
¡ | RATE OF INCREASE IN THE PER CAPITA COST OF COVERED HEALTHCARE BENEFITS — We project the expected increases in the cost of covered healthcare benefits |
Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of actual results allows for a smoothed recognition in earnings of changes in benefit obligations and plan performance over the working lives of the employees who benefit under the plans. The differences between actual results and expected or estimated results are recognized in full in other comprehensive income. Amounts recognized in other comprehensive income are reclassified to earnings in a systematic manner over the average remaining service period of active employees expected to receive benefits under the plan.
For additional information regarding pension and other postretirement benefits see Note 10.
ENVIRONMENTAL COMPLIANCE
Our environmental compliance costs include the cost of ongoing monitoring programs, the cost of remediation efforts and other similar costs. We expense or capitalize environmental costs consistent with our capitalization policy. We expense costs for an existing condition caused by past operations that do not contribute to future revenues. We accrue costs for environmental assessment and remediation efforts when we determine that a liability is probable and we can reasonably estimate the cost. At the early stages of a remediation effort, environmental remediation liabilities are not easily quantified due to the uncertainties of various factors. The range of an estimated remediation liability is defined and redefined as events in the remediation effort occur.
When we can estimate a range of probable loss, we accrue the most likely amount. In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. As of December 31, 2012, the spread between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $3,940,000. Accrual amounts may be based on technical cost estimations or the professional judgment of experienced environmental managers. Our Safety, Health and Environmental Affairs Management Committee routinely reviews cost estimates, including key assumptions, for accruing environmental compliance costs; however, a number of factors, including adverse agency rulings and encountering unanticipated conditions as remediation efforts progress, may cause actual results to differ materially from accrued costs.
For additional information regarding environmental compliance costs see Note 8.
CLAIMS AND LITIGATION INCLUDING SELF-INSURANCE
We are involved with claims and litigation, including items covered under our self-insurance program. We are self-insured for losses related to workers’ compensation up to $2,000,000 per occurrence and automotive and general/product liability up to $3,000,000 per occurrence. We have excess coverage on a per occurrence basis beyond these retention levels.
Under our self-insurance program, we aggregate certain claims and litigation costs that are reasonably predictable based on our historical loss experience and accrue losses, including future legal defense costs, based on actuarial studies. Certain claims and litigation costs, due to their unique nature, are not included in our actuarial studies. We use both internal and outside legal counsel to assess the probability of loss, and establish an accrual when the claims and litigation represent a probable loss and the cost can be reasonably estimated. For matters not included in our actuarial studies, legal defense costs are accrued when incurred. The following table outlines our self-insurance program at December 31:
dollars in thousands | 2012 | 2011 | ||||||
Self-insurance Program |
||||||||
Self-insured liabilities (undiscounted) |
$48,019 | $46,178 | ||||||
Insured liabilities (undiscounted) |
15,054 | 14,339 | ||||||
Discount rate |
0.51% | 0.65% | ||||||
Amounts Recognized in Consolidated |
||||||||
Balance Sheets |
||||||||
Investments and long-term receivables |
$14,822 | $0 | ||||||
Other accrued liabilities |
(17,260 | ) | (13,046 | ) | ||||
Other noncurrent liabilities |
(44,902 | ) | (32,089 | ) | ||||
Net liabilities (discounted) |
($47,340 | ) | ($45,135 | ) |
Estimated payments (undiscounted) under our self-insurance program for the five years subsequent to December 31, 2012 are as follows:
in thousands | ||||
Estimated Payments under Self-insurance Program |
||||
2013 |
$21,920 | |||
2014 |
12,910 | |||
2015 |
8,752 | |||
2016 |
5,547 | |||
2017 |
3,700 |
Significant judgment is used in determining the timing and amount of the accruals for probable losses, and the actual liability could differ materially from the accrued amounts.
INCOME TAXES
We file various federal, state and foreign income tax returns, including some returns that are consolidated with subsidiaries. We account for the current and deferred tax effects of such returns using the asset and liability method. Our current and deferred tax assets and liabilities reflect our best assessment of the estimated future taxes we will pay. Significant judgments and estimates are required in determining the current and deferred assets and liabilities. Annually, we compare the liabilities calculated for our federal, state and foreign income tax returns to the estimated liabilities calculated as part of the year end income tax provision. Any adjustments are reflected in our current and deferred tax assets and liabilities.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which we have already properly recorded the tax benefit in the income statement. On a quarterly basis, we assess all positive and negative evidence to determine the likelihood that the deferred tax asset balance will be recovered from future taxable income. We take into account such factors as:
¡ | cumulative losses in recent years |
¡ | taxable income in prior carryback years, if carryback is permitted under tax law |
¡ | future reversal of existing taxable temporary differences against deductible temporary differences |
¡ | future taxable income exclusive of reversing temporary differences |
¡ | the mix of taxable income in the jurisdictions in which we operate |
¡ | tax planning strategies |
Deferred tax assets are reduced by a valuation allowance if, based on an analysis of the factors above, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
U.S. income taxes are not provided on foreign earnings when such earnings are indefinitely reinvested offshore. We periodically evaluate our investment strategies for each foreign tax jurisdiction in which we operate to determine whether foreign earnings will be indefinitely reinvested offshore and, accordingly, whether U.S. income taxes should be provided when such earnings are recorded.
We recognize an income tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our income tax provision includes the net impact of changes in the liability for unrecognized income tax benefits and subsequent adjustments as we consider appropriate.
Before a particular matter for which we have recorded a liability related to an unrecognized income tax benefit is audited and finally resolved, a number of years may elapse. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized income tax benefits is adequate. Favorable resolution of an unrecognized income tax benefit could be recognized as a reduction in our income tax provision and effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized income tax benefit could increase the income tax provision and effective tax rate in the period of resolution.
We consider an issue to be resolved at the earlier of settlement of an examination, the expiration of the statute of limitations, or when the issue is “effectively settled.” Our liability for unrecognized income tax benefits is generally presented as noncurrent. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current. We classify interest and penalties recognized on the liability for unrecognized income tax benefits as income tax expense.
Our largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The impact of statutory depletion on the effective tax rate is presented in Note 9. The deduction for statutory depletion does not necessarily change proportionately to changes in pretax earnings.
COMPREHENSIVE INCOME
We report comprehensive income in our Consolidated Statements of Comprehensive Income and Consolidated Statements of Equity. Comprehensive income comprises two subsets: net earnings and other comprehensive income (OCI). OCI includes fair value adjustments to cash flow hedges, actuarial gains or losses and prior service costs related to pension and postretirement benefit plans.
For additional information regarding comprehensive income see Note 14.
EARNINGS PER SHARE (EPS)
We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Weighted-average common shares outstanding |
129,745 | 129,381 | 128,050 | |||||||||
Dilutive effect of |
||||||||||||
Stock options/SOSARs |
0 | 0 | 0 | |||||||||
Other stock compensation plans |
0 | 0 | 0 | |||||||||
Weighted-average common shares outstanding, assuming dilution |
129,745 | 129,381 | 128,050 |
All dilutive common stock equivalents are reflected in our earnings per share calculations. Antidilutive common stock equivalents are not included in our earnings per share calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation are excluded. These excluded shares for the years ended December 31 are as follows: 2012 — 617,000, 2011 — 304,000 and 2010 — 415,000.
The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price for the years ended December 31 is as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Antidilutive common stock equivalents |
4,762 | 5,845 | 5,827 |
NEW ACCOUNTING STANDARDS
ACCOUNTING STANDARDS RECENTLY ADOPTED
2012 — AMENDMENTS ON FAIR VALUE MEASUREMENT REQUIREMENTS As of and for the interim period ended March 31, 2012, we adopted Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments in this ASU achieve the objectives of developing common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS) and improving their understandability. Some of the requirements clarify the Financial Accounting Standards Board’s (FASB’s) intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Our adoption of this standard had no impact on our financial position, results of operations or liquidity.
2012 — AMENDMENTS ON GOODWILL IMPAIRMENT TESTING As of and for the interim period ended March 31, 2012, we adopted ASU No. 2011-08, “Testing Goodwill for Impairment” which amends the goodwill impairment testing guidance in Accounting Standards Codification (ASC) 350-20, “Goodwill.” Under the amended guidance, an entity has the option of performing a qualitative assessment when testing goodwill for impairment. The two-step impairment test would be required only if, on the basis of the qualitative factors, an entity determines that the fair value of the reporting unit is more likely than not (a likelihood of more than 50%) less than the carrying amount. Additionally, this ASU revises the examples of events and circumstances that an entity should consider when determining if an interim goodwill impairment test is required. Our adoption of this standard had no impact on our financial position, results of operations or liquidity.
2011 — PRESENTATION OF OTHER COMPREHENSIVE INCOME As of the annual period ended December 31, 2011, we adopted ASU No. 2011-05, “Presentation of Comprehensive Income.” This standard eliminates the option to present components of other comprehensive income (OCI) as part of the statement of equity. The amendments in this standard require that all nonowner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU No. 2011-12 indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in the Consolidated Statement of Comprehensive Income. In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 finalizes the requirements of ASU 2011-05 that ASU 2011-12 deferred, clarifying how to report the effect of significant reclassifications out of accumulated other comprehensive income. Our accompanying Consolidated Statements of Comprehensive Income conform to the presentation requirements of these standards.
2011 — ENHANCED DISCLOSURE REQUIREMENTS ON MULTIEMPLOYER BENEFIT PLANS As of the annual period ended December 31, 2011, we adopted ASU No. 2011-09, “Disclosures About an Employer’s Participation in a Multiemployer Plan” which increased the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension and other postretirement benefits. The ASU’s objective is to enhance the transparency of disclosures about (1) the significant multiemployer plans in which an employer participates, (2) the level of the employer’s participation in those plans, (3) the financial health of the plans and (4) the nature of the employer’s commitments to the plans. As a result of our adoption of this update, we enhanced our annual disclosures regarding multiemployer plans as reflected in Note 10.
ACCOUNTING STANDARDS PENDING ADOPTION
NEW DISCLOSURE REQUIREMENTS ON OFFSETTING ASSETS AND LIABILITIES In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities” which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial and derivative instruments. The scope of instruments covered under this ASU was further clarified in the January 2013 issuance of ASU 2013-01,“Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” These new disclosures are designed to facilitate comparisons between financial statements prepared under U.S. GAAP and those prepared under IFRS. These ASUs are effective for annual and interim reporting periods beginning on or after January 1, 2013, with retrospective application required. We will adopt these standards as of and for the interim period ending March 31, 2013. We do not expect the adoption of these standards to have a material impact on our consolidated financial statements.
AMENDMENTS ON INDEFINITE-LIVED INTANGIBLE ASSET IMPAIRMENT TESTING In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amends the impairment testing guidance in ASC 350-30, “General Intangibles Other Than Goodwill.” Under the amended guidance, an entity has the option of performing a qualitative assessment when testing an indefinite-lived intangible asset for impairment. Further testing would be required only if, on the basis of the qualitative factors, an entity determines that the fair value of the intangible asset is more likely than not (a likelihood of more than 50%) less than the carrying amount. Additionally, this ASU revises the examples of events and circumstances that an entity should consider when determining if an interim impairment test is required. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We will adopt this standard as of and for the interim period ending March 31, 2013. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ materially from these estimates.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2012 presentation.
|
NOTE 2: DISCONTINUED OPERATIONS
In 2005, we sold substantially all the assets of our Chemicals business to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. In addition to the initial cash proceeds, Basic Chemicals was required to make payments under two earn-out agreements subject to certain conditions. During 2007, we received the final payment under the ECU (electrochemical unit) earn-out, bringing cumulative cash receipts to its $150,000,000 cap.
Proceeds under the second earn-out agreement are based on the performance of the hydrochlorocarbon product HCC-240fa (commonly referred to as 5CP) from the closing of the transaction through December 31, 2012 (5CP earn-out). The primary determinant of the value for this earn-out is the level of growth in 5CP sales volume.
During 2012, we received payments totaling $11,369,000 under the 5CP earn-out related to performance during the year ended December 31, 2011. During 2011 and 2010, we received payments of $12,284,000 and $8,794,000, respectively, under the 5CP earn-out related to the respective years ended December 31, 2010 and December 31, 2009. Through December 31, 2012, we have received a total of $66,360,000 under the 5CP earn-out, a total of $33,259,000 in excess of the receivable recorded on the date of disposition.
We are liable for a cash transaction bonus payable to certain former key Chemicals employees based on prior year’s 5CP earn-out results. Payments for the transaction bonus were $1,137,000 in 2012, $1,228,000 in 2011 and $882,000 in 2010. We have paid a total of $3,768,000 of these transaction bonuses through December 31, 2012.
The financial results of the Chemicals business are classified as discontinued operations in the accompanying Consolidated Statements of Comprehensive Income for all periods presented. There were no net sales or revenues from discontinued operations for the years presented. Results from discontinued operations are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Discontinued Operations |
||||||||||||
Pretax earnings (loss) |
($8,017 | ) | ($3,669 | ) | $2,103 | |||||||
Gain on disposal, net of transaction bonus |
10,232 | 11,056 | 7,912 | |||||||||
Income tax provision |
(882 | ) | (2,910 | ) | (3,962 | ) | ||||||
Earnings on discontinued operations, net of income taxes |
$1,333 | $4,477 | $6,053 |
The 2012 pretax loss from discontinued operations of $8,017,000 was due primarily to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The 2011 pretax loss from discontinued operations of $3,669,000 includes a $7,575,000 pretax gain recognized on recovery from an insurer in lawsuits involving perchlorethylene (perc). This gain was offset by general and product liability costs, including legal defense costs, and environmental remediation costs. The 2010 pretax earnings from results of discontinued operations of $2,103,000 are due primarily to a $6,000,000 pretax gain recognized on recovery from an insurer in perc lawsuits. This gain was offset in part by general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. All of these insurance recoveries and settlements represent a partial recovery of legal and settlement costs recognized in prior years.
|
NOTE 3: INVENTORIES
Inventories at December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Inventories |
||||||||
Finished products 1 |
$ | 262,886 | $260,732 | |||||
Raw materials |
27,758 | 23,819 | ||||||
Products in process |
5,963 | 4,198 | ||||||
Operating supplies and other |
38,415 | 38,908 | ||||||
Total |
$ | 335,022 | $327,657 |
1 |
Includes inventories encumbered by the purchaser’s percentage of a volumetric production payment (see Note 19), as follows: December 31, 2012 — $8,726 thousand. |
In addition to the inventory balances presented above, as of December 31, 2012 and December 31, 2011, we have $35,477,000 and $19,726,000, respectively, of inventory classified as long-term assets (Other noncurrent assets) as we do not expect to sell the inventory within one year. Inventories valued under the LIFO method total $267,591,000 at December 31, 2012 and $251,978,000 at December 31, 2011. During 2012, 2011 and 2010, inventory reductions resulted in liquidations of LIFO inventory layers carried at lower costs prevailing in prior years as compared to current-year costs. The effect of the LIFO liquidation on 2012 results was to decrease cost of goods sold by $1,124,000 and increase net earnings by $688,000. The effect of the LIFO liquidation on 2011 results was to decrease cost of goods sold by $1,288,000 and increase net earnings by $776,000. The effect of the LIFO liquidation on 2010 results was to decrease cost of goods sold by $2,956,000 and increase net earnings by $1,763,000.
Estimated current cost exceeded LIFO cost at December 31, 2012 and 2011 by $150,654,000 and $140,335,000, respectively. We use the LIFO method of valuation for most of our inventories as it results in a better matching of costs with revenues. We provide supplemental income disclosures to facilitate comparisons with companies not on LIFO. The supplemental income calculation is derived by tax-effecting the change in the LIFO reserve for the periods presented. If all inventories valued at LIFO cost had been valued under the methods (substantially average cost) used prior to the adoption of the LIFO method, the approximate effect on net earnings would have been an increase of $5,990,000 in 2012, an increase of $10,050,000 in 2011 and a decrease of $3,890,000 in 2010.
|
NOTE 4: PROPERTY, PLANT & EQUIPMENT
Balances of major classes of assets and allowances for depreciation, depletion and amortization at December 31 are as follows:
in thousands | 2012 | 2011 | ||||||||
Property, Plant & Equipment |
||||||||||
Land and land improvements |
$2,120,999 | $2,122,350 | ||||||||
Buildings |
149,575 | 163,178 | ||||||||
Machinery and equipment |
4,195,165 | 4,206,870 | ||||||||
Leaseholds |
10,546 | 9,238 | ||||||||
Deferred asset retirement costs |
129,397 | 136,289 | ||||||||
Construction in progress |
60,935 | 67,621 | ||||||||
Total, gross |
$6,666,617 | $6,705,546 | ||||||||
Less allowances for
depreciation, depletion |
3,507,432 | 3,287,367 | ||||||||
Total, net |
$3,159,185 | $3,418,179 |
Capitalized interest costs with respect to qualifying construction projects and total interest costs incurred before recognition of the capitalized amount for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Capitalized interest cost |
$2,716 | $2,675 | $3,637 | |||||||||
Total interest cost
incurred before recognition |
215,783 | 223,303 | 185,240 |
|
NOTE 5: DERIVATIVE INSTRUMENTS
During the normal course of operations, we are exposed to market risks including fluctuations in interest rates, foreign currency exchange rates and commodity pricing. From time to time, and consistent with our risk management policies, we use derivative instruments to hedge against these market risks. We do not utilize derivative instruments for trading or other speculative purposes.
The accounting for gains and losses that result from changes in the fair value of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationship. The interest rate swap agreements described below were designated as either cash flow hedges or fair value hedges. The changes in fair value of our interest rate swap cash flow hedges are recorded in accumulated other comprehensive income (AOCI) and are reclassified into interest expense in the same period the hedged items affect earnings. The changes in fair value of our interest rate swap fair value hedges are recorded as interest expense consistent with the change in the fair value of the hedged items attributable to the risk being hedged.
CASH FLOW HEDGES
We have used interest rate swap agreements designated as cash flow hedges to minimize the variability in cash flows of liabilities or forecasted transactions caused by fluctuations in interest rates. In December 2007, we issued $325,000,000 of floating-rate notes due in 2010 that bore interest at 3-month London Interbank Offered Rate (LIBOR) plus 1.25% per annum. Concurrently, we entered into a 3-year interest rate swap agreement in the stated amount of $325,000,000. Under this agreement, we paid a fixed interest rate of 5.25% and received 3-month LIBOR plus 1.25% per annum. Concurrent with each quarterly interest payment, the portion of this swap related to that interest payment was settled and the associated realized gain or loss was recognized. This swap agreement terminated December 15, 2010, coinciding with the maturity of the notes. For the year ended December 31, 2010, $12,075,000 of the pretax loss in AOCI was reclassified to earnings in conjunction with the retirement of the related debt.
During 2007, we entered into fifteen forward starting interest rate swap agreements for a total stated amount of $1,500,000,000. Upon the 2007 and 2008 issuances of the related fixed-rate debt, we terminated and settled these forward starting swaps for cash payments of $89,777,000. Amounts in AOCI are being amortized to interest expense over the term of the related debt. For the 12-month period ending December 31, 2013, we estimate that $5,157,000 of the pretax loss in AOCI will be reclassified to earnings.
The effects of changes in the fair values of derivatives designated as cash flow hedges on the accompanying Consolidated Statements of Comprehensive Income for the years ended December 31 are as follows:
in thousands | Location on Statement | 2012 | 2011 | 2010 | ||||||||||
Cash Flow Hedges |
||||||||||||||
Loss recognized in
OCI |
OCI | $0 | $0 | ($882 | ) | |||||||||
Loss reclassified
from AOCI |
Interest expense | (6,314 | ) | (11,657 | ) | (19,619 | ) |
FAIR VALUE HEDGES
We have used interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in the benchmark interest rates for such debt. In June 2011, we issued $500,000,000 of 6.50% fixed-rate notes due in 2016. Concurrently, we entered into interest rate swap agreements in the stated amount of $500,000,000. Under these agreements, we paid 6-month LIBOR plus a spread of 4.05% and received a fixed interest rate of 6.50%. Additionally, in June 2011, we entered into interest rate swap agreements on our $150,000,000 of 10.125% fixed-rate notes due in 2015. Under these agreements, we paid 6-month LIBOR plus a spread of 8.03% and received a fixed interest rate of 10.125%. In August 2011, we terminated and settled these interest rate swap agreements for $25,382,000 of cash proceeds. The $23,387,000 forward component of the settlement (cash proceeds less $1,995,000 of accrued interest) was added to the carrying value of the related debt and is being amortized as a reduction to interest expense over the remaining lives of the related debt using the effective interest method. This amortization was reflected in the accompanying Consolidated Statements of Comprehensive Income as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Deferred Gain on Settlement |
||||||||||||
Amortized to earnings as a reduction to interest expense |
$4,052 | $1,291 | $0 |
|
NOTE 6: DEBT
Debt at December 31 is summarized as follows:
in thousands | 2012 | 2011 | ||||||
Long-term Debt |
||||||||
Bank line of credit |
$0 | $0 | ||||||
5.60% notes due 2012 1 |
0 | 134,508 | ||||||
6.30% notes due 2013 2 |
140,413 | 140,352 | ||||||
10.125% notes due 2015 3 |
152,718 | 153,464 | ||||||
6.50% notes due 2016 4 |
515,060 | 518,293 | ||||||
6.40% notes due 2017 5 |
349,888 | 349,869 | ||||||
7.00% notes due 2018 6 |
399,731 | 399,693 | ||||||
10.375% notes due 2018 7 |
248,676 | 248,526 | ||||||
7.50% notes due 2021 8 |
600,000 | 600,000 | ||||||
7.15% notes due 2037 9 |
239,553 | 239,545 | ||||||
Medium-term notes |
16,000 | 16,000 | ||||||
Industrial revenue bonds |
14,000 | 14,000 | ||||||
Other notes |
964 | 1,189 | ||||||
Total long-term debt including current maturities |
$2,677,003 | $2,815,439 | ||||||
Less current maturities |
150,602 | 134,762 | ||||||
Total long-term debt |
$2,526,401 | $2,680,677 | ||||||
Estimated fair value of long-term debt |
$2,766,835 | $2,796,504 |
1 |
Includes decreases for unamortized discounts, as follows: December 31, 2011 — $49 thousand. |
2 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $30 thousand and December 31, 2011 — $92 thousand. The effective interest rate for these notes is 7.48%. |
3 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: December 31, 2012 — $2,983 thousand and December 31, 2011 — $3,802 thousand. Additionally, includes decreases for unamortized discounts, as follows: December 31, 2012 — $265 thousand and December 31, 2011 — $338 thousand. The effective interest rate for these notes is 9.59%. |
4 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: December 31, 2012 — $15,060 thousand and December 31, 2011 — $18,293 thousand. The effective interest rate for these notes is 6.02%. |
5 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $112 thousand and December 31, 2011 — $131 thousand. The effective interest rate for these notes is 7.41%. |
6 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $269 thousand and December 31, 2011 — $307 thousand. The effective interest rate for these notes is 7.87%. |
7 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $1,324 thousand and December 31, 2011 — $1,474 thousand. The effective interest rate for these notes is 10.62%. |
8 |
The effective interest rate for these notes is 7.75%. |
9 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $635 thousand and December 31, 2011 — $643 thousand. The effective interest rate for these notes is 8.05%. |
Our long-term debt is presented in the table above net of unamortized discounts from par and unamortized deferred gains realized upon settlement of interest rate swaps. Discounts, deferred gains and debt issuance costs are being amortized using the effective interest method over the respective terms of the notes.
The estimated fair value of long-term debt presented in the table above was determined by averaging the asking price quotes for the notes. The fair value estimates were based on Level 2 information (as defined in Note 1, caption Fair Value Measurements) available to us as of the respective balance sheet dates. Although we are not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since those dates.
Scheduled debt payments during 2012 included $134,557,000 in November to retire the remaining portion of the 5.60% notes, and payments under various immaterial notes that either matured at various dates or required monthly payments.
Scheduled debt payments during 2011 included $5,000,000 in November to retire a portion of the medium-term notes, and payments under various immaterial notes that either matured at various dates or required monthly payments.
In December 2011, we entered into a new $600,000,000 bank line of credit (the line of credit). The line of credit expires on December 15, 2016 and is secured by certain domestic accounts receivable and inventory. Borrowing capacity fluctuates with the level of eligible accounts receivable and inventory and may be less than $600,000,000 at any point in time.
Borrowings under the line of credit bear interest at a rate determined at the time of borrowing equal to the lower of LIBOR plus a margin ranging from 1.75% to 2.25% based on the level of utilization, or an alternative rate derived from the lender’s prime rate. As of December 31, 2012, the applicable margin for LIBOR based borrowing was 1.75%.
In June 2011, we issued $1,100,000,000 of long-term notes in two series, as follows: $500,000,000 of 6.50% notes due in 2016 and $600,000,000 of 7.50% notes due in 2021. These notes were issued principally to:
¡ | repay and terminate our $450,000,000 floating-rate term loan due in 2015 |
¡ | fund the purchase through a tender offer of $165,443,000 of our outstanding 5.60% notes due in 2012 and $109,556,000 of our outstanding 6.30% notes due in 2013 |
¡ | repay $275,000,000 outstanding under our revolving credit facility, and |
¡ | for general corporate purposes |
The terminated $450,000,000 floating-rate term loan due in 2015 was established in July 2010 in order to repay the $100,000,000 outstanding balance of our floating-rate term loan due in 2011 and all outstanding commercial paper. Unamortized deferred financing costs of $2,423,000 were recognized in June 2011 as a component of interest expense upon the termination of this floating-rate term loan.
The June 2011 purchases of the 5.60% and 6.30% notes cost $294,533,000, including a $19,534,000 premium above the $274,999,000 face value of the notes. This premium primarily reflects the trading price of the notes at the time of purchase relative to par value. Additionally, $4,711,000 of expense associated with a proportional amount of unamortized discounts, deferred financing costs and amounts accumulated in OCI was recognized in 2011 upon the partial termination of the notes. The combined expense of $24,245,000 was recognized as a component of interest expense for the year 2011.
In February 2009, we issued $400,000,000 of long-term notes in two related series, as follows: $150,000,000 of 10.125% notes due in 2015 and $250,000,000 of 10.375% notes due in 2018. These notes were issued principally to repay borrowings outstanding under our short- and long-term debt obligations.
The 2008 and 2007 debt issuances described below relate primarily to funding the November 2007 acquisition of Florida Rock and replaced a portion of the short-term borrowings we incurred to initially fund the cash portion of the acquisition.
In June 2008 we issued $650,000,000 of long-term notes in two series, as follows: $250,000,000 of 6.30% notes due in 2013 and $400,000,000 of 7.00% notes due in 2018. The 6.30% notes due in 2013 were partially terminated in June 2011 with a tender offer as described above.
In December 2007, we issued $1,225,000,000 of long-term notes in four series, as follows: $325,000,000 of floating-rate notes due in 2010, $300,000,000 of 5.60% notes due in 2012, $350,000,000 of 6.40% notes due in 2017 and $250,000,000 of 7.15% notes due in 2037. The floating-rate notes were paid in December 2010 as scheduled. The 5.60% notes due in 2012 were partially terminated in June 2011 with a tender offer as described above.
During 1991, we issued $81,000,000 of medium-term notes ranging in maturity from 3 to 30 years, with interest rates from 7.59% to 8.85%. The $16,000,000 in medium-term notes outstanding as of December 31, 2012 has a weighted-average maturity of 3.3 years with a weighted-average interest rate of 8.79%.
The industrial revenue bonds were assumed in November 2007 with the acquisition of Florida Rock. These variable-rate tax-exempt bonds were to have matured as follows: $2,250,000 in June 2012, $1,300,000 in January 2021 and $14,000,000 in November 2022. The first two bond maturities were collateralized by certain property, plant & equipment and were prepaid in September 2010. The remaining $14,000,000 of bonds is backed by a standby letter of credit.
Other notes of $964,000 as of December 31, 2012 were issued at various times to acquire land or businesses or were assumed in business acquisitions.
The total scheduled (principal and interest) debt payments, excluding any draws, if any, on the line of credit, for the five years subsequent to December 31, 2012 are as follows:
in thousands | Total | Principal | Interest | |||||||||
Debt Payments (excluding the line of credit) |
||||||||||||
2013 |
$ | 342,050 | $ | 150,602 | $ | 191,448 | ||||||
2014 |
187,063 | 170 | 186,893 | |||||||||
2015 |
337,019 | 150,137 | 186,882 | |||||||||
2016 |
671,817 | 500,130 | 171,687 | |||||||||
2017 |
489,317 | 350,138 | 139,179 |
The line of credit contains limitations on liens, indebtedness, guarantees, acquisitions and divestitures, and certain restricted payments. Restricted payments include dividends to our shareholders. There is no dollar limit or percent of retained earnings limit on restricted payments. However, we must have cash and borrowing capacity, after the restricted payment is made, of at least $180,000,000 (or $120,000,000 if our fixed charge coverage ratio is above 1.00:1.00). The minimum fixed charge coverage ratio that is applicable only if usage exceeds 90% of the lesser of $600,000,000 and the borrowing capacity derived from the sum of eligible accounts receivable and inventory.
|
NOTE 7: OPERATING LEASES
Rental expense from continuing operations under nonmineral operating leases for the years ended December 31, exclusive of rental payments made under leases of one month or less, is summarized as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Operating Leases |
||||||||||||
Minimum rentals |
$36,951 | $34,701 | $33,573 | |||||||||
Contingent rentals (based principally on usage) |
32,705 | 29,882 | 27,418 | |||||||||
Total |
$69,656 | $64,583 | $60,991 |
Future minimum operating lease payments under all leases with initial or remaining noncancelable lease terms in excess of one year, exclusive of mineral leases, as of December 31, 2012 are payable as follows:
in thousands |
||||
Future Minimum Operating Lease Payments |
||||
2013 |
$26,735 | |||
2014 |
24,769 | |||
2015 |
21,069 | |||
2016 |
19,590 | |||
2017 |
17,725 | |||
Thereafter |
137,978 | |||
Total |
$247,866 |
Lease agreements frequently include renewal options and require that we pay for utilities, taxes, insurance and maintenance expense. Options to purchase are also included in some lease agreements.
|
NOTE 8: ACCRUED ENVIRONMENTAL
REMEDIATION COSTS
Our Consolidated Balance Sheets as of December 31 include accrued environmental remediation costs (primarily measured on an undiscounted basis) as follows:
in thousands | 2012 | 2011 | ||||||
Accrued Environmental Remediation Costs |
||||||||
Continuing operations |
$5,666 | $6,335 | ||||||
Retained from former Chemicals business |
5,792 | 5,652 | ||||||
Total |
$11,458 | $11,987 |
The long-term portion of the accruals noted above is included in other noncurrent liabilities in the accompanying Consolidated Balance Sheets and amounted to $7,299,000 at December 31, 2012 and $6,327,000 at December 31, 2011. The short-term portion of these accruals is included in other accrued liabilities in the accompanying Consolidated Balance Sheets.
The accrued environmental remediation costs in continuing operations relate primarily to the former Florida Rock, Tarmac, and CalMat facilities acquired in 2007, 2000 and 1999, respectively. The balances noted above for Chemicals relate to retained environmental remediation costs from the 2003 sale of the Performance Chemicals business and the 2005 sale of the Chloralkali business.
|
NOTE 9: INCOME TAXES
The components of earnings (loss) from continuing operations before income taxes are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Earnings (Loss)
from Continuing |
||||||||||||
Domestic |
($134,929 | ) | ($169,758 | ) | ($213,598 | ) | ||||||
Foreign |
14,511 | 16,020 | 21,392 | |||||||||
Total |
($120,418 | ) | ($153,738 | ) | ($192,206 | ) | ||||||
Provision for (benefit from) income taxes from continuing operations consists of the following:
|
|
|||||||||||
in thousands | 2012 | 2011 | 2010 | |||||||||
Provision for
(Benefit from) Income Taxes |
||||||||||||
Federal |
($5,631 | ) | $4,424 | ($46,671 | ) | |||||||
State and local |
5,271 | 5,482 | 3,909 | |||||||||
Foreign |
2,273 | 4,412 | 4,957 | |||||||||
Total |
1,913 | 14,318 | (37,805 | ) | ||||||||
Deferred |
||||||||||||
Federal |
(58,497 | ) | (76,558 | ) | (52,344 | ) | ||||||
State and local |
(8,464 | ) | (15,397 | ) | 1,422 | |||||||
Foreign |
(1,444 | ) | (846 | ) | (936 | ) | ||||||
Total |
(68,405 | ) | (92,801 | ) | (51,858 | ) | ||||||
Total benefit |
($66,492 | ) | ($78,483 | ) | ($89,663 | ) |
The benefit from income taxes differs from the amount computed by applying the federal statutory income tax rate to losses from continuing operations before income taxes. The sources and tax effects of the differences are as follows:
dollars in thousands |
2012 |
2011 |
2010 |
|||||||||||||||||||||||||
Income tax benefit
at the |
($42,146 | ) | 35.0% | ($53,809 | ) | 35.0% | ($67,272 | ) | 35.0% | |||||||||||||||||||
Provision for
(Benefit from) |
||||||||||||||||||||||||||||
Statutory depletion |
(19,608 | ) | 16.3% | (18,931 | ) | 12.3% | (20,301 | ) | 10.6% | |||||||||||||||||||
State and local
income taxes, net of federal |
(2,076 | ) | 1.7% | (6,445 | ) | 4.2% | 3,465 | -1.8% | ||||||||||||||||||||
Fair market value
over tax basis of |
(2,007 | ) | 1.7% | 0 | 0.0% | (3,223 | ) | 1.7% | ||||||||||||||||||||
Undistributed foreign earnings |
0 | 0.0% | (2,553 | ) | 1.7% | (3,331 | ) | 1.7% | ||||||||||||||||||||
Prior year true up adjustments |
(657 | ) | 0.5% | 3,115 | -2.1% | (1,095 | ) | 0.6% | ||||||||||||||||||||
Other, net |
2 | 0.0% | 140 | -0.1% | 2,094 | -1.2% | ||||||||||||||||||||||
Total income tax benefit |
($66,492 | ) | 55.2% | ($78,483 | ) | 51.0% | ($89,663 | ) | 46.6% |
Deferred income taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax liability at December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Deferred Tax Assets Related to |
||||||||
Pensions |
$84,869 | $58,193 | ||||||
Other postretirement benefits |
44,030 | 52,433 | ||||||
Accruals for asset
retirement obligations |
40,202 | 37,145 | ||||||
Accounts
receivable, principally allowance |
1,910 | 2,194 | ||||||
Deferred
compensation, vacation pay |
102,048 | 97,741 | ||||||
Interest rate swaps |
19,585 | 22,273 | ||||||
Self-insurance reserves |
18,165 | 16,467 | ||||||
Inventory |
8,011 | 6,984 | ||||||
Federal net operating loss carryforwards |
57,679 | 48,496 | ||||||
State net operating loss carryforwards |
45,929 | 36,912 | ||||||
Valuation
allowance on state net operating |
(38,837 | ) | (29,757 | ) | ||||
Foreign tax credit carryforwards |
22,409 | 22,395 | ||||||
Alternative minimum tax credit carryforwards |
15,711 | 10,724 | ||||||
Charitable contribution carryforwards |
9,953 | 9,523 | ||||||
Other |
20,561 | 18,619 | ||||||
Total deferred tax assets |
452,225 | 410,342 | ||||||
Deferred Tax Liabilities Related to |
||||||||
Fixed assets |
$754,697 | $799,632 | ||||||
Intangible assets |
295,429 | 286,317 | ||||||
Other |
18,770 | 13,889 | ||||||
Total deferred tax liabilities |
1,068,896 | 1,099,838 | ||||||
Net deferred tax liability |
$616,671 | $689,496 |
The above amounts are reflected in the accompanying Consolidated Balance Sheets as of December 31 as follows:
in thousands | 2012 | 2011 | ||||||
Deferred Income Taxes |
||||||||
Current assets |
($40,696 | ) | ($43,032 | ) | ||||
Noncurrent liabilities |
657,367 | 732,528 | ||||||
Net deferred tax liability |
$616,671 | $689,496 |
We have definite-lived deferred tax assets related to carryforwards at December 31, 2012 as follows:
in thousands | Deferred Tax Asset |
Valuation Allowance |
Expiration | |||||||||
Federal net operating loss carryforwards |
$57,679 | $0 | 2027 - 2032 | |||||||||
State net operating loss carryforwards |
45,929 | 38,837 | 2014 - 2032 | |||||||||
Foreign tax credit carryforwards |
22,409 | 0 | 2018 - 2021 | |||||||||
Charitable contribution carryforwards |
9,953 | 0 | 2014 - 2017 |
A deferred tax asset is recognized for deductible temporary differences, operating loss carryforwards and tax credit carryforwards using the applicable enacted tax rate. A valuation allowance is recognized if, based on the analysis of all positive and negative evidence, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. Future realization of deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period under the tax law.
At each reporting date, we consider both positive and negative evidence that could impact our view with regard to the future realization of deferred tax assets. At December 31, 2012, negative evidence exists by the fact that we are in a cumulative loss position. This negative evidence is weighed against the positive evidence created by the future taxable income originating from reversing existing taxable temporary differences, our historically profitable foreign operations, and tax-planning actions and strategies. We have determined that the positive evidence outweighs the negative evidence, and therefore, conclude that it is more-likely-than-not that we will realize the benefit of all of our deferred tax assets related to deductible temporary differences and federal net operating loss, foreign tax credit and charitable contribution carryforwards.
At December 31, 2012, we had a valuation allowance of $38,837,000 against our state net operating loss carryforwards of $45,929,000. This conclusion regarding the valuation allowance is supported by the following negative evidence:
¡ | required filing groups in many states are different from the federal filing group |
¡ | we no longer file in certain states for which we have net operating losses carryforwards |
¡ | certain states have short carryforward periods or limitations on the usage of a net operating loss |
The amount of our deferred tax assets considered realizable could be adjusted if estimates of future taxable income increase or decrease during the carryforward period.
As of December 31, 2012, income tax receivables of $1,500,000 are included in accounts and notes receivable in the accompanying Consolidated Balance Sheet. These receivables relate to prior year state overpayments that we have requested to be refunded. There were similar receivables of $3,000,000 as of December 31, 2011.
Uncertain tax positions and the resulting unrecognized income tax benefits are discussed in our accounting policy for income taxes (see Note 1, caption Income Taxes). Changes in unrecognized income tax benefits for the years ended December 31, are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Unrecognized
income tax benefits |
$13,488 | $28,075 | $20,974 | |||||||||
Increases for tax positions related to |
||||||||||||
Prior years |
0 | 389 | 14,685 | |||||||||
Current year |
1,356 | 913 | 1,447 | |||||||||
Decreases for tax positions related to |
||||||||||||
Prior years |
(43 | ) | (411 | ) | (8,028 | ) | ||||||
Settlements with taxing authorities |
(1,456 | ) | (15,402 | ) | 0 | |||||||
Expiration of applicable statute of limitations |
205 | (76 | ) | (1,003 | ) | |||||||
Unrecognized income tax benefits as of December 31 |
$13,550 | $13,488 | $28,075 |
We classify interest and penalties recognized on the liability for unrecognized income tax benefits as income tax expense. Interest and penalties recognized as income tax expense were $218,000 in 2012, $492,000 in 2011 and $1,525,000 in 2010. The balance of accrued interest and penalties included in our liability for unrecognized income tax benefits as of December 31 was $2,820,000 in 2012, $2,602,000 in 2011 and $4,496,000 in 2010.
Our unrecognized income tax benefits at December 31 in the table above include $9,170,000 in 2012, $9,205,000 in 2011 and $12,038,000 in 2010 that would affect the effective tax rate if recognized.
We are routinely examined by various taxing authorities. By mutual agreement between Vulcan and the IRS, we have extended the statutes of limitations for two examinations of our federal tax returns. The U.S. federal statutes of limitations for both 2006 and 2007 were extended to September 30, 2013. The U.S. federal statutes of limitations for both 2008 and 2009 were extended to April 15, 2014. We anticipate no single tax position generating a significant increase or decrease in our liability for unrecognized tax benefits within 12 months of this reporting date.
We file income tax returns in U.S. federal, various state and foreign jurisdictions. Generally, we are not subject to significant changes in income taxes by any taxing jurisdiction for the years prior to 2006.
As of December 31, 2011, we did not recognize deferred income taxes on $56,000,000 of accumulated undistributed earnings from one of our foreign subsidiaries. At that time, we considered such earnings to be indefinitely reinvested. If we were to distribute these earnings in the form of dividends, the distribution would be subject to U.S. income taxes resulting in $19,600,000 of previously unrecognized deferred income taxes. Beginning January 1, 2012, we removed our indefinite reinvestment assertion on future earnings of this foreign subsidiary and recorded deferred income taxes on its 2012 earnings.
|
NOTE 10: BENEFIT PLANS
PENSION PLANS
We sponsor three funded, noncontributory defined benefit pension plans. These plans cover substantially all employees hired prior to July 15, 2007, other than those covered by union-administered plans. Normal retirement age is 65, but the plans contain provisions for earlier retirement. Benefits for the Salaried Plan are generally based on salaries or wages and years of service; the Construction Materials Hourly Plan and the Chemicals Hourly Plan provide benefits equal to a flat dollar amount for each year of service. Effective July 15, 2007, we amended our defined benefit pension plans and our then existing defined contribution 401(k) plans to no longer accept new participants. Existing participants continue to accrue benefits under these plans. Salaried and non-union hourly employees hired on or after July 15, 2007 are eligible for a new single defined contribution 401(k)/Profit-Sharing plan established on that date.
In addition to these qualified plans, we sponsor three unfunded, nonqualified pension plans. The projected benefit obligation presented in the table below includes $92,322,000 and $83,025,000, respectively, related to these plans for 2012 and 2011.
The following table sets forth the combined funded status of the plans and their reconciliation with the related amounts recognized in our consolidated financial statements at December 31:
in thousands | 2012 | 2011 | ||||||
Change in Benefit Obligation |
||||||||
Projected benefit obligation at beginning of year |
$867,374 | $761,384 | ||||||
Service cost |
22,349 | 20,762 | ||||||
Interest cost |
43,194 | 42,383 | ||||||
Plan amendment 1 |
1,286 | 0 | ||||||
Actuarial loss |
96,222 | 81,699 | ||||||
Benefits paid |
(39,087 | ) | (38,854 | ) | ||||
Projected benefit obligation at end of year |
$991,338 | $867,374 | ||||||
Change in Plan Assets |
||||||||
Fair value of assets at beginning of year |
$636,648 | $630,303 | ||||||
Actual return on plan assets |
81,021 | 40,293 | ||||||
Employer contribution |
4,509 | 4,906 | ||||||
Benefits paid |
(39,087 | ) | (38,854 | ) | ||||
Fair value of assets at end of year |
$683,091 | $636,648 | ||||||
Funded status |
($308,247 | ) | ($230,726 | ) | ||||
Net amount recognized |
($308,247 | ) | ($230,726 | ) | ||||
Amounts Recognized in the Consolidated |
||||||||
Balance Sheets |
||||||||
Current liabilities |
($5,211 | ) | ($4,880 | ) | ||||
Noncurrent liabilities |
(303,036 | ) | (225,846 | ) | ||||
Net amount recognized |
($308,247 | ) | ($230,726 | ) | ||||
Amounts Recognized in Accumulated |
||||||||
Other Comprehensive Income |
||||||||
Net actuarial loss |
$325,807 | $281,352 | ||||||
Prior service cost |
1,609 | 597 | ||||||
Total amount recognized |
$327,416 | $281,949 |
1 |
An amendment to the salaried plan was necessary to maintain compliance with required discrimination testing. |
The accumulated benefit obligation and the projected benefit obligation exceeded plan assets for all of our defined benefit plans at December 31, 2012 and 2011.
The accumulated benefit obligation for all of our defined benefit pension plans totaled $928,059,000 (unfunded, nonqualified plans of $88,643,000) at December 31, 2012 and $812,346,000 (unfunded, nonqualified plans of $76,795,000) at December 31, 2011.
The following table sets forth the components of net periodic benefit cost, amounts recognized in other comprehensive income and weighted-average assumptions of the plans at December 31:
dollars in thousands | 2012 | 2011 | 2010 | |||||||||
Components of Net Periodic Pension Benefit Cost |
||||||||||||
Service cost |
$22,349 | $20,762 | $19,217 | |||||||||
Interest cost |
43,194 | 42,383 | 41,621 | |||||||||
Expected return on plan assets |
(48,780 | ) | (49,480 | ) | (50,122 | ) | ||||||
Amortization of prior service cost |
274 | 340 | 460 | |||||||||
Amortization of actuarial loss |
19,526 | 11,670 | 5,752 | |||||||||
Net periodic pension benefit cost |
$36,563 | $25,675 | $16,928 | |||||||||
Changes in Plan
Assets and Benefit |
||||||||||||
Net actuarial loss (gain) |
$63,981 | $90,886 | ($17,413 | ) | ||||||||
Prior service cost |
1,286 | 0 | 0 | |||||||||
Reclassification
of actuarial loss to net |
(19,526 | ) | (11,670 | ) | (5,752 | ) | ||||||
Reclassification
of prior service cost to net |
(274 | ) | (340 | ) | (460 | ) | ||||||
Amount recognized
in other comprehensive |
$45,467 | $78,876 | ($23,625 | ) | ||||||||
Amount recognized
in net periodic pension |
$82,030 | $104,551 | ($6,697 | ) | ||||||||
Assumptions |
||||||||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
4.96 | % | 5.49 | % | 5.92 | % | ||||||
Expected return on plan assets |
8.00 | % | 8.00 | % | 8.25 | % | ||||||
Rate of compensation increase |
||||||||||||
(for salary-related plans) |
3.50 | % | 3.50 | % | 3.40 | % | ||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
4.19 | % | 4.96 | % | 5.49 | % | ||||||
Rate of
compensation increase |
3.50 | % | 3.50 | % | 3.50 | % |
The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension benefit cost during 2013 are $26,216,000 and $380,000, respectively.
Assumptions regarding our expected return on plan assets are based primarily on judgments made by us and the Finance Committee of our Board. These judgments take into account the expectations of our pension plan consultants and actuaries and our investment advisors, and the opinions of market professionals. We base our expected return on long-term investment expectations. The expected return on plan assets used to determine 2012 pension benefit cost was 8.0%.
We establish our pension investment policy by evaluating asset/liability studies periodically performed by our consultants. These studies estimate trade-offs between expected returns on our investments and the variability in anticipated cash contributions to fund our pension liabilities. Our policy balances the variability in potential pension fund contributions to expected returns on our investments.
Our current strategy for implementing this policy is to invest in publicly traded equities and in publicly traded debt and private, nonliquid opportunities, such as venture capital, commodities, buyout funds and mezzanine debt. The target allocation ranges for plan assets are as follows: equity securities — 50% to 77%; debt securities — 15% to 27%; specialty investments — 10% to 20%; and cash reserves — 0% to 5%. Equity securities include domestic investments and foreign equities in the Europe, Australia and Far East (EAFE) and International Finance Corporation (IFC) Emerging Market Indices. Debt securities include domestic debt instruments, while specialty investments include investments in venture capital, buyout funds, mezzanine debt, private partnerships and an interest in a commodity index fund.
The fair values of our pension plan assets at December 31, 2012 and 2011 by asset category are as follows:
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2012
in thousands | Level 1 1 | Level 2 1 | Level 3 1 | Total | ||||||||||||
Asset Category |
||||||||||||||||
Debt securities |
$0 | $155,874 | $0 | $155,874 | ||||||||||||
Investment funds |
||||||||||||||||
Commodity funds |
0 | 27,906 | 0 | 27,906 | ||||||||||||
Equity funds |
4,503 | 388,499 | 0 | 393,002 | ||||||||||||
Short-term funds |
8,298 | 0 | 0 | 8,298 | ||||||||||||
Venture capital and partnerships |
0 | 0 | 98,011 | 98,011 | ||||||||||||
Total pension plan assets |
$12,801 | $572,279 | $98,011 | $683,091 |
1 See Note 1 under the caption Fair Value Measurements for a description of the fair value hierarchy.
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2011
in thousands | Level 1 1 | Level 2 1 | Level 3 1 | Total | ||||||||||||
Asset Category |
||||||||||||||||
Debt securities |
$0 | $152,240 | $0 | $152,240 | ||||||||||||
Investment funds |
||||||||||||||||
Commodity funds |
0 | 26,498 | 0 | 26,498 | ||||||||||||
Equity funds |
884 | 346,632 | 0 | 347,516 | ||||||||||||
Short-term funds |
3,593 | 0 | 0 | 3,593 | ||||||||||||
Venture capital and partnerships |
0 | 0 | 106,801 | 106,801 | ||||||||||||
Total pension plan assets |
$4,477 | $525,370 | $106,801 | $636,648 |
1 See Note 1 under the caption Fair Value Measurements for a description of the fair value hierarchy.
As of December 31, 2008, our Master Pension Trust had assets invested at Westridge Capital Management, Inc. (WCM) with a reported fair value of $59,245,000. In February 2009, the New York District Court appointed a receiver over WCM due to allegations of fraud and other violations of federal commodities and securities laws by principals of a WCM affiliate. In light of these allegations, we reassessed the fair value of our investments at WCM and recorded a $48,018,000 write-down in the estimated fair value of these assets for the year ended December 31, 2008.
During 2010, the court-appointed receiver released $6,555,000 as a partial distribution and the Master Pension Trust received a $15,000,000 insurance settlement related to our WCM loss. In April 2011, the court-appointed receiver released an additional $22,041,000 to our Master Pension Trust. This recovery resulted in the recognition of a $10,814,000 return on plan assets (net of the $11,227,000 remaining WCM investment). Future recoveries, if any, are expected to be limited.
At each measurement date, we estimate the fair value of our pension assets using various valuation techniques. We utilize, to the extent available, quoted market prices in active markets or observable market inputs in estimating the fair value of our pension assets. When quoted market prices or observable market inputs are not available, we utilize valuation techniques that rely on unobservable inputs to estimate the fair value of our pension assets. The following describes the types of investments included in each asset category listed in the table above and the valuation techniques we used to determine the fair values as of December 31, 2012.
The debt securities category consists of bonds issued by U.S. federal, state and local governments, corporate debt securities, fixed income obligations issued by foreign governments, and asset-backed securities. The fair values of U.S. government and corporate debt securities are based on current market rates and credit spreads for debt securities with similar maturities. The fair values of debt securities issued by foreign governments are based on prices obtained from broker/dealers and international indices. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market.
Investment funds consist of exchange traded and non-exchange traded funds. The commodity funds asset category consists of a single open-end commodity mutual fund. The equity funds asset category consists of index funds for domestic equities and an actively managed fund for international equities. The short-term funds asset category consists of a collective investment trust invested in highly liquid, short-term debt securities. For investment funds publicly traded on a national securities exchange, the fair value is based on quoted market prices. For investment funds not traded on an exchange, the total fair value of the underlying securities is used to determine the net asset value for each unit of the fund held by the pension fund. The estimated fair values of the underlying securities are generally valued based on quoted market prices. For securities without quoted market prices, other observable market inputs are utilized to determine the fair value.
The venture capital and partnerships asset category consists of various limited partnership funds, mezzanine debt funds and leveraged buyout funds. The fair value of these investments has been estimated based on methods employed by the general partners, including consideration of, among other things, reference to third-party transactions, valuations of comparable companies operating within the same or similar industry, the current economic and competitive environment, creditworthiness of the corporate issuer, as well as market prices for instruments with similar maturity, term, conditions and quality ratings. The use of different assumptions, applying different judgment to inherently subjective matters and changes in future market conditions could result in significantly different estimates of fair value of these securities.
A reconciliation of the fair value measurements of our pension plan assets using significant unobservable inputs (Level 3) for the years ended December 31 is presented below:
FAIR VALUE MEASUREMENTS
USING SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
in thousands | Debt Securities |
Venture Capital and Partnerships |
Total | |||||||||
Balance at December 31, 2010 |
$308 | $96,244 | $96,552 | |||||||||
Actual return on plan assets |
||||||||||||
Relating to assets still held at December 31, 2011 |
0 | 13,696 | 13,696 | |||||||||
Relating to assets
sold during the year ended |
0 | 0 | 0 | |||||||||
Purchases, sales and settlements, net |
0 | (3,139 | ) | (3,139 | ) | |||||||
Transfers in (out) of Level 3 |
(308 | ) | 0 | (308 | ) | |||||||
Balance at December 31, 2011 |
$0 | $106,801 | $106,801 | |||||||||
Actual return on plan assets |
||||||||||||
Relating to assets still held at December 31, 2012 |
0 | (6,858 | ) | (6,858 | ) | |||||||
Relating to assets
sold during the year ended |
0 | 0 | 0 | |||||||||
Purchases, sales and settlements, net |
0 | 15,356 | 15,356 | |||||||||
Transfers in (out) of Level 3 |
0 | (17,288 | ) | (17,288 | ) | |||||||
Balance at December 31, 2012 |
$0 | $98,011 | $98,011 |
Total employer contributions for the pension plans are presented below:
in thousands | Pension | |||
Employer Contributions |
||||
2010 |
$78,359 | |||
2011 |
4,906 | |||
2012 |
4,509 | |||
2013 (estimated) |
5,200 |
We contributed $72,500,000 in March 2010 ($18,636,000 in cash and $53,864,000 in stock — 1,190,000 shares valued at $45.26 per share) and an additional $1,300,000 in July 2010 to our qualified pension plans for the 2009 plan year. We do not anticipate contributions will be required to fund the qualified plans during 2013. In addition to the contributions to our qualified pension plans, we made $4,509,000, $4,906,000 and $4,559,000 of benefit payments for our nonqualified plans during 2012, 2011 and 2010, respectively, and expect to make payments of $5,200,000 during 2013 for our nonqualified plans.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
in thousands | Pension | |||
Estimated Future Benefit Payments | ||||
2013 |
$42,335 | |||
2014 |
51,155 | |||
2015 |
49,066 | |||
2016 |
50,515 | |||
2017 |
51,709 | |||
2018-2022 |
284,836 |
We contribute to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements for union-represented employees. A multiemployer plan is subject to collective bargaining for employees of two or more unrelated companies. Multiemployer plans are managed by boards of trustees on which management and labor have equal representation. However, in most cases, management is not directly represented. The risks of participating in multiemployer plans differ from single employer plans as follows:
¡ | assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers |
¡ | if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers |
¡ | if we cease to have an obligation to contribute to one or more of the multiemployer plans to which we contribute, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability |
A summary of each multiemployer pension plan for which we participate is presented below:
Pension Fund |
EIN/Pension Plan Number |
Pension
Protection |
FIP/RP Status Pending/ |
Vulcan Contributions in thousands | Surcharge | Expiration Date/Range of CBAs |
||||||||||||||||||||||||||||||
2012 | 2011 | Implemented | 2012 | 2011 | 2010 | Imposed | ||||||||||||||||||||||||||||||
A | 36-6042061-001 | red | orange | no | $147 | $162 | $176 | no | 5/31/2013 | |||||||||||||||||||||||||||
5/31/2015 - | ||||||||||||||||||||||||||||||||||||
B | 36-6052390-001 | green | green | no | 418 | 408 | 494 | no | 1/31/2016 | |||||||||||||||||||||||||||
5/31/2013 - | ||||||||||||||||||||||||||||||||||||
C | 36-6044243-001 | red | red | no | 302 | 276 | 267 | no | 1/31/2016 | |||||||||||||||||||||||||||
D | 51-6031295-002 | green | green | no | 64 | 52 | 49 | no | 3/31/2014 | |||||||||||||||||||||||||||
E | 94-6277608-001 | yellow | yellow | yes | 232 | 177 | 176 | no | 7/15/2013 | |||||||||||||||||||||||||||
7/31/2014 - | ||||||||||||||||||||||||||||||||||||
F | 52-6074345-001 | red | red | yes | 887 | 840 | 825 | no | 1/31/2016 | |||||||||||||||||||||||||||
G | 51-6067400-001 | green | green | no | 211 | 166 | 181 | no | 4/30/2014 | |||||||||||||||||||||||||||
H | 36-6140097-001 | green | green | no | 1,392 | 1,543 | 1,566 | no | 4/30/2014 | |||||||||||||||||||||||||||
7/15/2013 - | ||||||||||||||||||||||||||||||||||||
I | 94-6090764-001 | orange | orange | yes | 2,082 | 1,737 | 1,576 | no | 9/17/2013 | |||||||||||||||||||||||||||
J | 95-6032478-001 | red | red | yes | 391 | 313 | 243 | no | 9/30/2015 | |||||||||||||||||||||||||||
K | 36-6155778-001 | red | red | no | 216 | 198 | 195 | no | 4/30/2013 | |||||||||||||||||||||||||||
L 2 | 51-6051034-001 | yellow | green | 2 | 0 | 24 | 54 | 2 | 2 | |||||||||||||||||||||||||||
7/15/2013 - | ||||||||||||||||||||||||||||||||||||
M | 91-6145047-001 | green | green | no | 885 | 882 | 764 | no | 4/8/2017 | |||||||||||||||||||||||||||
Total contributions |
$7,227 | $6,778 | $6,566 |
A Automobile Mechanics Local No. 701 Pension Fund |
H Midwest Operating Engineers Pension Trust Fund |
|
B Central Pension Fund of the IUOE and Participating Employers |
I Operating Engineers Trust Funds - Local 3 |
|
C Central States Southeast and Southwest Areas Pension Plan |
J Operating Engineers Pension Trust Funds - Local 12 |
|
D IAM National Pension Fund |
K Suburban Teamsters of Northern Illinois Pension Plan |
|
E Laborers Trust Funds for Northern California |
L Teamsters Union No 142 Pension Trust Fund |
|
F LIUNA National Industrial Pension Fund |
M Western Conference of Teamsters Pension Trust Fund |
|
G Local 786 Building Material Pension Trust |
||
EIN Employer Identification Number |
||
FIP Funding Improvement Plan |
||
RP Rehabilitation Plan |
||
CBA Collective Bargaining Agreement |
1 |
The Pension Protection Act of 2006 defines the zone status as follows: green - healthy, yellow - endangered, orange - seriously endangered and red - critical. |
2 |
All employees covered under this plan were located at operations divested on 9/30/2011. |
Our contributions to individual multiemployer pension funds did not exceed 5% of the fund’s total contributions in the three years ended December 31, 2012, 2011 and 2010. Additionally, our contributions to multiemployer postretirement benefit plans were immaterial for all periods presented in the accompanying consolidated financial statements.
As of December 31, 2012, a total of 20% of our domestic hourly labor force was covered by collective bargaining agreements. Of such employees covered by collective bargaining agreements, 19% were covered by agreements that expire in 2013. We also employed 235 union employees in Mexico who are covered by a collective bargaining agreement that will expire in 2013. None of our union employees in Mexico participate in multiemployer pension plans.
In addition to the pension plans noted above, we had one unfunded supplemental retirement plan as of December 31, 2012 and 2011. The accrued costs for the supplemental retirement plan were $1,243,000 at December 31, 2012 and $1,293,000 at December 31, 2011.
POSTRETIREMENT PLANS
In addition to pension benefits, we provide certain healthcare and life insurance benefits for some retired employees. In the fourth quarter of 2012, we amended our postretirement healthcare plan to cap our portion of the medical coverage cost at the 2015 level. Effective July 15, 2007, we amended our salaried postretirement healthcare coverage to increase the eligibility age for early retirement coverage to age 62, unless certain grandfathering provisions were met. Substantially all our salaried employees and where applicable, hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain service requirements. Generally, Company-provided healthcare benefits terminate when covered individuals become eligible for Medicare benefits, become eligible for other group insurance coverage or reach age 65, whichever occurs first.
The following table sets forth the combined funded status of the plans and their reconciliation with the related amounts recognized in our consolidated financial statements at December 31:
in thousands | 2012 | 2011 | ||||||
Change in Benefit Obligation |
||||||||
Projected benefit obligation at beginning of year |
$134,926 | $133,717 | ||||||
Service cost |
4,409 | 4,789 | ||||||
Interest cost |
5,851 | 6,450 | ||||||
Plan amendments |
(38,414 | ) | 0 | |||||
Actuarial (gain) loss |
13,562 | (2,854 | ) | |||||
Benefits paid |
(6,834 | ) | (7,176 | ) | ||||
Projected benefit obligation at end of year |
$113,500 | $134,926 | ||||||
Change in Plan Assets |
||||||||
Fair value of assets at beginning of year |
$0 | $0 | ||||||
Actual return on plan assets |
0 | 0 | ||||||
Fair value of assets at end of year |
$0 | $0 | ||||||
Funded status |
($113,500 | ) | ($134,926 | ) | ||||
Net amount recognized |
($113,500 | ) | ($134,926 | ) | ||||
Amounts
Recognized in the |
||||||||
Current liabilities |
($10,366 | ) | ($9,966 | ) | ||||
Noncurrent liabilities |
(103,134 | ) | (124,960 | ) | ||||
Net amount recognized |
($113,500 | ) | ($134,926 | ) | ||||
Amounts
Recognized in Accumulated |
||||||||
Net actuarial loss |
$38,221 | $26,006 | ||||||
Prior service credit |
(41,182 | ) | (4,141 | ) | ||||
Total amount recognized |
($2,961 | ) | $21,865 |
The following table sets forth the components of net periodic benefit cost, amounts recognized in other comprehensive income, weighted-average assumptions and assumed trend rates of the plans at December 31:
dollars in thousands |
2012 | 2011 | 2010 | |||||||||
Components of
Net Periodic Postretirement |
||||||||||||
Service cost |
$4,409 | $4,789 | $4,265 | |||||||||
Interest cost |
5,851 | 6,450 | 6,651 | |||||||||
Amortization of prior service credit |
(1,372 | ) | (674 | ) | (728 | ) | ||||||
Amortization of actuarial loss |
1,346 | 1,149 | 887 | |||||||||
Net periodic postretirement benefit cost |
$10,234 | $11,714 | $11,075 | |||||||||
Changes in Plan
Assets and Benefit |
||||||||||||
Net actuarial (gain) loss |
$13,562 | ($2,853 | ) | $11,730 | ||||||||
Prior service credit |
(38,414 | ) | 0 | 0 | ||||||||
Reclassification
of actuarial loss to net |
(1,346 | ) | (1,149 | ) | (887 | ) | ||||||
Reclassification
of prior service credit to net |
1,372 | 674 | 728 | |||||||||
Amount recognized
in other comprehensive |
($24,826 | ) | ($3,328 | ) | $11,571 | |||||||
Amount recognized
in net periodic |
($14,592 | ) | $8,386 | $22,646 | ||||||||
Assumptions |
||||||||||||
Healthcare cost
trend rate assumed |
8.00% | 7.50% | 8.00% | |||||||||
Rate to which the
cost trend rate gradually |
5.00% | 5.00% | 5.00% | |||||||||
Year that the rate
reaches the rate it is |
2019 | 2017 | 2017 | |||||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
4.60% | 4.95% | 5.45% | |||||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
3.30% | 4.60% | 4.95% |
The estimated net actuarial loss and prior service credit that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost during 2013 are $2,331,000 and ($4,863,000), respectively.
Total employer contributions for the postretirement plans are presented below:
in thousands | Postretirement | |||
Employer Contributions |
||||
2010 |
$7,242 | |||
2011 |
7,176 | |||
2012 |
6,834 | |||
2013 (estimated) |
10,366 |
The employer contributions shown above are equal to the cost of benefits during the year. The plans are not funded and are not subject to any regulatory funding requirements.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
in thousands | Postretirement | |||
Estimated Future Benefit Payments |
||||
2013 |
$10,366 | |||
2014 |
10,807 | |||
2015 |
11,101 | |||
2016 |
11,050 | |||
2017 |
10,719 | |||
2018–2022 |
47,491 |
Contributions by participants to the postretirement benefit plans for the years ended December 31 are as follows:
in thousands | Postretirement | |||
Participants Contributions |
||||
2010 |
$1,829 | |||
2011 |
1,933 | |||
2012 |
1,901 |
PENSION AND OTHER POSTRETIREMENT BENEFITS ASSUMPTIONS
Each year we review our assumptions about the discount rate, the expected return on plan assets, the rate of compensation increase (for salary-related plans) and the rate of increase in the per capita cost of covered healthcare benefits.
In selecting the discount rate, we consider fixed-income security yields, specifically high-quality bonds. We also analyze the duration of plan liabilities and the yields for corresponding high-quality bonds. At December 31, 2012, the discount rates for our various plans ranged from 3.05% to 4.35%.
In estimating the expected return on plan assets, we consider past performance and long-term future expectations for the types of investments held by the plan as well as the expected long-term allocation of plan assets to these investments. At December 31, 2012, the expected return on plan assets was reduced to 7.5% from the 8.0% used to determine the 2012 expense.
In projecting the rate of compensation increase, we consider past experience and future expectations. At December 31, 2012, our projected weighted-average rate of compensation remained at 3.5%.
In selecting the rate of increase in the per capita cost of covered healthcare benefits, we consider past performance and forecasts of future healthcare cost trends. At December 31, 2012, our assumed rate of increase in the per capita cost of covered healthcare benefits was increased to 8.0% for 2013, decreasing each year until reaching 5.0% in 2019 and remaining level thereafter.
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects:
in thousands |
One-percentage-point Increase |
One-percentage-point Decrease |
||||||
Effect on total of service and interest cost |
$192 | ($186 | ) | |||||
Effect on postretirement benefit obligation |
3,274 | (3,149 | ) |
DEFINED CONTRIBUTION PLANS
We sponsor three defined contribution plans. Substantially all salaried and nonunion hourly employees are eligible to be covered by one of these plans. As stated above, effective July 15, 2007, we amended our defined benefit pension plans and our defined contribution 401(k) plans to no longer accept new participants. Existing participants continue to accrue benefits under these plans. Salaried and nonunion hourly employees hired on or after July 15, 2007 are eligible for a single defined contribution 401(k)/Profit-Sharing plan. Expense recognized in connection with these plans totaled $18,460,000 in 2012, $16,057,000 in 2011 and $15,273,000 in 2010.
|
NOTE 11: INCENTIVE PLANS
SHARE-BASED COMPENSATION PLANS
Our 2006 Omnibus Long-term Incentive Plan (Plan) authorizes the granting of stock options, Stock-Only Stock Appreciation Rights (SOSARs) and other types of share-based awards to key salaried employees and non-employee directors. The maximum number of shares that may be issued under the Plan is 11,900,000.
PERFORMANCE SHARES — Each performance share unit is equal to and paid in one share of our common stock, but carries no voting or dividend rights. The number of units ultimately paid for performance share awards may range from 0% to 200% of target. For awards granted prior to 2010, 50% of the payment is based upon our Total Shareholder Return (TSR) performance relative to the TSR performance of the S&P 500®. The remaining 50% of the payment is based upon the achievement of established internal financial performance targets. For awards granted after 2009, the payment is based solely upon our relative TSR performance. Awards granted prior to 2011 vest on December 31 of the third year after date of grant. Awards granted in 2011 and beyond vest on December 31 of the fourth year after date of grant. Vesting is accelerated upon reaching retirement age, death, disability, or change of control, all as defined in the award agreement. Nonvested units are forfeited upon termination for any other reason. Expense provisions referable to these awards amounted to $12,151,000 in 2012, $8,879,000 in 2011 and $7,562,000 in 2010.
The fair value of performance shares is estimated as of the date of grant using a Monte Carlo simulation model. The following table summarizes the activity for nonvested performance share units during the year ended December 31, 2012:
Target Number of Shares |
Weighted-average Grant Date Fair Value |
|||||||
Performance Shares |
||||||||
Nonvested at January 1, 2012 |
607,539 | $39.73 | ||||||
Granted |
479,560 | $46.22 | ||||||
Vested |
(214,159 | ) | $40.34 | |||||
Canceled/forfeited |
(36,574 | ) | $41.64 | |||||
Nonvested at December 31, 2012 |
836,366 | $43.21 |
During 2011 and 2010, the weighted-average grant date fair value of performance shares granted was $39.38 and $40.34, respectively.
The aggregate values for distributed performance share awards are based on the closing price of our common stock as of the distribution date. The aggregate values of distributed performance shares for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Aggregate value of
distributed |
$493 | $2,548 | $2,981 |
STOCK OPTIONS/SOSARS — Stock options/SOSARs granted have an exercise price equal to the market value of our underlying common stock on the date of grant. With the exceptions of the stock option grants awarded in December 2005 and January 2006, the options/SOSARs vest ratably over 3 to 5 years and expire 10 years subsequent to the grant. The options awarded in December 2005 and January 2006 were fully vested on the date of grant and expire 10 years subsequent to the grant date. Vesting is accelerated upon reaching retirement age, death, disability, or change of control, all as defined in the award agreement. Nonvested awards are forfeited upon termination for any other reason.
The fair value of stock options/SOSARs is estimated as of the date of grant using the Black-Scholes option pricing model. Compensation cost for stock options/SOSARs is based on this grant date fair value and is recognized for awards that ultimately vest. The following table presents the weighted-average fair value and the weighted-average assumptions used in estimating the fair value of grants during the years ended December 31:
2012 1 | 2011 | 2010 | ||||||||||
SOSARs |
||||||||||||
Fair value |
N/A | $10.51 | $12.05 | |||||||||
Risk-free interest rate |
N/A | 2.27% | 3.15% | |||||||||
Dividend yield |
N/A | 1.95% | 2.00% | |||||||||
Volatility |
N/A | 31.57% | 27.58% | |||||||||
Expected term |
N/A | 7.75 years | 7.50 years |
1 No SOSARS were granted in 2012.
The risk-free interest rate is based on the yield at the date of grant of a U.S. Treasury security with a maturity period approximating the SOSARs expected term. The dividend yield assumption is based on our historical dividend payouts adjusted for current expectations of future payouts. The volatility assumption is based on the historical volatility and expectations about future volatility of our common stock over a period equal to the SOSARs expected term. The expected term is based on historical experience and expectations about future exercises and represents the period of time that SOSARs granted are expected to be outstanding.
A summary of our stock option/SOSAR activity as of December 31, 2012 and changes during the year are presented below:
Number |
Weighted-average |
Weighted-average |
Aggregate |
|||||||||||||
Stock Options/SOSARs |
||||||||||||||||
Outstanding at January 1, 2012 |
6,641,847 | $54.69 | ||||||||||||||
Granted |
0 | $0.00 | ||||||||||||||
Exercised |
(505,432 | ) | $34.01 | |||||||||||||
Forfeited or expired |
(745,808 | ) | $46.69 | |||||||||||||
Outstanding at December 31, 2012 |
5,390,607 | $57.73 | 4.59 | $22,047 | ||||||||||||
Vested and expected to vest |
5,365,068 | $57.84 | 4.57 | $21,632 | ||||||||||||
Exercisable at December 31, 2012 |
4,853,258 | $59.77 | 4.22 | $15,503 |
The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between our stock price on the last trading day of 2012 and the exercise price, multiplied by the number of in-the-money options/SOSARs) that would have been received by the option holders had all options/SOSARs been exercised on December 31, 2012. These values change based on the fair market value of our common stock. The aggregate intrinsic values of options/SOSARs exercised for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Aggregate
intrinsic value of options/ |
$5,674 | $164 | $1,830 |
To the extent the tax deductions exceed compensation cost recorded, the tax benefit is reflected as a component of equity in our Consolidated Balance Sheets. The following table presents cash and stock consideration received and tax benefit realized from stock option/SOSAR exercises and compensation cost recorded referable to stock options/SOSARs for the years ended December 31:
in thousands | 2012 | 2011 | 2010 | |||||||||
Stock Options/SOSARs |
||||||||||||
Cash and stock
consideration received |
$ | 15,787 | $ | 3,596 | $ | 20,502 | ||||||
Tax benefit from exercises |
2,202 | 66 | 733 | |||||||||
Compensation cost |
2,966 | 7,968 | 11,288 |
CASH-BASED COMPENSATION PLANS
We have incentive plans under which cash awards may be made annually to officers and key employees. Expense provisions referable to these plans amounted to $16,118,000 in 2012, $6,938,000 in 2011 and $5,080,000 in 2010.
|
NOTE 12: COMMITMENTS AND
CONTINGENCIES
We have commitments in the form of unconditional purchase obligations as of December 31, 2012. These include commitments for the purchase of property, plant & equipment of $3,880,000 and commitments for noncapital purchases of $50,582,000. These commitments are due as follows:
in thousands | Unconditional Purchase Obligations |
|||
Property, Plant & Equipment |
||||
2013 |
$3,880 | |||
Thereafter |
0 | |||
Total |
$3,880 | |||
Noncapital |
||||
2013 |
$15,432 | |||
2014–2015 |
20,062 | |||
2016–2017 |
6,363 | |||
Thereafter |
8,725 | |||
Total |
$50,582 |
Expenditures under the noncapital purchase commitments totaled $83,599,000 in 2012, $89,407,000 in 2011 and $111,142,000 in 2010.
We have commitments in the form of minimum royalties under mineral leases as of December 31, 2012 in the amount of $222,230,000, due as follows:
in thousands | Mineral Leases |
|||
Mineral Royalties |
||||
2013 |
$24,693 | |||
2014–2015 |
39,544 | |||
2016–2017 |
25,138 | |||
Thereafter |
132,855 | |||
Total |
$222,230 |
Expenditures for mineral royalties under mineral leases totaled $46,007,000 in 2012, $45,690,000 in 2011 and $43,111,000 in 2010.
Certain of our aggregates reserves are burdened by volumetric production payments (nonoperating interest) as described in Note 19. As the holder of the working interest, we have responsibility to bear the cost of mining and producing the reserves attributable to this nonoperating interest.
We provide certain third parties with irrevocable standby letters of credit in the normal course of business. We use commercial banks to issue such letters of credit to back our obligations to pay or perform when required to do so according to the requirements of an underlying agreement. The standby letters of credit listed below are cancelable only at the option of the beneficiaries who are authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. Our standby letters of credit as of December 31, 2012 are summarized by purpose in the table below:
in thousands | ||||
Standby Letters of Credit | ||||
Risk management insurance |
$35,110 | |||
Industrial revenue bond |
14,230 | |||
Reclamation/restoration requirements |
7,862 | |||
Other |
100 | |||
Total |
$57,302 |
Since banks consider standby letters of credit as contingent extensions of credit, we are required to pay a fee until they expire or are canceled. Substantially all of our standby letters of credit have a one-year term and are automatically renewed unless canceled with the approval of the beneficiary. All $57,302,000 of our outstanding standby letters of credit as of December 31, 2012 are backed by our $600,000,000 bank line of credit which expires December 15, 2016.
As described in Note 2, we may be required to make cash payments in the form of a transaction bonus to certain key former Chemicals employees. The transaction bonus is contingent upon the amount received under the 5CP earn-out agreement entered into in connection with the sale of the Chemicals business. Amounts due are payable annually based on the prior year’s results. Based on the cumulative receipts from the earn-out, we paid $1,137,000 in transaction bonuses during 2012. Future expense, if any, is dependent upon our receiving sufficient cash receipts under the 5CP earn-out and will be accrued in the period the earn-out income is recognized.
As described in Note 9, our liability for unrecognized income tax benefits is $13,550,000 as of December 31, 2012.
In September 2001, we were named a defendant in a suit brought by the Illinois Department of Transportation (IDOT) alleging damage to a 0.9-mile section of Joliet Road that bisects our McCook quarry in McCook, Illinois, a Chicago suburb. In 2010, we settled this lawsuit for $40,000,000 and recognized the full charge pending arbitration with our insurers. In 2011, we were awarded a total of $49,657,000 in payment of the insurers’ share of the settlement amount, attorneys’ fees and interest.
We are subject to occasional governmental proceedings and orders pertaining to occupational safety and health or to protection of the environment, such as proceedings or orders relating to noise abatement, air emissions or water discharges. As part of our continuing program of stewardship in safety, health and environmental matters, we have been able to resolve such proceedings and to comply with such orders without any material adverse effects on our business.
We have received notices from the United States Environmental Protection Agency (EPA) or similar state or local agencies that we are considered a potentially responsible party (PRP) at a limited number of sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state and local environmental laws. Generally we share the cost of remediation at these sites with other PRPs or alleged PRPs in accordance with negotiated or prescribed allocations. There is inherent uncertainty in determining the potential cost of remediating a given site and in determining any individual party’s share in that cost. As a result, estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, remediation methods, other PRPs and their probable level of involvement, and actions by or against governmental agencies or private parties.
We have reviewed the nature and extent of our involvement at each Superfund site, as well as potential obligations arising under other federal, state and local environmental laws. While ultimate resolution and financial liability is uncertain at a number of the sites, in our opinion based on information currently available, the ultimate resolution of claims and assessments related to these sites will not have a material effect on our consolidated results of operations, financial position or cash flows, although amounts recorded in a given period could be material to our results of operations or cash flows for that period. Amounts accrued for environmental matters are presented in Note 8.
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 specifically described below. At this time, we cannot determine the likelihood or reasonably estimate a range of loss pertaining to these matters.
SHAREHOLDER LITIGATION
¡ | IRELAND LITIGATION — On May 25, 2012, a shareholder lawsuit was filed in state court in Jefferson County, Alabama, styled Glenn Ireland II, and William C. Ireland, Jr., derivatively on behalf of Vulcan Materials Company v. Donald M. James, et al., Case No. CV-2012-901655. The lawsuit was amended to add the Charles Byron Ireland Trust as a plaintiff. This lawsuit is brought as a derivative action against the current Board of Directors and two former directors. It makes claims of breaches of fiduciary duty and mismanagement by the defendants based primarily upon (i) Vulcan’s merger with Florida Rock, (ii) the compensation of the CEO of Vulcan, and (iii) the Martin Marietta hostile takeover bid. The Company and its directors believe the lawsuit is meritless. The trial court denied our motion to dismiss which raised threshold issues about whether the plaintiffs could maintain a lawsuit against the Company. We have filed a mandamus petition with the Alabama Supreme Court seeking an appellate review of this ruling. |
PERCHLOROETHYLENE CASES
We are a defendant in a case involving perchloroethylene (perc), which was a product manufactured by our former Chemicals business. Perc is a cleaning solvent used in dry cleaning and other industrial applications. Vulcan is vigorously defending this case:
¡ | SUFFOLK COUNTY WATER AUTHORITY — On July 29, 2010, we were served in an action styled Suffolk County Water Authority v. The Dow Chemical Company, et al., in the Supreme Court for Suffolk County, State of New York. The complaint alleges that the plaintiff “owns and/or operates drinking water systems and supplies drinking water to thousands of residents and businesses, in Suffolk County, New York.” The complaint alleges that perc and its breakdown products “have been and are contaminating and damaging Plaintiff’s drinking water supply wells.” The plaintiff is seeking compensatory and punitive damages. The trial court ruled that any detectable amount of perc in a well constitutes a legal injury. We are appealing this and other rulings of the trial court. Discovery is ongoing. At this time, plaintiffs have not established that our perc was used at any specific dry cleaner, or that we are liable for any alleged contamination. |
§ | R.R. STREET INDEMNITY — Street, a former distributor of perc manufactured by us, alleges that we owe Street, and its insurer (National Union), a defense and indemnity in several litigation matters in which Street was named as a defendant. National Union alleges that we are obligated to contribute to National Union’s share of defense fees, costs and any indemnity payments made on Street’s behalf. We have had discussions with Street about the nature and extent of indemnity obligations, if any, and to date there has been no resolution of these issues. |
LOWER PASSAIC RIVER MATTERS
§ | NJDEP LITIGATION — In 2009, Vulcan and over 300 other parties were named as third-party defendants in New Jersey Department of Environmental Protection, et al. v. Occidental Chemical Corporation, et al., a case originally brought by the New Jersey Department of Environmental Protection (NJDEP) in the New Jersey Superior Court. Vulcan was brought into the suit due to alleged discharges to the lower Passaic River (River) from the former Chemicals Division - Newark Plant. Vulcan owned and operated this site as a chloralkali plant from 1961-1974. In 1974, we sold the plant, although we continued to operate the plant for one additional year. This suit by the NJDEP seeks recovery of past and future clean-up costs, as well as unspecified economic damages, punitive damages, penalties and a variety of other forms of relief. This case is currently stayed. At this time, we cannot reasonably estimate our liability related to this case because it is unclear what contaminants and legal issues will be presented at trial and the extent to which the Newark operation may have impacted the River. |
§ | LOWER PASSAIC RIVER STUDY AREA (SUPERFUND SITE) — Vulcan and approximately 70 other companies are parties to a May 2007 Administrative Order on Consent (AOC) with the U.S. Environmental Protection Agency (EPA) to perform a Remedial Investigation/Feasibility Study (RI/FS) of the lower 17 miles of the River. Separately, the EPA issued a draft Focused Feasibility Study (FFS) that evaluated early action remedial alternatives for a portion of the River. The EPA was given a range of estimated costs for these alternatives between $0.9 billion and $3.5 billion, although estimates of the cost and timing of future environmental remediation requirements are inherently imprecise and subject to revision. The EPA has not released the final FFS. As an interim step related to the 2007 AOC, Vulcan and sixty-nine (69) other companies voluntarily entered into an Administrative Settlement Agreement and Order on Consent on June 18, 2012 with the EPA for remediation actions focused at River Mile 10.9 of the River. Our estimated costs related to this focused remediation action, based on an interim allocation, are immaterial and have been accrued. On June 25, 2012, the EPA issued a Unilateral Administrative Order for Removal Response Activities to Occidental Chemical Corporation ordering Occidental to participate and cooperate in this remediation action at River Mile 10.9. |
At this time, we cannot reasonably estimate our liability related to this matter because the RI/FS is ongoing; the ultimate remedial approach and associated cost has not been determined; and the parties that will participate in funding the remediation and their respective allocations are not yet known.
It is not possible to predict with certainty the ultimate outcome of these and other legal proceedings in which we are involved and a number of factors, including developments in ongoing discovery or adverse rulings, 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 Note 1 under the caption Claims and Litigation Including Self-insurance.
|
NOTE 13: EQUITY
In September 2012 and February 2011, we issued 60,855 and 372,992 shares, respectively, of common stock in connection with a business acquisition as described in Note 19.
In March 2010, we issued 1,190,000 shares of common stock to our qualified pension plans (par value of $1 per share) as described in Note 10. This transaction increased equity by $53,864,000 (common stock $1,190,000 and capital in excess of par $52,674,000).
We periodically issue shares of common stock to the trustee of our 401(k) savings and retirement plan to satisfy the plan participants’ elections to invest in our common stock. The resulting cash proceeds provide a means of improving cash flow, increasing equity and reducing leverage. Under this arrangement, the stock issuances and resulting cash proceeds for the years ended December 31 were as follows:
§ | 2012 — issued no shares |
§ | 2011 — issued 110,881 shares for cash proceeds of $4,745,000 |
§ | 2010 — issued 882,131 shares for cash proceeds of $41,734,000 |
During 2012, we reclassified the $10,764,000 stock election portion of our directors deferred compensation obligation from liability (current and noncurrent) to equity (capital in excess of par). The participants’ elections are irrevocable and the stock component must be settled in shares of our common stock.
There were no shares held in treasury as of December 31, 2012, 2011 and 2010 and no shares purchased during any of these three years. As of December 31, 2012, 3,411,416 shares may be repurchased under the current purchase authorization of our Board of Directors.
|
NOTE 14: 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 Consolidated Statements of Comprehensive Income and Consolidated Statements of Equity, net of applicable taxes.
The amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010 is summarized as follows:
in thousands |
Before-tax Amount |
Tax (Expense) Benefit |
Net-of-tax Amount |
|||||||||
Other Comprehensive Income (Loss) |
||||||||||||
December 31, 2010 |
||||||||||||
Fair value adjustment to cash flow hedges |
($882 | ) | $401 | ($481 | ) | |||||||
Reclassification
adjustment for cash flow |
19,619 | (8,910 | ) | 10,709 | ||||||||
Adjustment for
funded status of pension |
5,683 | (2,482 | ) | 3,201 | ||||||||
Amortization of
pension and postretirement |
6,371 | (2,781 | ) | 3,590 | ||||||||
Total other comprehensive income (loss) |
$30,791 | ($13,772 | ) | $17,019 | ||||||||
December 31, 2011 |
||||||||||||
Fair value adjustment to cash flow hedges |
$0 | $0 | $0 | |||||||||
Reclassification
adjustment for cash flow |
11,657 | (4,506 | ) | 7,151 | ||||||||
Adjustment for
funded status of pension |
(88,033 | ) | 33,667 | (54,366 | ) | |||||||
Amortization of
pension and postretirement |
12,485 | (4,775 | ) | 7,710 | ||||||||
Total other comprehensive income (loss) |
($63,891 | ) | $24,386 | ($39,505 | ) | |||||||
December 31, 2012 |
||||||||||||
Fair value adjustment to cash flow hedges |
$0 | $0 | $0 | |||||||||
Reclassification
adjustment for cash flow |
6,314 | (2,498 | ) | 3,816 | ||||||||
Adjustment for
funded status of pension |
(40,414 | ) | 15,960 | (24,454 | ) | |||||||
Amortization of
pension and postretirement |
19,774 | (7,809 | ) | 11,965 | ||||||||
Total other comprehensive income (loss) |
($14,326 | ) | $5,653 | ($8,673 | ) | |||||||
Amounts in accumulated other comprehensive income (loss), net of tax, at December 31, are as follows:
|
|
|||||||||||
in thousands | 2012 | 2011 | 2010 | |||||||||
Accumulated Other Comprehensive Loss |
||||||||||||
Cash flow hedges |
($28,170 | ) | ($31,986 | ) | ($39,137 | ) | ||||||
Pension and postretirement plans |
(197,347 | ) | (184,858 | ) | (138,202 | ) | ||||||
Total |
($225,517 | ) | ($216,844 | ) | ($177,339 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to earnings, are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Reclassification Adjustment for Cash Flow Hedges |
||||||||||||
Interest expense |
$6,314 | $11,657 | $19,619 | |||||||||
Benefit from income taxes |
(2,498 | ) | (4,506 | ) | (8,910 | ) | ||||||
Total |
$3,816 | $7,151 | $10,709 | |||||||||
Amortization of
Pension and Postretirement Plan |
||||||||||||
Cost of goods sold |
$15,665 | $9,458 | $4,783 | |||||||||
Selling, administrative and general expenses |
4,109 | 3,027 | 1,588 | |||||||||
Benefit from income taxes |
(7,809 | ) | (4,775 | ) | (2,781 | ) | ||||||
Total |
$11,965 | $7,710 | $3,590 | |||||||||
Total reclassifications from AOCI to earnings |
$15,781 | $14,861 | $14,299 |
|
NOTE 15: SEGMENT REPORTING
We have four operating segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement.
The Aggregates segment produces and sells aggregates (crushed stone, sand and gravel, sand, and other aggregates) and related products and services (transportation and other). During 2012, the Aggregates segment principally served markets in nineteen states, the District of Columbia, the Bahamas and Mexico with a full line of aggregates, and ten additional states with railroad ballast. Customers use aggregates primarily in the construction and maintenance of highways, streets and other public works and in the construction of housing and commercial, industrial and other nonresidential facilities. Customers are served by truck, rail and water distribution networks from our production facilities and sales yards. Due to the high weight-to-value ratio of aggregates, markets generally are local in nature. Quarries located on waterways and rail lines allow us to serve remote markets where local aggregates reserves may not be available. We sell a relatively small amount of construction aggregates outside the United States. Nondomestic net sales were $14,733,000 in 2012, $16,678,000 in 2011 and $23,380,000 in 2010.
The Concrete segment produces and sells ready-mixed concrete in six states and the District of Columbia. Additionally, we produce and sell, in a limited number of these markets, other concrete products such as block and precast and resell purchased building materials related to the use of ready-mixed concrete and concrete block.
The Asphalt Mix segment produces and sells asphalt mix in three states primarily in our southwestern and western markets.
Aggregates comprise approximately 78% of ready-mixed concrete by weight and 95% of asphalt mix by weight. Our Concrete and Asphalt Mix segments are almost wholly supplied with their aggregates requirements from our Aggregates segment. These intersegment sales are made at local market prices for the particular grade and quality of product utilized in the production of ready-mixed concrete and asphalt mix. Customers for our Concrete and Asphalt Mix segments are generally served locally at our production facilities or by truck. Because ready-mixed concrete and asphalt mix harden rapidly, delivery is time constrained and generally confined to a radius of approximately 20 to 25 miles from the producing facility.
The Cement segment produces and sells Portland and masonry cement in both bulk and bags from our Florida cement plant. Other Cement segment facilities in Florida import and export cement, clinker and slag and either resell, grind, blend, bag or reprocess those materials. This segment also includes a Florida facility that mines, produces and sells calcium products. Our Concrete segment is the largest single customer of our Cement segment.
The vast majority of our activities are domestic. Long-lived assets outside the United States, which consist primarily of property, plant & equipment, were $138,415,000 in 2012, $142,988,000 in 2011 and $150,157,000 in 2010. Equity method investments of $22,965,000 in 2012, $22,876,000 in 2011 and $22,852,000 in 2010 are included below in the identifiable assets for the Aggregates segment.
SEGMENT FINANCIAL DISCLOSURE
in millions | 2012 | 2011 | 2010 | |||||||||
Total Revenues |
||||||||||||
Aggregates |
||||||||||||
Segment revenues |
$1,729.4 | $1,734.0 | $1,766.9 | |||||||||
Intersegment sales |
(148.2 | ) | (142.6 | ) | (154.1 | ) | ||||||
Net sales |
$1,581.2 | $1,591.4 | $1,612.8 | |||||||||
Concrete |
||||||||||||
Segment revenues |
$406.4 | $374.7 | $383.2 | |||||||||
Net sales |
$406.4 | $374.7 | $383.2 | |||||||||
Asphalt Mix |
||||||||||||
Segment revenues |
$378.1 | $399.0 | $369.9 | |||||||||
Net sales |
$378.1 | $399.0 | $369.9 | |||||||||
Cement |
||||||||||||
Segment revenues |
$84.6 | $71.9 | $80.2 | |||||||||
Intersegment sales |
(39.1 | ) | (30.1 | ) | (40.2 | ) | ||||||
Net sales |
$45.5 | $41.8 | $40.0 | |||||||||
Totals |
||||||||||||
Net sales |
$2,411.2 | $2,406.9 | $2,405.9 | |||||||||
Delivery revenues |
156.1 | 157.7 | 153.0 | |||||||||
Total revenues |
$2,567.3 | $2,564.6 | $2,558.9 | |||||||||
Gross Profit |
||||||||||||
Aggregates |
$352.1 | $306.2 | $320.2 | |||||||||
Concrete |
(38.2 | ) | (43.4 | ) | (45.0 | ) | ||||||
Asphalt Mix |
22.9 | 25.6 | 29.3 | |||||||||
Cement |
(2.8 | ) | (4.5 | ) | (3.8 | ) | ||||||
Total |
$334.0 | $283.9 | $300.7 | |||||||||
Depreciation, Depletion, Accretion and Amortization 1 |
||||||||||||
Aggregates |
$240.7 | $267.0 | $288.6 | |||||||||
Concrete |
41.3 | 47.7 | 50.5 | |||||||||
Asphalt Mix |
8.7 | 7.7 | 8.4 | |||||||||
Cement |
18.1 | 17.8 | 20.1 | |||||||||
Other |
23.2 | 21.5 | 14.5 | |||||||||
Total |
$332.0 | $361.7 | $382.1 | |||||||||
Capital Expenditures |
||||||||||||
Aggregates |
$77.0 | $67.6 | $60.6 | |||||||||
Concrete |
9.2 | 6.3 | 3.7 | |||||||||
Asphalt Mix |
7.2 | 16.1 | 4.5 | |||||||||
Cement |
1.2 | 3.2 | 7.3 | |||||||||
Corporate |
1.2 | 4.7 | 3.3 | |||||||||
Total |
$95.8 | $97.9 | $79.4 | |||||||||
Identifiable Assets 2 |
||||||||||||
Aggregates |
$6,717.3 | $6,837.0 | $6,984.5 | |||||||||
Concrete |
412.3 | 461.1 | 483.2 | |||||||||
Asphalt Mix |
218.9 | 234.9 | 211.5 | |||||||||
Cement |
398.1 | 417.8 | 435.0 | |||||||||
Total identifiable assets |
7,746.6 | 7,950.8 | 8,114.2 | |||||||||
General corporate assets |
104.5 | 122.7 | 177.8 | |||||||||
Cash items |
275.5 | 155.8 | 47.5 | |||||||||
Total assets |
$8,126.6 | $8,229.3 | $8,339.5 |
1 The allocation of indirect depreciation to our operating segments was changed in 2012 to better align the presentation with how management views information internally. The 2011 and 2010 DDA&A amounts presented above have been revised to conform to the 2012 presentation.
2 Certain temporarily idled assets are included within a segment’s Identifiable Assets but the associated DDA&A is shown within Other in the DDA&A section above since the related DDA&A is excluded from segment gross profit.
|
NOTE 16: SUPPLEMENTAL CASH FLOW
INFORMATION
Supplemental information referable to the Consolidated Statements of Cash Flows is summarized below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Cash Payments (Refunds) |
||||||||||||
Interest (exclusive of amount capitalized) |
$207,745 | $205,088 | $172,653 | |||||||||
Income taxes |
20,374 | (29,874 | ) | (15,745 | ) | |||||||
Noncash Investing and Financing Activities |
||||||||||||
Accrued liabilities
for purchases of property, |
$9,627 | $7,226 | $8,200 | |||||||||
Fair value of
noncash assets and |
0 | 25,994 | 0 | |||||||||
Stock issued for pension contribution (Note 13) |
0 | 0 | 53,864 | |||||||||
Amounts referable to business acquisitions |
||||||||||||
Liabilities assumed |
0 | 13,912 | 150 | |||||||||
Fair value of equity consideration |
0 | 18,529 | 0 |
|
NOTE 17: ASSET RETIREMENT
OBLIGATIONS
Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets.
Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the ARO is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement.
We record all AROs for which we have legal obligations for land reclamation at estimated fair value. Essentially all these AROs relate to our underlying land parcels, including both owned properties and mineral leases. For the years ended December 31, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
ARO Operating Costs |
||||||||||||
Accretion |
$7,956 | $8,195 | $8,641 | |||||||||
Depreciation |
5,599 | 7,242 | 11,516 | |||||||||
Total |
$13,555 | $15,437 | $20,157 |
ARO operating costs for our continuing operations are reported in cost of goods sold. AROs are reported within other noncurrent liabilities in our accompanying Consolidated Balance Sheets.
Reconciliations of the carrying amounts of our asset retirement obligations for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Asset Retirement Obligations |
||||||||
Balance at beginning of year |
$153,979 | $162,730 | ||||||
Liabilities incurred |
127 | 1,738 | ||||||
Liabilities settled |
(2,993 | ) | (16,630 | ) | ||||
Accretion expense |
7,956 | 8,195 | ||||||
Revisions up (down), net |
(8,997 | ) | (2,054 | ) | ||||
Balance at end of year |
$150,072 | $153,979 |
Revisions to our asset retirement obligations during 2012 relate primarily to extensions in the estimated settlement dates at numerous sites as a result of reduced sales activity.
|
NOTE 18: GOODWILL AND
INTANGIBLE ASSETS
We classify purchased intangible assets into three categories: (1) goodwill, (2) intangible assets with finite lives subject to amortization and (3) intangible assets with indefinite lives. Goodwill and intangible assets with indefinite lives are not amortized; rather, they are reviewed for impairment at least annually. For additional information regarding our policies on impairment reviews, see Note 1 under the captions Goodwill and Goodwill Impairment, and Impairment of Long-lived Assets excluding Goodwill.
GOODWILL
Goodwill is recognized when the consideration paid for a business combination (acquisition) exceeds the fair value of the tangible and other intangible assets acquired. Goodwill is allocated to reporting units for purposes of testing goodwill for impairment. There were no charges for goodwill impairment in the years ended December 31, 2012, 2011 and 2010.
We have four reportable segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2012, 2011 and 2010 are summarized below:
GOODWILL
in thousands | Aggregates | Concrete | Asphalt Mix | Cement | Total | |||||||||||||||
Gross Carrying Amount |
||||||||||||||||||||
Total as of December 31, 2010 |
$3,005,383 | $0 | $91,633 | $252,664 | $3,349,680 | |||||||||||||||
Goodwill of divested businesses |
(10,300 | ) | 0 | 0 | 0 | (10,300 | ) | |||||||||||||
Total as of December 31, 2011 |
$2,995,083 | $0 | $91,633 | $252,664 | $3,339,380 | |||||||||||||||
Total as of December 31, 2012 |
$2,995,083 | $0 | $91,633 | $252,664 | $3,339,380 | |||||||||||||||
Accumulated Impairment Losses |
||||||||||||||||||||
Total as of December 31, 2010 |
$0 | $0 | $0 | ($252,664 | ) | ($252,664 | ) | |||||||||||||
Total as of December 31, 2011 |
$0 | $0 | $0 | ($252,664 | ) | ($252,664 | ) | |||||||||||||
Total as of December 31, 2012 |
$0 | $0 | $0 | ($252,664 | ) | ($252,664 | ) | |||||||||||||
Goodwill, net of Accumulated Impairment Losses |
||||||||||||||||||||
Total as of December 31, 2010 |
$3,005,383 | $0 | $91,633 | $0 | $3,097,016 | |||||||||||||||
Total as of December 31, 2011 |
$2,995,083 | $0 | $91,633 | $0 | $3,086,716 | |||||||||||||||
Total as of December 31, 2012 |
$2,995,083 | $0 | $91,633 | $0 | $3,086,716 |
We test goodwill for impairment on an annual basis or more frequently if events or circumstances change in a manner that would more likely than not reduce the fair value of a reporting unit below its carrying value. A decrease in the estimated fair value of one or more of our reporting units could result in the recognition of a material, noncash write-down of goodwill.
INTANGIBLE ASSETS
Intangible assets acquired in business combinations are stated at their fair value determined as of the date of acquisition. Costs incurred to renew or extend the life of existing intangible assets are capitalized. These capitalized renewal/extension costs were immaterial for the years presented. Intangible assets consist of contractual rights in place (primarily permitting and zoning rights), noncompetition agreements, favorable lease agreements, customer relationships and trade names and trademarks. Intangible assets acquired individually or otherwise obtained outside a business combination consist primarily of permitting, permitting compliance and zoning rights and are stated at their historical cost, less accumulated amortization, if applicable.
Historically, we have acquired intangible assets with only finite lives. Amortization of intangible assets with finite lives is recognized over their estimated useful lives using a method of amortization that closely reflects the pattern in which the economic benefits are consumed or otherwise realized. Intangible assets with finite lives are reviewed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. There were no charges for impairment of intangible assets in the years ended December 31, 2012, 2011 and 2010.
The gross carrying amount and accumulated amortization by major intangible asset class for the years ended December 31 are summarized below:
INTANGIBLE ASSETS
in thousands | 2012 | 2011 | ||||||
Gross Carrying Amount |
||||||||
Contractual rights in place |
$640,450 | $640,450 | ||||||
Noncompetition agreements |
1,450 | 1,430 | ||||||
Favorable lease agreements |
16,677 | 16,677 | ||||||
Permitting, permitting compliance and zoning rights |
82,596 | 76,956 | ||||||
Customer relationships |
14,493 | 14,493 | ||||||
Trade names and trademarks |
5,006 | 5,006 | ||||||
Other |
3,711 | 3,200 | ||||||
Total gross carrying amount |
$764,383 | $758,212 | ||||||
Accumulated Amortization |
||||||||
Contractual rights in place |
($42,470 | ) | ($35,748 | ) | ||||
Noncompetition agreements |
(985 | ) | (841 | ) | ||||
Favorable lease agreements |
(2,584 | ) | (2,031 | ) | ||||
Permitting, permitting compliance and zoning rights |
(14,625 | ) | (12,880 | ) | ||||
Customer relationships |
(5,927 | ) | (4,466 | ) | ||||
Trade names and trademarks |
(2,044 | ) | (1,544 | ) | ||||
Other |
(3,216 | ) | (3,200 | ) | ||||
Total accumulated amortization |
($71,851 | ) | ($60,710 | ) | ||||
Total Intangible Assets Subject to Amortization, net |
$692,532 | $697,502 | ||||||
Intangible Assets with Indefinite Lives |
0 | 0 | ||||||
Total Intangible Assets, net |
$692,532 | $697,502 | ||||||
Aggregate Amortization Expense for the Year |
$11,869 | $14,032 |
Estimated amortization expense for the five years subsequent to December 31, 2012 is as follows:
in thousands |
||||
Estimated Amortization Expense for Five Subsequent Years |
||||
2013 |
$12,043 | |||
2014 |
12,090 | |||
2015 |
12,255 | |||
2016 |
12,792 | |||
2017 |
13,980 |
|
NOTE 19: ACQUISITIONS AND
DIVESTITURES
2012 DIVESTITURES AND PENDING DIVESTITURES
In the fourth quarter of 2012, we completed the sale of:
§ | two tracts of land totaling approximately 148 acres resulting in net pretax cash proceeds of $57,690,000 and pretax gains of $41,155,000 |
§ | an aggregates production facility including approximately 197 acres of land resulting in net pretax cash proceeds of $10,476,000 and a pretax gain of $5,646,000 |
Also in the fourth quarter of 2012, we completed the sale of a percentage of the future production from aggregates reserves at certain owned and leased quarries. The sale was structured as a volumetric production payment (VPP) for which we received gross cash proceeds of $75,200,000 and incurred transactions costs of $1,617,000. Concurrently, we entered into a marketing agreement (the marketing agreement) with the purchaser through which we are designated the exclusive sales agent for the purchaser’s percentage of future production.
The key terms of the VPP are:
§ | The VPP provides the purchaser with a nonoperating interest in reserves thus entitling them to a specified percentage (the percentage) of future production |
§ | The VPP terminates at the earlier to occur of December 31, 2052 or the sale of 143.2 million tons of aggregates from the specified quarries subject to the VPP (as such, the future production in which the purchaser owns the percentage could be less than 143.2 million tons) |
§ | Based on historical and projected volumes from the specified quarries, it is expected that 143.2 million tons will be sold prior to 2052, resulting in the purchaser owning a percentage of the maximum 143.2 million tons of future production |
§ | The purchaser’s percentage of the maximum 143.2 million tons of future production is estimated, based on current sales volumes projections, to be 10.5% (approximately 15 million tons; the actual percentage received by the purchaser through the term of the transaction may vary based on when the maximum 143.2 million tons is sold) |
§ | We have no obligation for any minimum annual or cumulative production or sales volumes, nor is there any minimum sales price required |
§ | The purchaser has the right to take its percentage of future production in physical product, or receive the cash proceeds from the sale of its percentage under the terms of the marketing agreement |
§ | The purchaser’s percentage of future production is to be conveyed free and clear of future costs of production and sales |
§ | We retain full operational and marketing control of the specified quarries |
§ | We retain fee simple interest in the land as well as any residual values that may be realized upon the conclusion of mining |
The VPP and marketing agreements represent separate units of accounting, however, as the timing of revenue recognition under both are identical, allocation of revenues between the two deliverables is irrelevant. The net proceeds were recorded as deferred revenue and are being amortized on a unit-of-sales basis to revenues over the term of the VPP. Based on projected sales, we anticipate recognizing approximately $1,200,000 of deferred revenue in our 2013 Consolidated Statement of Comprehensive Income related to this transaction.
Additionally:
§ | In the second quarter of 2012, we sold mitigation credits resulting in net pretax cash proceeds of $13,469,000 and a pretax gain of $12,342,000 |
§ | In the first quarter of 2012, we sold real estate resulting in net pretax cash proceeds of $9,691,000 and a pretax gain of $5,979,000 |
Pending divestitures (Aggregates segment — a previously mined and subsequently reclaimed tract of land, an aggregates production facility and its related replacement reserve land, and Ready-mix segment — a former site of a ready-mix facility) are presented in the accompanying Consolidated Balance Sheet as of December 31, 2012 as assets held for sale and liabilities of assets held for sale. As the book value of the Aggregates segment land exceeded the expected selling price less cost to sell, a $1,738,000 loss on impairment was recognized in our Consolidated Statement of Comprehensive Income as other operating expenses for the year ended December 31, 2012. Conversely, the aggregates production facility and former ready-mix facility site are expected to generate significant gains on disposition. We expect the sales to occur during 2013. Depreciation and amortization expenses were suspended on the assets classified as held for sale. The major classes of assets and liabilities of assets classified as held for sale as of December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Held for Sale |
||||||||
Current assets |
$809 | $0 | ||||||
Property, plant & equipment, net |
14,274 | 0 | ||||||
Total assets held for sale |
$15,083 | $0 | ||||||
Noncurrent liabilities |
$801 | $0 | ||||||
Total liabilities of assets held for sale |
$801 | $0 |
2011 ACQUISITIONS AND DIVESTITURES
During the fourth quarter of 2011, we consummated a transaction resulting in an exchange of assets.
We acquired
§ | three aggregates facilities |
§ | one rail distribution yard |
In return, we divested:
§ | two aggregates facilities |
§ | one asphalt mix facility |
§ | two ready-mixed concrete facilities |
§ | one recycling operation |
§ | undeveloped real property |
Total consideration for the acquired assets of $35,406,000 includes the fair value of the divested assets plus $10,000,000 cash paid. We recognized a gain of $587,000, net of transaction related costs of $531,000, based on the fair value of the divested assets.
During the third quarter of 2011, we completed the sale of four aggregates facilities. The sale resulted in net cash proceeds at closing of $61,774,000, a receivable of $2,400,000 and a pretax gain on sale of $39,659,000. The book value of the divested operations included $10,300,000 of goodwill. Goodwill was allocated based on the relative fair value of the divested operations as compared to the relative fair value of the retained portion of the reporting unit.
In a separate 2011 transaction, we acquired ten ready-mixed concrete facilities for 432,407 shares of common stock valued at the closing date price of $42.85 per share (total consideration of $18,529,000 net of acquired cash). We issued 372,992 shares to the seller at closing and retained the remaining shares to fulfill certain working capital adjustments and indemnification obligations. During the third quarter of 2012, we issued 60,855 shares (including shares accrued for dividends) of common stock to the seller as the final payment. As a result of this acquisition, we recognized $6,419,000 of amortizable intangible assets, none of which is expected to be deductible for income tax purposes. The amortizable intangible assets consist of contractual rights in place and will be amortized over an estimated weighted-average period of 20 years.
|
NOTE 20: UNAUDITED
SUPPLEMENTARY DATA
The following is a summary of selected quarterly financial information (unaudited) for each of the years ended December 31, 2012 and 2011:
2012 | ||||||||||||||||
Three Months Ended | ||||||||||||||||
in thousands, except per share data | March 31 | June 30 | Sept 30 | Dec 31 | ||||||||||||
Net sales |
$499,851 | $648,890 | $687,616 | $574,886 | ||||||||||||
Total revenues |
535,882 | 694,136 | 728,861 | 608,431 | ||||||||||||
Gross profit |
21,958 | 105,939 | 126,923 | 79,206 | ||||||||||||
Operating earnings (loss) 1, 2 |
(46,279 | ) | 19,662 | 55,866 | 55,532 | |||||||||||
Earnings (loss) from continuing operations 1, 2 |
(57,050 | ) | (16,985 | ) | 15,621 | 4,488 | ||||||||||
Net earnings (loss) 1, 2 |
(52,053 | ) | (18,283 | ) | 14,260 | 3,483 | ||||||||||
Basic earnings (loss) per share from continuing operations |
($0.44 | ) | ($0.13 | ) | $0.12 | $0.03 | ||||||||||
Diluted earnings (loss) per share from continuing operations |
(0.44 | ) | (0.13 | ) | 0.12 | 0.03 | ||||||||||
Basic net earnings (loss) per share |
($0.40 | ) | ($0.14 | ) | $0.11 | $0.03 | ||||||||||
Diluted net earnings (loss) per share |
(0.40 | ) | (0.14 | ) | 0.11 | 0.03 |
1 Includes exchange offer costs as described in Note 1, as follows (in thousands): Q1 $10,065, Q2 $32,060, Q3 $1,206 and Q4 $49.
2 Includes restructing costs as described in Note 1, as follows (in thousands): Q1 $1,411, Q2 $4,551, Q3 $3,056 and Q4 $539.
2011 | ||||||||||||||||
Three Months Ended | ||||||||||||||||
in thousands, except per share data | March 31 | June 30 | Sept 30 | Dec 31 | ||||||||||||
Net sales |
$456,316 | $657,457 | $714,947 | $578,189 | ||||||||||||
Total revenues |
487,200 | 701,971 | 760,752 | 614,627 | ||||||||||||
Gross profit |
(7,106 | ) | 100,840 | 115,780 | 74,355 | |||||||||||
Operating earnings (loss) 1, 2 |
(61,184 | ) | 23,488 | 106,668 | (5,528 | ) | ||||||||||
Earnings (loss) from continuing operations 1, 2 |
(64,622 | ) | (7,102 | ) | 22,412 | (25,943 | ) | |||||||||
Net earnings (loss) 1, 2 |
(54,733 | ) | (8,139 | ) | 19,959 | (27,865 | ) | |||||||||
Basic earnings (loss) per share from continuing operations |
($0.50 | ) | ($0.05 | ) | $0.17 | ($0.20 | ) | |||||||||
Diluted earnings (loss) per share from continuing operations |
(0.50 | ) | (0.05 | ) | 0.17 | (0.20 | ) | |||||||||
Basic net earnings (loss) per share |
($0.42 | ) | ($0.06 | ) | $0.15 | ($0.22 | ) | |||||||||
Diluted net earnings (loss) per share |
(0.42 | ) | (0.06 | ) | 0.15 | (0.22 | ) |
1 Includes exchange offer costs as described in Note 1, as follows (in thousands): Q4 $2,227.
2 Includes restructing costs as described in Note 1, as follows (in thousands): Q1 $306, Q2 $1,831, Q3 $839 and Q4 $9,995.
|
NATURE OF OPERATIONS
Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation’s largest producer of construction aggregates, primarily crushed stone, sand and gravel; a major producer of asphalt mix and ready-mixed concrete and a leading producer of cement in Florida.
Due to the 2005 sale of our Chemicals business as described in Note 2, the operating results of the Chemicals business are presented as discontinued operations in the accompanying Consolidated Statements of Comprehensive Income.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Vulcan Materials Company and all our majority or wholly-owned subsidiary companies. All intercompany transactions and accounts have been eliminated in consolidation.
RESTRUCTURING CHARGES
Costs associated with restructuring our operations include severance and related charges to eliminate a specified number of employee positions, costs to relocate employees, contract cancellation costs and charges to vacate facilities and consolidate operations. Relocation and contract cancellation costs and charges to vacate facilities are recognized in the period the liability is incurred. Severance charges for employees, who are required to render service beyond a minimum retention period, generally more than 60 days, are recognized ratably over the retention period; otherwise, the full severance charge is recognized on the date a detailed restructuring plan has been authorized by management and communicated to employees.
In 2011, we substantially completed the implementation of a multi-year project to replace our legacy information technology systems with new ERP and Shared Services platforms. These platforms are helping us streamline processes enterprise-wide and standardize administrative and support functions while providing enhanced flexibility to monitor and control costs. Leveraging this significant investment in technology allowed us to reduce overhead and administrative staff. Additionally, in December 2011, our Board of Directors approved a restructuring plan to consolidate our eight divisions into four regions as part of an ongoing effort to reduce overhead costs and increase operating efficiency. As a result of these two restructuring plans, we recognized $12,971,000 of severance and related charges in 2011. There were no significant charges related to these restructuring plans in 2012.
In 2012, our Board approved a Profit Enhancement Plan that further leverages our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During 2012, we incurred $9,557,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan, $8,038,000 of which was paid as of December 31, 2012. We do not expect to incur any future material charges related to this Profit Enhancement Plan.
EXCHANGE OFFER COSTS
In December 2011, Martin Marietta Materials, Inc. (Martin Marietta) commenced an unsolicited exchange offer for all outstanding shares of our common stock and indicated its intention to nominate a slate of directors to our Board. After careful consideration, including a thorough review of the offer with its financial and legal advisors, our Board unanimously determined that Martin Marietta’s offer was inadequate, substantially undervalued Vulcan, was not in the best interests of Vulcan and its shareholders and had substantial risk.
In May 2012, the Delaware Chancery Court ruled and the Delaware Supreme Court affirmed that Martin Marietta had breached two confidentiality agreements between the companies, and enjoined Martin Marietta through September 15, 2012 from pursuing its exchange offer for our shares, prosecuting its proxy contest, or otherwise taking steps to acquire control of our shares or assets and from any further violations of the two confidentiality agreements between the parties. As a result of the court ruling, Martin Marietta withdrew its exchange offer and its board nominees.
In response to Martin Marietta’s actions, we incurred legal, professional and other costs as follows: 2012 — $43,380,000 and 2011 — $2,227,000. As of December 31, 2012, $43,107,000 of the incurred costs was paid.
CASH EQUIVALENTS
We classify as cash equivalents all highly liquid securities with a maturity of three months or less at the time of purchase. The carrying amount of these securities approximates fair value due to their short-term maturities.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable from customers result from our extending credit to trade customers for the purchase of our products. The terms generally provide for payment within 30 days of being invoiced. On occasion, when necessary to conform to regional industry practices, we sell product under extended payment terms, which may result in either secured or unsecured short-term notes; or, on occasion, notes with durations of less than one year are taken in settlement of existing accounts receivable. Other accounts and notes receivable result from short-term transactions (less than one year) other than the sale of our products, such as interest receivable; insurance claims; freight claims; tax refund claims; bid deposits or rents receivable. Receivables are aged and appropriate allowances for doubtful accounts and bad debt expense are recorded. Bad debt expense for the years ended December 31 was as follows: 2012 — $2,505,000, 2011 — $1,644,000 and 2010 — $3,100,000. Write-offs of accounts receivables for the years ended December 31 were as follows: 2012 — $2,805,000, 2011 — $2,651,000 and 2010 — $4,317,000.
FINANCING RECEIVABLES
Financing receivables are included in accounts and notes receivable and/or investments and long-term receivables in the accompanying Consolidated Balance Sheets. Financing receivables are contractual rights to receive money on demand or on fixed or determinable dates. Trade receivables with normal credit terms are not considered financing receivables. Financing receivables were as follows: December 31, 2012 — $8,609,000 and December 31, 2011 — $7,471,000. Both of these balances include a related-party (Vulcan Materials Company Foundation) receivable in the amount of $1,550,000 due in 2014. None of our financing receivables are individually significant. We evaluate the collectibility of financing receivables on a periodic basis or whenever events or changes in circumstances indicate we may be exposed to credit losses. As of December 31, 2012 and 2011, no allowances were recorded for these receivables.
INVENTORIES
Inventories and supplies are stated at the lower of cost or market. We use the last-in, first-out (LIFO) method of valuation for most of our inventories because it results in a better matching of costs with revenues. Such costs include fuel, parts and supplies, raw materials, direct labor and production overhead. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Substantially all operating supplies inventory is carried at average cost. For additional information regarding our inventories see Note 3.
PROPERTY, PLANT & EQUIPMENT
Property, plant & equipment are carried at cost less accumulated depreciation, depletion and amortization. The cost of properties held under capital leases, if any, is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease.
Capitalized software costs of $10,855,000 and $12,910,000 are reflected in net property, plant & equipment as of December 31, 2012 and 2011, respectively. We capitalized software costs for the years ended December 31 as follows: 2012— $408,000, 2011 — $3,746,000 and 2010 — $1,167,000. During the same periods, $2,463,000, $2,520,000 and $2,895,000, respectively, of previously capitalized costs were depreciated. For additional information regarding our property, plant & equipment see Note 4.
REPAIR AND MAINTENANCE
Repair and maintenance costs generally are charged to operating expense as incurred. Renewals and betterments that add materially to the utility or useful lives of property, plant & equipment are capitalized and subsequently depreciated. Actual costs for planned major maintenance activities, related primarily to periodic overhauls on our oceangoing vessels, are capitalized and amortized to the next overhaul.
DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION
Depreciation is generally computed by the straight-line method at rates based on the estimated service lives of the various classes of assets, which include machinery and equipment (3 to 30 years), buildings (10 to 20 years) and land improvements (7 to 20 years). Capitalized software costs are included in machinery and equipment and are depreciated on a straight-line basis beginning when the software project is substantially complete. Depreciation for our Newberry, Florida cement production facilities is computed by the unit-of-production method based on estimated output.
Cost depletion on depletable quarry land is computed by the unit-of-production method based on estimated recoverable units.
Accretion reflects the period-to-period increase in the carrying amount of the liability for asset retirement obligations. It is computed using the same credit-adjusted, risk-free rate used to initially measure the liability at fair value.
Amortization of intangible assets subject to amortization is computed based on the estimated life of the intangible assets. A significant portion of our intangible assets is contractual rights in place associated with zoning, permitting and other rights to access and extract aggregates reserves. Contractual rights in place associated with aggregates reserves are amortized using the unit-of-production method based on estimated recoverable units. Other intangible assets are amortized principally by the straight-line method.
Leaseholds are amortized over varying periods not in excess of applicable lease terms or estimated useful lives.
Depreciation, depletion, accretion and amortization expense for the years ended December 31 is outlined below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Depreciation, Depletion, Accretion and Amortization |
||||||||||||
Depreciation |
$301,146 | $328,072 | $349,460 | |||||||||
Depletion |
10,607 | 11,195 | 10,337 | |||||||||
Accretion |
7,956 | 8,195 | 8,641 | |||||||||
Amortization of leaseholds |
381 | 225 | 195 | |||||||||
Amortization of intangibles |
11,869 | 14,032 | 13,460 | |||||||||
Total |
$331,959 | $361,719 | $382,093 |
DERIVATIVE INSTRUMENTS
We periodically use derivative instruments to reduce our exposure to interest rate risk, currency exchange risk or price fluctuations on commodity energy sources consistent with our risk management policies. We do not use derivative financial instruments for speculative or trading purposes. Additional disclosures regarding our derivative instruments are presented in 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 at December 31 subject to fair value measurement on a recurring basis are summarized below:
Level 1 | ||||||||
in thousands | 2012 | 2011 | ||||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Mutual funds |
$13,349 | $13,536 | ||||||
Equities |
9,843 | 7,057 | ||||||
Total |
$23,192 | $20,593 | ||||||
Level 2 | ||||||||
in thousands | 2012 | 2011 | ||||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Common/collective trust funds |
$2,265 | $2,192 | ||||||
Total |
$2,265 | $2,192 |
We have established two Rabbi Trusts for the purpose of providing a level of security for the nonqualified employee 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. Investments in Level 2 common/collective trust funds are stated at estimated fair value based on the underlying investments in those funds. The underlying investments are comprised of short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit. Net trading gains (losses) of the Rabbi Trust investments were $8,564,000 and ($3,292,000) for the years ended December 31, 2012 and 2011, respectively. The portion of the net trading gains (losses) related to investments still held by the Rabbi Trusts at December 31, 2012 and 2011 were $9,012,000 and ($3,370,000), respectively.
The carrying values of our cash equivalents, accounts and notes receivable, current maturities of long-term debt, short-term borrowings, trade payables and accruals, and all 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 5 and 6, respectively.
There were no assets or liabilities subject to fair value measurement on a nonrecurring basis in 2011. Assets that were subject to fair value measurement on a nonrecurring basis as of December 31, 2012 are summarized below:
2012 | ||||||||
in thousands | Level 3 | Impairment Charges |
||||||
Fair Value Nonrecurring |
||||||||
Assets held for sale |
$10,559 | $1,738 | ||||||
Totals |
$10,559 | $1,738 |
The fair values of the assets classified as held for sale were estimated based on the negotiated transaction values. The loss on impairment represents the difference between the carrying value and the fair value less costs to sell of the impacted long-lived assets.
GOODWILL AND GOODWILL IMPAIRMENT
Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than its carrying amount. As of December 31, 2012, goodwill totaled $3,086,716,000, the same as at December 31, 2011. Total goodwill represents 38% of total assets at both December 31, 2012 and December 31, 2011.
Goodwill is tested for impairment annually, as of November 1, or more frequently whenever events or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at the reporting unit level. In December 2011, we announced an organizational restructuring plan that led to changes in the manner in which our operations are managed. As a result, we reorganized our reporting unit structure and reassigned goodwill among our revised reporting units using a relative fair value approach. This reorganization led to an increase in reporting units from 13 to 19, of which 10 carry goodwill. The reporting units are evaluated using a two-step process.
The first step of the impairment test identifies potential impairment by comparing the fair value of a reporting unit to its carrying value, including goodwill. If the fair value of a reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step of the impairment test is not required. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any.
The second step of the impairment test compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill. If the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
We have four operating segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. Within these four operating segments, we have identified 19 reporting units based primarily on geographic location. The carrying value of each reporting unit is determined by assigning assets and liabilities, including goodwill, to those reporting units as of the measurement date. We estimate the fair values of the reporting units by considering the indicated fair values derived from both an income approach, which involves discounting estimated future cash flows, and a market approach, which involves the application of revenue and EBITDA multiples of comparable companies. We consider market factors when determining the assumptions and estimates used in our valuation models. To substantiate the fair values derived from these valuations, we reconcile the reporting unit fair values to our market capitalization.
The results of the first step of the annual impairment tests performed as of November 1, 2012 indicated that the fair values of all reporting units with goodwill substantially exceeded their carrying values. The results of the first step of the annual impairment tests performed as of November 1, 2011 and 2010 indicated that the fair values of the reporting units with goodwill exceeded their carrying values. Accordingly, there were no charges for goodwill impairment in the years ended December 31, 2012, 2011 or 2010.
Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ materially from those estimates. Changes in key assumptions or management judgment with respect to a reporting unit or its prospects, which may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or significant underperformance relative to historical or projected future operating results, could result in a significantly different estimate of the fair value of our reporting units, which could result in an impairment charge in the future.
For additional information regarding goodwill see Note 18.
IMPAIRMENT OF LONG-LIVED ASSETS EXCLUDING GOODWILL
We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. As of December 31, 2012, net property, plant & equipment represents 39% of total assets, while net other intangible assets represents 9% of total assets. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value of the long-lived assets. Fair value is determined primarily by using a discounted cash flow methodology that requires considerable management judgment and long-term assumptions. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results. We periodically review the appropriateness of the estimated useful lives of our long-lived assets.
We test long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. As a result, our long-lived asset impairment test is at a significantly lower level than the level at which we test goodwill for impairment. In markets where we do not produce downstream products (e.g. ready-mixed concrete and asphalt mix), the lowest level of largely independent identifiable cash flows is at the individual aggregates operation or a group of aggregates operations collectively serving a local market. Conversely, in vertically integrated markets, the cash flows of our downstream and upstream businesses are not largely independently identifiable as the selling price of the upstream products (aggregates and cement) determines the profitability of the downstream business.
During 2012, we recorded a $2,034,000 loss on impairment of long-lived assets related primarily to assets classified as held for sale (see Note 19). Long-lived asset impairments during 2011 were immaterial and related to property abandonments. During 2010 we recorded a $3,936,000 loss on impairment of long-lived assets. We utilized an income approach to measure the fair value of the long-lived assets and determined that the carrying value of the assets exceeded the fair value. The loss on impairment represents the difference between the carrying value and the fair value of the impacted long-lived assets.
For additional information regarding long-lived assets and intangible assets see Notes 4 and 18.
COMPANY OWNED LIFE INSURANCE
We have Company Owned Life Insurance (COLI) policies for which the cash surrender values, loans outstanding and the net values included in other noncurrent assets in the accompanying Consolidated Balance Sheets as of December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Company Owned Life Insurance |
||||||||
Cash surrender value |
$41,351 | $38,300 | ||||||
Loans outstanding |
41,345 | 38,289 | ||||||
Net value included in noncurrent assets |
$6 | $11 |
REVENUE RECOGNITION
Revenue is recognized at the time the selling price is fixed, the product’s title is transferred to the buyer and collectibility of the sales proceeds is reasonably assured. Total revenues include sales of products to customers, net of any discounts and taxes, and third-party delivery revenues billed to customers.
Our 2012 revenue excludes proceeds from the sale of a volumetric production payment as described in Note 19 under the caption 2012 Divestitures. These proceeds are deferred until we meet our obligation to produce and deliver the product or market the product under the terms of the agreement. These proceeds were classified within the operating activities section of our Consolidated Statements of Cash Flows as the transaction essentially represents the prepayment of future production.
STRIPPING COSTS
In the mining industry, the costs of removing overburden and waste materials to access mineral deposits are referred to as stripping costs.
Stripping costs incurred during the production phase are considered costs of extracted minerals under our inventory costing system, inventoried, and recognized in cost of sales in the same period as the revenue from the sale of the inventory. The production stage is deemed to begin when the activities, including removal of overburden and waste material that may contain incidental saleable material, required to access the saleable product are complete. Stripping costs considered as production costs and included in the costs of inventory produced were $37,875,000 in 2012, $40,049,000 in 2011 and $40,842,000 in 2010.
Conversely, stripping costs incurred during the development stage of a mine (pre-production stripping) are excluded from our inventory cost. Pre-production stripping costs are capitalized and reported within other noncurrent assets in our accompanying Consolidated Balance Sheets. Capitalized pre-production stripping costs are expensed over the productive life of the mine using the unit-of-production method. Pre-production stripping costs included in other noncurrent assets were $18,887,000 as of December 31, 2012 and $17,860,000 as of December 31, 2011.
OTHER COSTS
Costs are charged to earnings as incurred for the start-up of new plants and for normal recurring costs of mineral exploration and research and development. Research and development costs totaled $0 in 2012, $1,109,000 in 2011 and $1,582,000 in 2010, and are included in selling, administrative and general expenses in the Consolidated Statements of Comprehensive Income.
SHARE-BASED COMPENSATION
We account for our share-based compensation awards using fair-value-based measurement methods. These result in the recognition of compensation expense for all share-based compensation awards, including stock options, based on their fair value as of the grant date. Compensation cost is recognized over the requisite service period.
We receive an income tax deduction for share-based compensation equal to the excess of the market value of our common stock on the date of exercise or issuance over the exercise price. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are classified as financing cash flows. The $267,000, $121,000 and $808,000 in excess tax benefits classified as financing cash inflows for the years ended December 31, 2012, 2011 and 2010, respectively, in the accompanying Consolidated Statements of Cash Flows relate to the exercise of stock options and issuance of shares under long-term incentive plans.
A summary of the estimated future compensation cost (unrecognized compensation expense) as of December 31, 2012 related to share-based awards granted to employees under our long-term incentive plans is presented below:
dollars in thousands |
Unrecognized Compensation Expense |
Expected Weighted-average Recognition (Years) |
||||||
Share-based Compensation |
||||||||
SOSARs 1 |
$2,698 | 1.5 | ||||||
Performance shares |
17,488 | 2.7 | ||||||
Total/weighted-average |
$20,186 | 2.5 |
1 |
Stock-Only Stock Appreciation Rights (SOSARs) |
Pretax compensation expense related to our employee share-based compensation awards and related income tax benefits for the years ended December 31 are summarized below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Employee Share-based Compensation Awards |
||||||||||||
Pretax compensation expense |
$15,491 | $17,537 | $19,746 | |||||||||
Income tax benefits |
6,011 | 6,976 | 7,968 |
For additional information regarding share-based compensation, see Note 11 under the caption Share-based Compensation Plans.
RECLAMATION COSTS
Reclamation costs resulting from normal use of long-lived assets are recognized over the period the asset is in use only if there is a legal obligation to incur these costs upon retirement of the assets. Additionally, reclamation costs resulting from normal use under a mineral lease are recognized over the lease term only if there is a legal obligation to incur these costs upon expiration of the lease. The obligation, which cannot be reduced by estimated offsetting cash flows, is recorded at fair value as a liability at the obligating event date and is accreted through charges to operating expenses. This fair value is also capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. If the obligation is settled for other than the carrying amount of the liability, a gain or loss is recognized on settlement.
To determine the fair value of the obligation, we estimate the cost for a third party to perform the legally required reclamation tasks including a reasonable profit margin. This cost is then increased for both future estimated inflation and an estimated market risk premium related to the estimated years to settlement. Once calculated, this cost is discounted to fair value using present value techniques with a credit-adjusted, risk-free rate commensurate with the estimated years to settlement.
In estimating the settlement date, we evaluate the current facts and conditions to determine the most likely settlement date. If this evaluation identifies alternative estimated settlement dates, we use a weighted-average settlement date considering the probabilities of each alternative.
We review reclamation obligations at least annually for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date. Examples of events that would trigger a change in the cost include a new reclamation law or amendment of an existing mineral lease. Examples of events that would trigger a change in the estimated settlement date include the acquisition of additional reserves or the closure of a facility.
The carrying value of these obligations was $150,072,000 as of December 31, 2012 and $153,979,000 as of December 31, 2011. For additional information regarding reclamation obligations (referred to in our financial statements as asset retirement obligations) see Note 17.
PENSION AND OTHER POSTRETIREMENT BENEFITS
Accounting for pension and postretirement benefits requires that we make significant assumptions regarding the valuation of benefit obligations and the performance of plan assets. The primary assumptions are as follows:
¡ | DISCOUNT RATE — The discount rate is used in calculating the present value of benefits, which is based on projections of benefit payments to be made in the future |
¡ | EXPECTED RETURN ON PLAN ASSETS — We project the future return on plan assets based principally on prior performance and our expectations for future returns for the types of investments held by the plan as well as the expected long-term asset allocation of the plan. These projected returns reduce the recorded net benefit costs |
¡ | RATE OF COMPENSATION INCREASE — For salary-related plans only, we project employees’ annual pay increases, which are used to project employees’ pension benefits at retirement |
¡ | RATE OF INCREASE IN THE PER CAPITA COST OF COVERED HEALTHCARE BENEFITS — We project the expected increases in the cost of covered healthcare benefits |
Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of actual results allows for a smoothed recognition in earnings of changes in benefit obligations and plan performance over the working lives of the employees who benefit under the plans. The differences between actual results and expected or estimated results are recognized in full in other comprehensive income. Amounts recognized in other comprehensive income are reclassified to earnings in a systematic manner over the average remaining service period of active employees expected to receive benefits under the plan.
For additional information regarding pension and other postretirement benefits see Note 10.
ENVIRONMENTAL COMPLIANCE
Our environmental compliance costs include the cost of ongoing monitoring programs, the cost of remediation efforts and other similar costs. We expense or capitalize environmental costs consistent with our capitalization policy. We expense costs for an existing condition caused by past operations that do not contribute to future revenues. We accrue costs for environmental assessment and remediation efforts when we determine that a liability is probable and we can reasonably estimate the cost. At the early stages of a remediation effort, environmental remediation liabilities are not easily quantified due to the uncertainties of various factors. The range of an estimated remediation liability is defined and redefined as events in the remediation effort occur.
When we can estimate a range of probable loss, we accrue the most likely amount. In the event that no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. As of December 31, 2012, the spread between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $3,940,000. Accrual amounts may be based on technical cost estimations or the professional judgment of experienced environmental managers. Our Safety, Health and Environmental Affairs Management Committee routinely reviews cost estimates, including key assumptions, for accruing environmental compliance costs; however, a number of factors, including adverse agency rulings and encountering unanticipated conditions as remediation efforts progress, may cause actual results to differ materially from accrued costs.
For additional information regarding environmental compliance costs see Note 8.
CLAIMS AND LITIGATION INCLUDING SELF-INSURANCE
We are involved with claims and litigation, including items covered under our self-insurance program. We are self-insured for losses related to workers’ compensation up to $2,000,000 per occurrence and automotive and general/product liability up to $3,000,000 per occurrence. We have excess coverage on a per occurrence basis beyond these retention levels.
Under our self-insurance program, we aggregate certain claims and litigation costs that are reasonably predictable based on our historical loss experience and accrue losses, including future legal defense costs, based on actuarial studies. Certain claims and litigation costs, due to their unique nature, are not included in our actuarial studies. We use both internal and outside legal counsel to assess the probability of loss, and establish an accrual when the claims and litigation represent a probable loss and the cost can be reasonably estimated. For matters not included in our actuarial studies, legal defense costs are accrued when incurred. The following table outlines our self-insurance program at December 31:
dollars in thousands | 2012 | 2011 | ||||||
Self-insurance Program |
||||||||
Self-insured liabilities (undiscounted) |
$48,019 | $46,178 | ||||||
Insured liabilities (undiscounted) |
15,054 | 14,339 | ||||||
Discount rate |
0.51% | 0.65% | ||||||
Amounts Recognized in Consolidated |
||||||||
Balance Sheets |
||||||||
Investments and long-term receivables |
$14,822 | $0 | ||||||
Other accrued liabilities |
(17,260 | ) | (13,046 | ) | ||||
Other noncurrent liabilities |
(44,902 | ) | (32,089 | ) | ||||
Net liabilities (discounted) |
($47,340 | ) | ($45,135 | ) |
Estimated payments (undiscounted) under our self-insurance program for the five years subsequent to December 31, 2012 are as follows:
in thousands | ||||
Estimated Payments under Self-insurance Program |
||||
2013 |
$21,920 | |||
2014 |
12,910 | |||
2015 |
8,752 | |||
2016 |
5,547 | |||
2017 |
3,700 |
Significant judgment is used in determining the timing and amount of the accruals for probable losses, and the actual liability could differ materially from the accrued amounts.
INCOME TAXES
We file various federal, state and foreign income tax returns, including some returns that are consolidated with subsidiaries. We account for the current and deferred tax effects of such returns using the asset and liability method. Our current and deferred tax assets and liabilities reflect our best assessment of the estimated future taxes we will pay. Significant judgments and estimates are required in determining the current and deferred assets and liabilities. Annually, we compare the liabilities calculated for our federal, state and foreign income tax returns to the estimated liabilities calculated as part of the year end income tax provision. Any adjustments are reflected in our current and deferred tax assets and liabilities.
We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns for which we have already properly recorded the tax benefit in the income statement. On a quarterly basis, we assess all positive and negative evidence to determine the likelihood that the deferred tax asset balance will be recovered from future taxable income. We take into account such factors as:
¡ | cumulative losses in recent years |
¡ | taxable income in prior carryback years, if carryback is permitted under tax law |
¡ | future reversal of existing taxable temporary differences against deductible temporary differences |
¡ | future taxable income exclusive of reversing temporary differences |
¡ | the mix of taxable income in the jurisdictions in which we operate |
¡ | tax planning strategies |
Deferred tax assets are reduced by a valuation allowance if, based on an analysis of the factors above, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
U.S. income taxes are not provided on foreign earnings when such earnings are indefinitely reinvested offshore. We periodically evaluate our investment strategies for each foreign tax jurisdiction in which we operate to determine whether foreign earnings will be indefinitely reinvested offshore and, accordingly, whether U.S. income taxes should be provided when such earnings are recorded.
We recognize an income tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. Our liability associated with unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. Our income tax provision includes the net impact of changes in the liability for unrecognized income tax benefits and subsequent adjustments as we consider appropriate.
Before a particular matter for which we have recorded a liability related to an unrecognized income tax benefit is audited and finally resolved, a number of years may elapse. The number of years with open tax audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized income tax benefits is adequate. Favorable resolution of an unrecognized income tax benefit could be recognized as a reduction in our income tax provision and effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized income tax benefit could increase the income tax provision and effective tax rate in the period of resolution.
We consider an issue to be resolved at the earlier of settlement of an examination, the expiration of the statute of limitations, or when the issue is “effectively settled.” Our liability for unrecognized income tax benefits is generally presented as noncurrent. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current. We classify interest and penalties recognized on the liability for unrecognized income tax benefits as income tax expense.
Our largest permanent item in computing both our effective tax rate and taxable income is the deduction allowed for statutory depletion. The impact of statutory depletion on the effective tax rate is presented in Note 9. The deduction for statutory depletion does not necessarily change proportionately to changes in pretax earnings.
COMPREHENSIVE INCOME
We report comprehensive income in our Consolidated Statements of Comprehensive Income and Consolidated Statements of Equity. Comprehensive income comprises two subsets: net earnings and other comprehensive income (OCI). OCI includes fair value adjustments to cash flow hedges, actuarial gains or losses and prior service costs related to pension and postretirement benefit plans.
For additional information regarding comprehensive income see Note 14.
EARNINGS PER SHARE (EPS)
We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Weighted-average common shares outstanding |
129,745 | 129,381 | 128,050 | |||||||||
Dilutive effect of |
||||||||||||
Stock options/SOSARs |
0 | 0 | 0 | |||||||||
Other stock compensation plans |
0 | 0 | 0 | |||||||||
Weighted-average common shares outstanding, assuming dilution |
129,745 | 129,381 | 128,050 |
All dilutive common stock equivalents are reflected in our earnings per share calculations. Antidilutive common stock equivalents are not included in our earnings per share calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation are excluded. These excluded shares for the years ended December 31 are as follows: 2012 — 617,000, 2011 — 304,000 and 2010 — 415,000.
The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price for the years ended December 31 is as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Antidilutive common stock equivalents |
4,762 | 5,845 | 5,827 |
NEW ACCOUNTING STANDARDS
ACCOUNTING STANDARDS RECENTLY ADOPTED
2012 — AMENDMENTS ON FAIR VALUE MEASUREMENT REQUIREMENTS As of and for the interim period ended March 31, 2012, we adopted Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments in this ASU achieve the objectives of developing common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (IFRS) and improving their understandability. Some of the requirements clarify the Financial Accounting Standards Board’s (FASB’s) intent about the application of existing fair value measurement requirements while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Our adoption of this standard had no impact on our financial position, results of operations or liquidity.
2012 — AMENDMENTS ON GOODWILL IMPAIRMENT TESTING As of and for the interim period ended March 31, 2012, we adopted ASU No. 2011-08, “Testing Goodwill for Impairment” which amends the goodwill impairment testing guidance in Accounting Standards Codification (ASC) 350-20, “Goodwill.” Under the amended guidance, an entity has the option of performing a qualitative assessment when testing goodwill for impairment. The two-step impairment test would be required only if, on the basis of the qualitative factors, an entity determines that the fair value of the reporting unit is more likely than not (a likelihood of more than 50%) less than the carrying amount. Additionally, this ASU revises the examples of events and circumstances that an entity should consider when determining if an interim goodwill impairment test is required. Our adoption of this standard had no impact on our financial position, results of operations or liquidity.
2011 — PRESENTATION OF OTHER COMPREHENSIVE INCOME As of the annual period ended December 31, 2011, we adopted ASU No. 2011-05, “Presentation of Comprehensive Income.” This standard eliminates the option to present components of other comprehensive income (OCI) as part of the statement of equity. The amendments in this standard require that all nonowner changes in equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU No. 2011-12 indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in the Consolidated Statement of Comprehensive Income. In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU 2013-02 finalizes the requirements of ASU 2011-05 that ASU 2011-12 deferred, clarifying how to report the effect of significant reclassifications out of accumulated other comprehensive income. Our accompanying Consolidated Statements of Comprehensive Income conform to the presentation requirements of these standards.
2011 — ENHANCED DISCLOSURE REQUIREMENTS ON MULTIEMPLOYER BENEFIT PLANS As of the annual period ended December 31, 2011, we adopted ASU No. 2011-09, “Disclosures About an Employer’s Participation in a Multiemployer Plan” which increased the quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension and other postretirement benefits. The ASU’s objective is to enhance the transparency of disclosures about (1) the significant multiemployer plans in which an employer participates, (2) the level of the employer’s participation in those plans, (3) the financial health of the plans and (4) the nature of the employer’s commitments to the plans. As a result of our adoption of this update, we enhanced our annual disclosures regarding multiemployer plans as reflected in Note 10.
ACCOUNTING STANDARDS PENDING ADOPTION
NEW DISCLOSURE REQUIREMENTS ON OFFSETTING ASSETS AND LIABILITIES In December 2011, the FASB issued ASU 2011-11, “Disclosures About Offsetting Assets and Liabilities” which creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial and derivative instruments. The scope of instruments covered under this ASU was further clarified in the January 2013 issuance of ASU 2013-01,“Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” These new disclosures are designed to facilitate comparisons between financial statements prepared under U.S. GAAP and those prepared under IFRS. These ASUs are effective for annual and interim reporting periods beginning on or after January 1, 2013, with retrospective application required. We will adopt these standards as of and for the interim period ending March 31, 2013. We do not expect the adoption of these standards to have a material impact on our consolidated financial statements.
AMENDMENTS ON INDEFINITE-LIVED INTANGIBLE ASSET IMPAIRMENT TESTING In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” which amends the impairment testing guidance in ASC 350-30, “General Intangibles Other Than Goodwill.” Under the amended guidance, an entity has the option of performing a qualitative assessment when testing an indefinite-lived intangible asset for impairment. Further testing would be required only if, on the basis of the qualitative factors, an entity determines that the fair value of the intangible asset is more likely than not (a likelihood of more than 50%) less than the carrying amount. Additionally, this ASU revises the examples of events and circumstances that an entity should consider when determining if an interim impairment test is required. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We will adopt this standard as of and for the interim period ending March 31, 2013. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ materially from these estimates.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2012 presentation.
|
Depreciation, depletion, accretion and amortization expense for the years ended December 31 is outlined below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Depreciation, Depletion, Accretion and Amortization |
||||||||||||
Depreciation |
$301,146 | $328,072 | $349,460 | |||||||||
Depletion |
10,607 | 11,195 | 10,337 | |||||||||
Accretion |
7,956 | 8,195 | 8,641 | |||||||||
Amortization of leaseholds |
381 | 225 | 195 | |||||||||
Amortization of intangibles |
11,869 | 14,032 | 13,460 | |||||||||
Total |
$331,959 | $361,719 | $382,093 |
Our assets at December 31 subject to fair value measurement on a recurring basis are summarized below:
Level 1 | ||||||||
in thousands | 2012 | 2011 | ||||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Mutual funds |
$13,349 | $13,536 | ||||||
Equities |
9,843 | 7,057 | ||||||
Total |
$23,192 | $20,593 | ||||||
Level 2 | ||||||||
in thousands | 2012 | 2011 | ||||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Common/collective trust funds |
$2,265 | $2,192 | ||||||
Total |
$2,265 | $2,192 |
Assets that were subject to fair value measurement on a nonrecurring basis as of December 31, 2012 are summarized below:
2012 | ||||||||
in thousands | Level 3 | Impairment Charges |
||||||
Fair Value Nonrecurring |
||||||||
Assets held for sale |
$10,559 | $1,738 | ||||||
Totals |
$10,559 | $1,738 |
We have Company Owned Life Insurance (COLI) policies for which the cash surrender values, loans outstanding and the net values included in other noncurrent assets in the accompanying Consolidated Balance Sheets as of December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Company Owned Life Insurance |
||||||||
Cash surrender value |
$41,351 | $38,300 | ||||||
Loans outstanding |
41,345 | 38,289 | ||||||
Net value included in noncurrent assets |
$6 | $11 |
A summary of the estimated future compensation cost (unrecognized compensation expense) as of December 31, 2012 related to share-based awards granted to employees under our long-term incentive plans is presented below:
dollars in thousands |
Unrecognized Compensation Expense |
Expected Weighted-average Recognition (Years) |
||||||
Share-based Compensation |
||||||||
SOSARs 1 |
$2,698 | 1.5 | ||||||
Performance shares |
17,488 | 2.7 | ||||||
Total/weighted-average |
$20,186 | 2.5 |
1 |
Stock-Only Stock Appreciation Rights (SOSARs) |
Pretax compensation expense related to our employee share-based compensation awards and related income tax benefits for the years ended December 31 are summarized below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Employee Share-based Compensation Awards |
||||||||||||
Pretax compensation expense |
$15,491 | $17,537 | $19,746 | |||||||||
Income tax benefits |
6,011 | 6,976 | 7,968 |
The following table outlines our self-insurance program at December 31:
dollars in thousands | 2012 | 2011 | ||||||
Self-insurance Program |
||||||||
Self-insured liabilities (undiscounted) |
$48,019 | $46,178 | ||||||
Insured liabilities (undiscounted) |
15,054 | 14,339 | ||||||
Discount rate |
0.51% | 0.65% | ||||||
Amounts Recognized in Consolidated |
||||||||
Balance Sheets |
||||||||
Investments and long-term receivables |
$14,822 | $0 | ||||||
Other accrued liabilities |
(17,260 | ) | (13,046 | ) | ||||
Other noncurrent liabilities |
(44,902 | ) | (32,089 | ) | ||||
Net liabilities (discounted) |
($47,340 | ) | ($45,135 | ) |
Estimated payments (undiscounted) under our self-insurance program for the five years subsequent to December 31, 2012 are as follows:
in thousands | ||||
Estimated Payments under Self-insurance Program |
||||
2013 |
$21,920 | |||
2014 |
12,910 | |||
2015 |
8,752 | |||
2016 |
5,547 | |||
2017 |
3,700 |
We report two earnings per share numbers, basic and diluted. These are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Weighted-average common shares outstanding |
129,745 | 129,381 | 128,050 | |||||||||
Dilutive effect of |
||||||||||||
Stock options/SOSARs |
0 | 0 | 0 | |||||||||
Other stock compensation plans |
0 | 0 | 0 | |||||||||
Weighted-average common shares outstanding, assuming dilution |
129,745 | 129,381 | 128,050 |
The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price for the years ended December 31 is as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Antidilutive common stock equivalents |
4,762 | 5,845 | 5,827 |
|
Results from discontinued operations are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Discontinued Operations |
||||||||||||
Pretax earnings (loss) |
($8,017 | ) | ($3,669 | ) | $2,103 | |||||||
Gain on disposal, net of transaction bonus |
10,232 | 11,056 | 7,912 | |||||||||
Income tax provision |
(882 | ) | (2,910 | ) | (3,962 | ) | ||||||
Earnings on discontinued operations, net of income taxes |
$1,333 | $4,477 | $6,053 |
|
Inventories at December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Inventories |
||||||||
Finished products 1 |
$ | 262,886 | $260,732 | |||||
Raw materials |
27,758 | 23,819 | ||||||
Products in process |
5,963 | 4,198 | ||||||
Operating supplies and other |
38,415 | 38,908 | ||||||
Total |
$ | 335,022 | $327,657 |
1 |
Includes inventories encumbered by the purchaser’s percentage of a volumetric production payment (see Note 19), as follows: December 31, 2012 — $8,726 thousand. |
|
Balances of major classes of assets and allowances for depreciation, depletion and amortization at December 31 are as follows:
in thousands | 2012 | 2011 | ||||||||
Property, Plant & Equipment |
||||||||||
Land and land improvements |
$2,120,999 | $2,122,350 | ||||||||
Buildings |
149,575 | 163,178 | ||||||||
Machinery and equipment |
4,195,165 | 4,206,870 | ||||||||
Leaseholds |
10,546 | 9,238 | ||||||||
Deferred asset retirement costs |
129,397 | 136,289 | ||||||||
Construction in progress |
60,935 | 67,621 | ||||||||
Total, gross |
$6,666,617 | $6,705,546 | ||||||||
Less allowances for
depreciation, depletion |
3,507,432 | 3,287,367 | ||||||||
Total, net |
$3,159,185 | $3,418,179 |
Capitalized interest costs with respect to qualifying construction projects and total interest costs incurred before recognition of the capitalized amount for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Capitalized interest cost |
$2,716 | $2,675 | $3,637 | |||||||||
Total interest cost
incurred before recognition |
215,783 | 223,303 | 185,240 |
|
The effects of changes in the fair values of derivatives designated as cash flow hedges on the accompanying Consolidated Statements of Comprehensive Income for the years ended December 31 are as follows:
in thousands | Location on Statement | 2012 | 2011 | 2010 | ||||||||||
Cash Flow Hedges |
||||||||||||||
Loss recognized in
OCI |
OCI | $0 | $0 | ($882 | ) | |||||||||
Loss reclassified
from AOCI |
Interest expense | (6,314 | ) | (11,657 | ) | (19,619 | ) |
This amortization was reflected in the accompanying Consolidated Statements of Comprehensive Income as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Deferred Gain on Settlement |
||||||||||||
Amortized to earnings as a reduction to interest expense |
$4,052 | $1,291 | $0 |
|
Debt at December 31 is summarized as follows:
in thousands | 2012 | 2011 | ||||||
Long-term Debt |
||||||||
Bank line of credit |
$0 | $0 | ||||||
5.60% notes due 2012 1 |
0 | 134,508 | ||||||
6.30% notes due 2013 2 |
140,413 | 140,352 | ||||||
10.125% notes due 2015 3 |
152,718 | 153,464 | ||||||
6.50% notes due 2016 4 |
515,060 | 518,293 | ||||||
6.40% notes due 2017 5 |
349,888 | 349,869 | ||||||
7.00% notes due 2018 6 |
399,731 | 399,693 | ||||||
10.375% notes due 2018 7 |
248,676 | 248,526 | ||||||
7.50% notes due 2021 8 |
600,000 | 600,000 | ||||||
7.15% notes due 2037 9 |
239,553 | 239,545 | ||||||
Medium-term notes |
16,000 | 16,000 | ||||||
Industrial revenue bonds |
14,000 | 14,000 | ||||||
Other notes |
964 | 1,189 | ||||||
Total long-term debt including current maturities |
$2,677,003 | $2,815,439 | ||||||
Less current maturities |
150,602 | 134,762 | ||||||
Total long-term debt |
$2,526,401 | $2,680,677 | ||||||
Estimated fair value of long-term debt |
$2,766,835 | $2,796,504 |
1 |
Includes decreases for unamortized discounts, as follows: December 31, 2011 — $49 thousand. |
2 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $30 thousand and December 31, 2011 — $92 thousand. The effective interest rate for these notes is 7.48%. |
3 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: December 31, 2012 — $2,983 thousand and December 31, 2011 — $3,802 thousand. Additionally, includes decreases for unamortized discounts, as follows: December 31, 2012 — $265 thousand and December 31, 2011 — $338 thousand. The effective interest rate for these notes is 9.59%. |
4 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: December 31, 2012 — $15,060 thousand and December 31, 2011 — $18,293 thousand. The effective interest rate for these notes is 6.02%. |
5 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $112 thousand and December 31, 2011 — $131 thousand. The effective interest rate for these notes is 7.41%. |
6 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $269 thousand and December 31, 2011 — $307 thousand. The effective interest rate for these notes is 7.87%. |
7 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $1,324 thousand and December 31, 2011 — $1,474 thousand. The effective interest rate for these notes is 10.62%. |
8 |
The effective interest rate for these notes is 7.75%. |
9 |
Includes decreases for unamortized discounts, as follows: December 31, 2012 — $635 thousand and December 31, 2011 — $643 thousand. The effective interest rate for these notes is 8.05%. |
The total scheduled (principal and interest) debt payments, excluding any draws, if any, on the line of credit, for the five years subsequent to December 31, 2012 are as follows:
in thousands | Total | Principal | Interest | |||||||||
Debt Payments (excluding the line of credit) |
||||||||||||
2013 |
$ | 342,050 | $ | 150,602 | $ | 191,448 | ||||||
2014 |
187,063 | 170 | 186,893 | |||||||||
2015 |
337,019 | 150,137 | 186,882 | |||||||||
2016 |
671,817 | 500,130 | 171,687 | |||||||||
2017 |
489,317 | 350,138 | 139,179 |
|
Rental expense from continuing operations under nonmineral operating leases for the years ended December 31, exclusive of rental payments made under leases of one month or less, is summarized as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Operating Leases |
||||||||||||
Minimum rentals |
$36,951 | $34,701 | $33,573 | |||||||||
Contingent rentals (based principally on usage) |
32,705 | 29,882 | 27,418 | |||||||||
Total |
$69,656 | $64,583 | $60,991 |
Future minimum operating lease payments under all leases with initial or remaining noncancelable lease terms in excess of one year, exclusive of mineral leases, as of December 31, 2012 are payable as follows:
in thousands |
||||
Future Minimum Operating Lease Payments |
||||
2013 |
$26,735 | |||
2014 |
24,769 | |||
2015 |
21,069 | |||
2016 |
19,590 | |||
2017 |
17,725 | |||
Thereafter |
137,978 | |||
Total |
$247,866 |
|
Our Consolidated Balance Sheets as of December 31 include accrued environmental remediation costs (primarily measured on an undiscounted basis) as follows:
in thousands | 2012 | 2011 | ||||||
Accrued Environmental Remediation Costs |
||||||||
Continuing operations |
$5,666 | $6,335 | ||||||
Retained from former Chemicals business |
5,792 | 5,652 | ||||||
Total |
$11,458 | $11,987 |
|
The components of earnings (loss) from continuing operations before income taxes are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Earnings (Loss)
from Continuing |
||||||||||||
Domestic |
($134,929 | ) | ($169,758 | ) | ($213,598 | ) | ||||||
Foreign |
14,511 | 16,020 | 21,392 | |||||||||
Total |
($120,418 | ) | ($153,738 | ) | ($192,206 | ) | ||||||
in thousands | 2012 | 2011 | 2010 | |||||||||
Earnings (Loss)
from Continuing |
||||||||||||
Domestic |
($134,929 | ) | ($169,758 | ) | ($213,598 | ) | ||||||
Foreign |
14,511 | 16,020 | 21,392 | |||||||||
Total |
($120,418 | ) | ($153,738 | ) | ($192,206 | ) | ||||||
Provision for (benefit from) income taxes from continuing operations consists of the following:
|
|
|||||||||||
in thousands | 2012 | 2011 | 2010 | |||||||||
Provision for
(Benefit from) Income Taxes |
||||||||||||
Federal |
($5,631 | ) | $4,424 | ($46,671 | ) | |||||||
State and local |
5,271 | 5,482 | 3,909 | |||||||||
Foreign |
2,273 | 4,412 | 4,957 | |||||||||
Total |
1,913 | 14,318 | (37,805 | ) | ||||||||
Deferred |
||||||||||||
Federal |
(58,497 | ) | (76,558 | ) | (52,344 | ) | ||||||
State and local |
(8,464 | ) | (15,397 | ) | 1,422 | |||||||
Foreign |
(1,444 | ) | (846 | ) | (936 | ) | ||||||
Total |
(68,405 | ) | (92,801 | ) | (51,858 | ) | ||||||
Total benefit |
($66,492 | ) | ($78,483 | ) | ($89,663 | ) |
The sources and tax effects of the differences are as follows:
dollars in thousands |
2012 |
2011 |
2010 |
|||||||||||||||||||||||||
Income tax benefit
at the |
($42,146 | ) | 35.0% | ($53,809 | ) | 35.0% | ($67,272 | ) | 35.0% | |||||||||||||||||||
Provision for
(Benefit from) |
||||||||||||||||||||||||||||
Statutory depletion |
(19,608 | ) | 16.3% | (18,931 | ) | 12.3% | (20,301 | ) | 10.6% | |||||||||||||||||||
State and local
income taxes, net of federal |
(2,076 | ) | 1.7% | (6,445 | ) | 4.2% | 3,465 | -1.8% | ||||||||||||||||||||
Fair market value
over tax basis of |
(2,007 | ) | 1.7% | 0 | 0.0% | (3,223 | ) | 1.7% | ||||||||||||||||||||
Undistributed foreign earnings |
0 | 0.0% | (2,553 | ) | 1.7% | (3,331 | ) | 1.7% | ||||||||||||||||||||
Prior year true up adjustments |
(657 | ) | 0.5% | 3,115 | -2.1% | (1,095 | ) | 0.6% | ||||||||||||||||||||
Other, net |
2 | 0.0% | 140 | -0.1% | 2,094 | -1.2% | ||||||||||||||||||||||
Total income tax benefit |
($66,492 | ) | 55.2% | ($78,483 | ) | 51.0% | ($89,663 | ) | 46.6% |
The components of the net deferred income tax liability at December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Deferred Tax Assets Related to |
||||||||
Pensions |
$84,869 | $58,193 | ||||||
Other postretirement benefits |
44,030 | 52,433 | ||||||
Accruals for asset
retirement obligations |
40,202 | 37,145 | ||||||
Accounts
receivable, principally allowance |
1,910 | 2,194 | ||||||
Deferred
compensation, vacation pay |
102,048 | 97,741 | ||||||
Interest rate swaps |
19,585 | 22,273 | ||||||
Self-insurance reserves |
18,165 | 16,467 | ||||||
Inventory |
8,011 | 6,984 | ||||||
Federal net operating loss carryforwards |
57,679 | 48,496 | ||||||
State net operating loss carryforwards |
45,929 | 36,912 | ||||||
Valuation
allowance on state net operating |
(38,837 | ) | (29,757 | ) | ||||
Foreign tax credit carryforwards |
22,409 | 22,395 | ||||||
Alternative minimum tax credit carryforwards |
15,711 | 10,724 | ||||||
Charitable contribution carryforwards |
9,953 | 9,523 | ||||||
Other |
20,561 | 18,619 | ||||||
Total deferred tax assets |
452,225 | 410,342 | ||||||
Deferred Tax Liabilities Related to |
||||||||
Fixed assets |
$754,697 | $799,632 | ||||||
Intangible assets |
295,429 | 286,317 | ||||||
Other |
18,770 | 13,889 | ||||||
Total deferred tax liabilities |
1,068,896 | 1,099,838 | ||||||
Net deferred tax liability |
$616,671 | $689,496 |
The above amounts are reflected in the accompanying Consolidated Balance Sheets as of December 31 as follows:
in thousands | 2012 | 2011 | ||||||
Deferred Income Taxes |
||||||||
Current assets |
($40,696 | ) | ($43,032 | ) | ||||
Noncurrent liabilities |
657,367 | 732,528 | ||||||
Net deferred tax liability |
$616,671 | $689,496 |
We have definite-lived deferred tax assets related to carryforwards at December 31, 2012 as follows:
in thousands |
Deferred Tax Asset |
Valuation Allowance |
Expiration | |||||||||
Federal net operating loss carryforwards |
$57,679 | $0 | 2027 - 2032 | |||||||||
State net operating loss carryforwards |
45,929 | 38,837 | 2014 - 2032 | |||||||||
Foreign tax credit carryforwards |
22,409 | 0 | 2018 - 2021 | |||||||||
Charitable contribution carryforwards |
9,953 | 0 | 2014 - 2017 |
Changes in unrecognized income tax benefits for the years ended December 31, are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Unrecognized
income tax benefits |
$13,488 | $28,075 | $20,974 | |||||||||
Increases for tax positions related to |
||||||||||||
Prior years |
0 | 389 | 14,685 | |||||||||
Current year |
1,356 | 913 | 1,447 | |||||||||
Decreases for tax positions related to |
||||||||||||
Prior years |
(43 | ) | (411 | ) | (8,028 | ) | ||||||
Settlements with taxing authorities |
(1,456 | ) | (15,402 | ) | 0 | |||||||
Expiration of applicable statute of limitations |
205 | (76 | ) | (1,003 | ) | |||||||
Unrecognized income tax benefits as of December 31 |
$13,550 | $13,488 | $28,075 |
|
The fair values of our pension plan assets at December 31, 2012 and 2011 by asset category are as follows:
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2012
in thousands | Level 1 1 | Level 2 1 | Level 3 1 | Total | ||||||||||||
Asset Category |
||||||||||||||||
Debt securities |
$0 | $155,874 | $0 | $155,874 | ||||||||||||
Investment funds |
||||||||||||||||
Commodity funds |
0 | 27,906 | 0 | 27,906 | ||||||||||||
Equity funds |
4,503 | 388,499 | 0 | 393,002 | ||||||||||||
Short-term funds |
8,298 | 0 | 0 | 8,298 | ||||||||||||
Venture capital and partnerships |
0 | 0 | 98,011 | 98,011 | ||||||||||||
Total pension plan assets |
$12,801 | $572,279 | $98,011 | $683,091 |
1 See Note 1 under the caption Fair Value Measurements for a description of the fair value hierarchy.
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2011
in thousands | Level 1 1 | Level 2 1 | Level 3 1 | Total | ||||||||||||
Asset Category |
||||||||||||||||
Debt securities |
$0 | $152,240 | $0 | $152,240 | ||||||||||||
Investment funds |
||||||||||||||||
Commodity funds |
0 | 26,498 | 0 | 26,498 | ||||||||||||
Equity funds |
884 | 346,632 | 0 | 347,516 | ||||||||||||
Short-term funds |
3,593 | 0 | 0 | 3,593 | ||||||||||||
Venture capital and partnerships |
0 | 0 | 106,801 | 106,801 | ||||||||||||
Total pension plan assets |
$4,477 | $525,370 | $106,801 | $636,648 |
1 See Note 1 under the caption Fair Value Measurements for a description of the fair value hierarchy.
A reconciliation of the fair value measurements of our pension plan assets using significant unobservable inputs (Level 3) for the years ended December 31 is presented below:
FAIR VALUE MEASUREMENTS
USING SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3)
in thousands | Debt Securities |
Venture Capital and Partnerships |
Total | |||||||||
Balance at December 31, 2010 |
$308 | $96,244 | $96,552 | |||||||||
Actual return on plan assets |
||||||||||||
Relating to assets still held at December 31, 2011 |
0 | 13,696 | 13,696 | |||||||||
Relating to assets
sold during the year ended |
0 | 0 | 0 | |||||||||
Purchases, sales and settlements, net |
0 | (3,139 | ) | (3,139 | ) | |||||||
Transfers in (out) of Level 3 |
(308 | ) | 0 | (308 | ) | |||||||
Balance at December 31, 2011 |
$0 | $106,801 | $106,801 | |||||||||
Actual return on plan assets |
||||||||||||
Relating to assets still held at December 31, 2012 |
0 | (6,858 | ) | (6,858 | ) | |||||||
Relating to assets
sold during the year ended |
0 | 0 | 0 | |||||||||
Purchases, sales and settlements, net |
0 | 15,356 | 15,356 | |||||||||
Transfers in (out) of Level 3 |
0 | (17,288 | ) | (17,288 | ) | |||||||
Balance at December 31, 2012 |
$0 | $98,011 | $98,011 |
A summary of each multiemployer pension plan for which we participate is presented below:
Pension Fund |
EIN/Pension Plan Number |
Pension
Protection |
FIP/RP Status Pending/ |
Vulcan Contributions in thousands | Surcharge | Expiration Date/Range of CBAs |
||||||||||||||||||||||||||||||
2012 | 2011 | Implemented | 2012 | 2011 | 2010 | Imposed | ||||||||||||||||||||||||||||||
A | 36-6042061-001 | red | orange | no | $147 | $162 | $176 | no | 5/31/2013 | |||||||||||||||||||||||||||
5/31/2015 - | ||||||||||||||||||||||||||||||||||||
B | 36-6052390-001 | green | green | no | 418 | 408 | 494 | no | 1/31/2016 | |||||||||||||||||||||||||||
5/31/2013 - | ||||||||||||||||||||||||||||||||||||
C | 36-6044243-001 | red | red | no | 302 | 276 | 267 | no | 1/31/2016 | |||||||||||||||||||||||||||
D | 51-6031295-002 | green | green | no | 64 | 52 | 49 | no | 3/31/2014 | |||||||||||||||||||||||||||
E | 94-6277608-001 | yellow | yellow | yes | 232 | 177 | 176 | no | 7/15/2013 | |||||||||||||||||||||||||||
7/31/2014 - | ||||||||||||||||||||||||||||||||||||
F | 52-6074345-001 | red | red | yes | 887 | 840 | 825 | no | 1/31/2016 | |||||||||||||||||||||||||||
G | 51-6067400-001 | green | green | no | 211 | 166 | 181 | no | 4/30/2014 | |||||||||||||||||||||||||||
H | 36-6140097-001 | green | green | no | 1,392 | 1,543 | 1,566 | no | 4/30/2014 | |||||||||||||||||||||||||||
7/15/2013 - | ||||||||||||||||||||||||||||||||||||
I | 94-6090764-001 | orange | orange | yes | 2,082 | 1,737 | 1,576 | no | 9/17/2013 | |||||||||||||||||||||||||||
J | 95-6032478-001 | red | red | yes | 391 | 313 | 243 | no | 9/30/2015 | |||||||||||||||||||||||||||
K | 36-6155778-001 | red | red | no | 216 | 198 | 195 | no | 4/30/2013 | |||||||||||||||||||||||||||
L 2 | 51-6051034-001 | yellow | green | 2 | 0 | 24 | 54 | 2 | 2 | |||||||||||||||||||||||||||
7/15/2013 - | ||||||||||||||||||||||||||||||||||||
M | 91-6145047-001 | green | green | no | 885 | 882 | 764 | no | 4/8/2017 | |||||||||||||||||||||||||||
Total contributions |
$7,227 | $6,778 | $6,566 |
A Automobile Mechanics Local No. 701 Pension Fund |
H Midwest Operating Engineers Pension Trust Fund |
|
B Central Pension Fund of the IUOE and Participating Employers |
I Operating Engineers Trust Funds - Local 3 |
|
C Central States Southeast and Southwest Areas Pension Plan |
J Operating Engineers Pension Trust Funds - Local 12 |
|
D IAM National Pension Fund |
K Suburban Teamsters of Northern Illinois Pension Plan |
|
E Laborers Trust Funds for Northern California |
L Teamsters Union No 142 Pension Trust Fund |
|
F LIUNA National Industrial Pension Fund |
M Western Conference of Teamsters Pension Trust Fund |
|
G Local 786 Building Material Pension Trust |
||
EIN Employer Identification Number |
||
FIP Funding Improvement Plan |
||
RP Rehabilitation Plan |
||
CBA Collective Bargaining Agreement |
1 |
The Pension Protection Act of 2006 defines the zone status as follows: green - healthy, yellow - endangered, orange - seriously endangered and red - critical. |
2 |
All employees covered under this plan were located at operations divested on 9/30/2011. |
Contributions by participants to the postretirement benefit plans for the years ended December 31 are as follows:
in thousands | Postretirement | |||
Participants Contributions |
||||
2010 |
$1,829 | |||
2011 |
1,933 | |||
2012 |
1,901 |
Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects:
in thousands |
One-percentage-point Increase |
One-percentage-point Decrease |
||||||
Effect on total of service and interest cost |
$192 | ($186 | ) | |||||
Effect on postretirement benefit obligation |
3,274 | (3,149 | ) |
The following table sets forth the combined funded status of the plans and their reconciliation with the related amounts recognized in our consolidated financial statements at December 31:
in thousands | 2012 | 2011 | ||||||
Change in Benefit Obligation |
||||||||
Projected benefit obligation at beginning of year |
$867,374 | $761,384 | ||||||
Service cost |
22,349 | 20,762 | ||||||
Interest cost |
43,194 | 42,383 | ||||||
Plan amendment 1 |
1,286 | 0 | ||||||
Actuarial loss |
96,222 | 81,699 | ||||||
Benefits paid |
(39,087 | ) | (38,854 | ) | ||||
Projected benefit obligation at end of year |
$991,338 | $867,374 | ||||||
Change in Plan Assets |
||||||||
Fair value of assets at beginning of year |
$636,648 | $630,303 | ||||||
Actual return on plan assets |
81,021 | 40,293 | ||||||
Employer contribution |
4,509 | 4,906 | ||||||
Benefits paid |
(39,087 | ) | (38,854 | ) | ||||
Fair value of assets at end of year |
$683,091 | $636,648 | ||||||
Funded status |
($308,247 | ) | ($230,726 | ) | ||||
Net amount recognized |
($308,247 | ) | ($230,726 | ) | ||||
Amounts Recognized in the Consolidated |
||||||||
Balance Sheets |
||||||||
Current liabilities |
($5,211 | ) | ($4,880 | ) | ||||
Noncurrent liabilities |
(303,036 | ) | (225,846 | ) | ||||
Net amount recognized |
($308,247 | ) | ($230,726 | ) | ||||
Amounts Recognized in Accumulated |
||||||||
Other Comprehensive Income |
||||||||
Net actuarial loss |
$325,807 | $281,352 | ||||||
Prior service cost |
1,609 | 597 | ||||||
Total amount recognized |
$327,416 | $281,949 |
1 |
An amendment to the salaried plan was necessary to maintain compliance with required discrimination testing. |
The following table sets forth the components of net periodic benefit cost, amounts recognized in other comprehensive income and weighted-average assumptions of the plans at December 31:
dollars in thousands | 2012 | 2011 | 2010 | |||||||||
Components of Net Periodic Pension Benefit Cost |
||||||||||||
Service cost |
$22,349 | $20,762 | $19,217 | |||||||||
Interest cost |
43,194 | 42,383 | 41,621 | |||||||||
Expected return on plan assets |
(48,780 | ) | (49,480 | ) | (50,122 | ) | ||||||
Amortization of prior service cost |
274 | 340 | 460 | |||||||||
Amortization of actuarial loss |
19,526 | 11,670 | 5,752 | |||||||||
Net periodic pension benefit cost |
$36,563 | $25,675 | $16,928 | |||||||||
Changes in Plan
Assets and Benefit |
||||||||||||
Net actuarial loss (gain) |
$63,981 | $90,886 | ($17,413 | ) | ||||||||
Prior service cost |
1,286 | 0 | 0 | |||||||||
Reclassification
of actuarial loss to net |
(19,526 | ) | (11,670 | ) | (5,752 | ) | ||||||
Reclassification
of prior service cost to net |
(274 | ) | (340 | ) | (460 | ) | ||||||
Amount recognized
in other comprehensive |
$45,467 | $78,876 | ($23,625 | ) | ||||||||
Amount recognized
in net periodic pension |
$82,030 | $104,551 | ($6,697 | ) | ||||||||
Assumptions |
||||||||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
4.96 | % | 5.49 | % | 5.92 | % | ||||||
Expected return on plan assets |
8.00 | % | 8.00 | % | 8.25 | % | ||||||
Rate of compensation increase |
||||||||||||
(for salary-related plans) |
3.50 | % | 3.50 | % | 3.40 | % | ||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
4.19 | % | 4.96 | % | 5.49 | % | ||||||
Rate of
compensation increase |
3.50 | % | 3.50 | % | 3.50 | % |
Total employer contributions for the pension plans are presented below:
in thousands | Pension | |||
Employer Contributions |
||||
2010 |
$78,359 | |||
2011 |
4,906 | |||
2012 |
4,509 | |||
2013 (estimated) |
5,200 |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
in thousands | Pension | |||
Estimated Future Benefit Payments | ||||
2013 |
$42,335 | |||
2014 |
51,155 | |||
2015 |
49,066 | |||
2016 |
50,515 | |||
2017 |
51,709 | |||
2018-2022 |
284,836 |
The following table sets forth the combined funded status of the plans and their reconciliation with the related amounts recognized in our consolidated financial statements at December 31:
in thousands | 2012 | 2011 | ||||||
Change in Benefit Obligation |
||||||||
Projected benefit obligation at beginning of year |
$134,926 | $133,717 | ||||||
Service cost |
4,409 | 4,789 | ||||||
Interest cost |
5,851 | 6,450 | ||||||
Plan amendments |
(38,414 | ) | 0 | |||||
Actuarial (gain) loss |
13,562 | (2,854 | ) | |||||
Benefits paid |
(6,834 | ) | (7,176 | ) | ||||
Projected benefit obligation at end of year |
$113,500 | $134,926 | ||||||
Change in Plan Assets |
||||||||
Fair value of assets at beginning of year |
$0 | $0 | ||||||
Actual return on plan assets |
0 | 0 | ||||||
Fair value of assets at end of year |
$0 | $0 | ||||||
Funded status |
($113,500 | ) | ($134,926 | ) | ||||
Net amount recognized |
($113,500 | ) | ($134,926 | ) | ||||
Amounts
Recognized in the |
||||||||
Current liabilities |
($10,366 | ) | ($9,966 | ) | ||||
Noncurrent liabilities |
(103,134 | ) | (124,960 | ) | ||||
Net amount recognized |
($113,500 | ) | ($134,926 | ) | ||||
Amounts
Recognized in Accumulated |
||||||||
Net actuarial loss |
$38,221 | $26,006 | ||||||
Prior service credit |
(41,182 | ) | (4,141 | ) | ||||
Total amount recognized |
($2,961 | ) | $21,865 |
The following table sets forth the components of net periodic benefit cost, amounts recognized in other comprehensive income, weighted-average assumptions and assumed trend rates of the plans at December 31:
dollars in thousands |
2012 | 2011 | 2010 | |||||||||
Components of
Net Periodic Postretirement |
||||||||||||
Service cost |
$4,409 | $4,789 | $4,265 | |||||||||
Interest cost |
5,851 | 6,450 | 6,651 | |||||||||
Amortization of prior service credit |
(1,372 | ) | (674 | ) | (728 | ) | ||||||
Amortization of actuarial loss |
1,346 | 1,149 | 887 | |||||||||
Net periodic postretirement benefit cost |
$10,234 | $11,714 | $11,075 | |||||||||
Changes in Plan
Assets and Benefit |
||||||||||||
Net actuarial (gain) loss |
$13,562 | ($2,853 | ) | $11,730 | ||||||||
Prior service credit |
(38,414 | ) | 0 | 0 | ||||||||
Reclassification
of actuarial loss to net |
(1,346 | ) | (1,149 | ) | (887 | ) | ||||||
Reclassification
of prior service credit to net |
1,372 | 674 | 728 | |||||||||
Amount recognized
in other comprehensive |
($24,826 | ) | ($3,328 | ) | $11,571 | |||||||
Amount recognized
in net periodic |
($14,592 | ) | $8,386 | $22,646 | ||||||||
Assumptions |
||||||||||||
Healthcare cost
trend rate assumed |
8.00% | 7.50% | 8.00% | |||||||||
Rate to which the
cost trend rate gradually |
5.00% | 5.00% | 5.00% | |||||||||
Year that the rate
reaches the rate it is |
2019 | 2017 | 2017 | |||||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
4.60% | 4.95% | 5.45% | |||||||||
Weighted-average assumptions used to |
||||||||||||
Discount rate |
3.30% | 4.60% | 4.95% |
Total employer contributions for the postretirement plans are presented below:
in thousands | Postretirement | |||
Employer Contributions |
||||
2010 |
$7,242 | |||
2011 |
7,176 | |||
2012 |
6,834 | |||
2013 (estimated) |
10,366 |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
in thousands | Postretirement | |||
Estimated Future Benefit Payments |
||||
2013 |
$10,366 | |||
2014 |
10,807 | |||
2015 |
11,101 | |||
2016 |
11,050 | |||
2017 |
10,719 | |||
2018–2022 |
47,491 |
|
The following table summarizes the activity for nonvested performance share units during the year ended December 31, 2012:
Target Number of Shares |
Weighted-average Grant Date Fair Value |
|||||||
Performance Shares |
||||||||
Nonvested at January 1, 2012 |
607,539 | $39.73 | ||||||
Granted |
479,560 | $46.22 | ||||||
Vested |
(214,159 | ) | $40.34 | |||||
Canceled/forfeited |
(36,574 | ) | $41.64 | |||||
Nonvested at December 31, 2012 |
836,366 | $43.21 |
The aggregate values of distributed performance shares for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Aggregate value of
distributed |
$493 | $2,548 | $2,981 |
The following table presents the weighted-average fair value and the weighted-average assumptions used in estimating the fair value of grants during the years ended December 31:
2012 1 | 2011 | 2010 | ||||||||||
SOSARs |
||||||||||||
Fair value |
N/A | $10.51 | $12.05 | |||||||||
Risk-free interest rate |
N/A | 2.27% | 3.15% | |||||||||
Dividend yield |
N/A | 1.95% | 2.00% | |||||||||
Volatility |
N/A | 31.57% | 27.58% | |||||||||
Expected term |
N/A | 7.75 years | 7.50 years |
1 No SOSARS were granted in 2012.
A summary of our stock option/SOSAR activity as of December 31, 2012 and changes during the year are presented below:
Number |
Weighted-average |
Weighted-average |
Aggregate |
|||||||||||||
Stock Options/SOSARs |
||||||||||||||||
Outstanding at January 1, 2012 |
6,641,847 | $54.69 | ||||||||||||||
Granted |
0 | $0.00 | ||||||||||||||
Exercised |
(505,432 | ) | $34.01 | |||||||||||||
Forfeited or expired |
(745,808 | ) | $46.69 | |||||||||||||
Outstanding at December 31, 2012 |
5,390,607 | $57.73 | 4.59 | $22,047 | ||||||||||||
Vested and expected to vest |
5,365,068 | $57.84 | 4.57 | $21,632 | ||||||||||||
Exercisable at December 31, 2012 |
4,853,258 | $59.77 | 4.22 | $15,503 |
The aggregate intrinsic values of options/SOSARs exercised for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Aggregate
intrinsic value of options/ |
$5,674 | $164 | $1,830 |
The following table presents cash and stock consideration received and tax benefit realized from stock option/SOSAR exercises and compensation cost recorded referable to stock options/SOSARs for the years ended December 31:
in thousands | 2012 | 2011 | 2010 | |||||||||
Stock Options/SOSARs |
||||||||||||
Cash and stock
consideration received |
$ | 15,787 | $ | 3,596 | $ | 20,502 | ||||||
Tax benefit from exercises |
2,202 | 66 | 733 | |||||||||
Compensation cost |
2,966 | 7,968 | 11,288 |
|
We have commitments in the form of unconditional purchase obligations as of December 31, 2012. These include commitments for the purchase of property, plant & equipment of $3,880,000 and commitments for noncapital purchases of $50,582,000. These commitments are due as follows:
in thousands |
Unconditional Purchase Obligations |
|||
Property, Plant & Equipment |
||||
2013 |
$3,880 | |||
Thereafter |
0 | |||
Total |
$3,880 | |||
Noncapital |
||||
2013 |
$15,432 | |||
2014–2015 |
20,062 | |||
2016–2017 |
6,363 | |||
Thereafter |
8,725 | |||
Total |
$50,582 |
We have commitments in the form of minimum royalties under mineral leases as of December 31, 2012 in the amount of $222,230,000, due as follows:
in thousands | Mineral Leases |
|||
Mineral Royalties |
||||
2013 |
$24,693 | |||
2014–2015 |
39,544 | |||
2016–2017 |
25,138 | |||
Thereafter |
132,855 | |||
Total |
$222,230 |
Our standby letters of credit as of December 31, 2012 are summarized by purpose in the table below:
in thousands | ||||
Standby Letters of Credit | ||||
Risk management insurance |
$35,110 | |||
Industrial revenue bond |
14,230 | |||
Reclamation/restoration requirements |
7,862 | |||
Other |
100 | |||
Total |
$57,302 |
|
The amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010 is summarized as follows:
in thousands |
Before-tax Amount |
Tax (Expense) Benefit |
Net-of-tax Amount |
|||||||||
Other Comprehensive Income (Loss) |
||||||||||||
December 31, 2010 |
||||||||||||
Fair value adjustment to cash flow hedges |
($882 | ) | $401 | ($481 | ) | |||||||
Reclassification
adjustment for cash flow |
19,619 | (8,910 | ) | 10,709 | ||||||||
Adjustment for
funded status of pension |
5,683 | (2,482 | ) | 3,201 | ||||||||
Amortization of
pension and postretirement |
6,371 | (2,781 | ) | 3,590 | ||||||||
Total other comprehensive income (loss) |
$30,791 | ($13,772 | ) | $17,019 | ||||||||
December 31, 2011 |
||||||||||||
Fair value adjustment to cash flow hedges |
$0 | $0 | $0 | |||||||||
Reclassification
adjustment for cash flow |
11,657 | (4,506 | ) | 7,151 | ||||||||
Adjustment for
funded status of pension |
(88,033 | ) | 33,667 | (54,366 | ) | |||||||
Amortization of
pension and postretirement |
12,485 | (4,775 | ) | 7,710 | ||||||||
Total other comprehensive income (loss) |
($63,891 | ) | $24,386 | ($39,505 | ) | |||||||
December 31, 2012 |
||||||||||||
Fair value adjustment to cash flow hedges |
$0 | $0 | $0 | |||||||||
Reclassification
adjustment for cash flow |
6,314 | (2,498 | ) | 3,816 | ||||||||
Adjustment for
funded status of pension |
(40,414 | ) | 15,960 | (24,454 | ) | |||||||
Amortization of
pension and postretirement |
19,774 | (7,809 | ) | 11,965 | ||||||||
Total other comprehensive income (loss) |
($14,326 | ) | $5,653 | ($8,673 | ) | |||||||
in thousands |
Before-tax Amount |
Tax (Expense) Benefit |
Net-of-tax Amount |
|||||||||
Other Comprehensive Income (Loss) |
||||||||||||
December 31, 2010 |
||||||||||||
Fair value adjustment to cash flow hedges |
($882 | ) | $401 | ($481 | ) | |||||||
Reclassification
adjustment for cash flow |
19,619 | (8,910 | ) | 10,709 | ||||||||
Adjustment for
funded status of pension |
5,683 | (2,482 | ) | 3,201 | ||||||||
Amortization of
pension and postretirement |
6,371 | (2,781 | ) | 3,590 | ||||||||
Total other comprehensive income (loss) |
$30,791 | ($13,772 | ) | $17,019 | ||||||||
December 31, 2011 |
||||||||||||
Fair value adjustment to cash flow hedges |
$0 | $0 | $0 | |||||||||
Reclassification
adjustment for cash flow |
11,657 | (4,506 | ) | 7,151 | ||||||||
Adjustment for
funded status of pension |
(88,033 | ) | 33,667 | (54,366 | ) | |||||||
Amortization of
pension and postretirement |
12,485 | (4,775 | ) | 7,710 | ||||||||
Total other comprehensive income (loss) |
($63,891 | ) | $24,386 | ($39,505 | ) | |||||||
December 31, 2012 |
||||||||||||
Fair value adjustment to cash flow hedges |
$0 | $0 | $0 | |||||||||
Reclassification
adjustment for cash flow |
6,314 | (2,498 | ) | 3,816 | ||||||||
Adjustment for
funded status of pension |
(40,414 | ) | 15,960 | (24,454 | ) | |||||||
Amortization of
pension and postretirement |
19,774 | (7,809 | ) | 11,965 | ||||||||
Total other comprehensive income (loss) |
($14,326 | ) | $5,653 | ($8,673 | ) | |||||||
Amounts in accumulated other comprehensive income (loss), net of tax, at December 31, are as follows:
|
|
|||||||||||
in thousands | 2012 | 2011 | 2010 | |||||||||
Accumulated Other Comprehensive Loss |
||||||||||||
Cash flow hedges |
($28,170 | ) | ($31,986 | ) | ($39,137 | ) | ||||||
Pension and postretirement plans |
(197,347 | ) | (184,858 | ) | (138,202 | ) | ||||||
Total |
($225,517 | ) | ($216,844 | ) | ($177,339 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to earnings, are as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
Reclassification Adjustment for Cash Flow Hedges |
||||||||||||
Interest expense |
$6,314 | $11,657 | $19,619 | |||||||||
Benefit from income taxes |
(2,498 | ) | (4,506 | ) | (8,910 | ) | ||||||
Total |
$3,816 | $7,151 | $10,709 | |||||||||
Amortization of
Pension and Postretirement Plan |
||||||||||||
Cost of goods sold |
$15,665 | $9,458 | $4,783 | |||||||||
Selling, administrative and general expenses |
4,109 | 3,027 | 1,588 | |||||||||
Benefit from income taxes |
(7,809 | ) | (4,775 | ) | (2,781 | ) | ||||||
Total |
$11,965 | $7,710 | $3,590 | |||||||||
Total reclassifications from AOCI to earnings |
$15,781 | $14,861 | $14,299 |
|
SEGMENT FINANCIAL DISCLOSURE
in millions | 2012 | 2011 | 2010 | |||||||||
Total Revenues |
||||||||||||
Aggregates |
||||||||||||
Segment revenues |
$1,729.4 | $1,734.0 | $1,766.9 | |||||||||
Intersegment sales |
(148.2 | ) | (142.6 | ) | (154.1 | ) | ||||||
Net sales |
$1,581.2 | $1,591.4 | $1,612.8 | |||||||||
Concrete |
||||||||||||
Segment revenues |
$406.4 | $374.7 | $383.2 | |||||||||
Net sales |
$406.4 | $374.7 | $383.2 | |||||||||
Asphalt Mix |
||||||||||||
Segment revenues |
$378.1 | $399.0 | $369.9 | |||||||||
Net sales |
$378.1 | $399.0 | $369.9 | |||||||||
Cement |
||||||||||||
Segment revenues |
$84.6 | $71.9 | $80.2 | |||||||||
Intersegment sales |
(39.1 | ) | (30.1 | ) | (40.2 | ) | ||||||
Net sales |
$45.5 | $41.8 | $40.0 | |||||||||
Totals |
||||||||||||
Net sales |
$2,411.2 | $2,406.9 | $2,405.9 | |||||||||
Delivery revenues |
156.1 | 157.7 | 153.0 | |||||||||
Total revenues |
$2,567.3 | $2,564.6 | $2,558.9 | |||||||||
Gross Profit |
||||||||||||
Aggregates |
$352.1 | $306.2 | $320.2 | |||||||||
Concrete |
(38.2 | ) | (43.4 | ) | (45.0 | ) | ||||||
Asphalt Mix |
22.9 | 25.6 | 29.3 | |||||||||
Cement |
(2.8 | ) | (4.5 | ) | (3.8 | ) | ||||||
Total |
$334.0 | $283.9 | $300.7 | |||||||||
Depreciation, Depletion, Accretion and Amortization 1 |
||||||||||||
Aggregates |
$240.7 | $267.0 | $288.6 | |||||||||
Concrete |
41.3 | 47.7 | 50.5 | |||||||||
Asphalt Mix |
8.7 | 7.7 | 8.4 | |||||||||
Cement |
18.1 | 17.8 | 20.1 | |||||||||
Other |
23.2 | 21.5 | 14.5 | |||||||||
Total |
$332.0 | $361.7 | $382.1 | |||||||||
Capital Expenditures |
||||||||||||
Aggregates |
$77.0 | $67.6 | $60.6 | |||||||||
Concrete |
9.2 | 6.3 | 3.7 | |||||||||
Asphalt Mix |
7.2 | 16.1 | 4.5 | |||||||||
Cement |
1.2 | 3.2 | 7.3 | |||||||||
Corporate |
1.2 | 4.7 | 3.3 | |||||||||
Total |
$95.8 | $97.9 | $79.4 | |||||||||
Identifiable Assets 2 |
||||||||||||
Aggregates |
$6,717.3 | $6,837.0 | $6,984.5 | |||||||||
Concrete |
412.3 | 461.1 | 483.2 | |||||||||
Asphalt Mix |
218.9 | 234.9 | 211.5 | |||||||||
Cement |
398.1 | 417.8 | 435.0 | |||||||||
Total identifiable assets |
7,746.6 | 7,950.8 | 8,114.2 | |||||||||
General corporate assets |
104.5 | 122.7 | 177.8 | |||||||||
Cash items |
275.5 | 155.8 | 47.5 | |||||||||
Total assets |
$8,126.6 | $8,229.3 | $8,339.5 |
1 The allocation of indirect depreciation to our operating segments was changed in 2012 to better align the presentation with how management views information internally. The 2011 and 2010 DDA&A amounts presented above have been revised to conform to the 2012 presentation.
2 Certain temporarily idled assets are included within a segment’s Identifiable Assets but the associated DDA&A is shown within Other in the DDA&A section above since the related DDA&A is excluded from segment gross profit.
|
Supplemental information referable to the Consolidated Statements of Cash Flows is summarized below:
in thousands | 2012 | 2011 | 2010 | |||||||||
Cash Payments (Refunds) |
||||||||||||
Interest (exclusive of amount capitalized) |
$207,745 | $205,088 | $172,653 | |||||||||
Income taxes |
20,374 | (29,874 | ) | (15,745 | ) | |||||||
Noncash Investing and Financing Activities |
||||||||||||
Accrued liabilities
for purchases of property, |
$9,627 | $7,226 | $8,200 | |||||||||
Fair value of
noncash assets and |
0 | 25,994 | 0 | |||||||||
Stock issued for pension contribution (Note 13) |
0 | 0 | 53,864 | |||||||||
Amounts referable to business acquisitions |
||||||||||||
Liabilities assumed |
0 | 13,912 | 150 | |||||||||
Fair value of equity consideration |
0 | 18,529 | 0 |
|
For the years ended December 31, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:
in thousands | 2012 | 2011 | 2010 | |||||||||
ARO Operating Costs |
||||||||||||
Accretion |
$7,956 | $8,195 | $8,641 | |||||||||
Depreciation |
5,599 | 7,242 | 11,516 | |||||||||
Total |
$13,555 | $15,437 | $20,157 |
Reconciliations of the carrying amounts of our asset retirement obligations for the years ended December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Asset Retirement Obligations |
||||||||
Balance at beginning of year |
$153,979 | $162,730 | ||||||
Liabilities incurred |
127 | 1,738 | ||||||
Liabilities settled |
(2,993 | ) | (16,630 | ) | ||||
Accretion expense |
7,956 | 8,195 | ||||||
Revisions up (down), net |
(8,997 | ) | (2,054 | ) | ||||
Balance at end of year |
$150,072 | $153,979 |
|
Changes in the carrying amount of goodwill by reportable segment for the years ended December 31, 2012, 2011 and 2010 are summarized below:
GOODWILL
in thousands | Aggregates | Concrete | Asphalt Mix | Cement | Total | |||||||||||||||
Gross Carrying Amount |
||||||||||||||||||||
Total as of December 31, 2010 |
$3,005,383 | $0 | $91,633 | $252,664 | $3,349,680 | |||||||||||||||
Goodwill of divested businesses |
(10,300 | ) | 0 | 0 | 0 | (10,300 | ) | |||||||||||||
Total as of December 31, 2011 |
$2,995,083 | $0 | $91,633 | $252,664 | $3,339,380 | |||||||||||||||
Total as of December 31, 2012 |
$2,995,083 | $0 | $91,633 | $252,664 | $3,339,380 | |||||||||||||||
Accumulated Impairment Losses |
||||||||||||||||||||
Total as of December 31, 2010 |
$0 | $0 | $0 | ($252,664 | ) | ($252,664 | ) | |||||||||||||
Total as of December 31, 2011 |
$0 | $0 | $0 | ($252,664 | ) | ($252,664 | ) | |||||||||||||
Total as of December 31, 2012 |
$0 | $0 | $0 | ($252,664 | ) | ($252,664 | ) | |||||||||||||
Goodwill, net of Accumulated Impairment Losses |
||||||||||||||||||||
Total as of December 31, 2010 |
$3,005,383 | $0 | $91,633 | $0 | $3,097,016 | |||||||||||||||
Total as of December 31, 2011 |
$2,995,083 | $0 | $91,633 | $0 | $3,086,716 | |||||||||||||||
Total as of December 31, 2012 |
$2,995,083 | $0 | $91,633 | $0 | $3,086,716 |
The gross carrying amount and accumulated amortization by major intangible asset class for the years ended December 31 are summarized below:
INTANGIBLE ASSETS
in thousands | 2012 | 2011 | ||||||
Gross Carrying Amount |
||||||||
Contractual rights in place |
$640,450 | $640,450 | ||||||
Noncompetition agreements |
1,450 | 1,430 | ||||||
Favorable lease agreements |
16,677 | 16,677 | ||||||
Permitting, permitting compliance and zoning rights |
82,596 | 76,956 | ||||||
Customer relationships |
14,493 | 14,493 | ||||||
Trade names and trademarks |
5,006 | 5,006 | ||||||
Other |
3,711 | 3,200 | ||||||
Total gross carrying amount |
$764,383 | $758,212 | ||||||
Accumulated Amortization |
||||||||
Contractual rights in place |
($42,470 | ) | ($35,748 | ) | ||||
Noncompetition agreements |
(985 | ) | (841 | ) | ||||
Favorable lease agreements |
(2,584 | ) | (2,031 | ) | ||||
Permitting, permitting compliance and zoning rights |
(14,625 | ) | (12,880 | ) | ||||
Customer relationships |
(5,927 | ) | (4,466 | ) | ||||
Trade names and trademarks |
(2,044 | ) | (1,544 | ) | ||||
Other |
(3,216 | ) | (3,200 | ) | ||||
Total accumulated amortization |
($71,851 | ) | ($60,710 | ) | ||||
Total Intangible Assets Subject to Amortization, net |
$692,532 | $697,502 | ||||||
Intangible Assets with Indefinite Lives |
0 | 0 | ||||||
Total Intangible Assets, net |
$692,532 | $697,502 | ||||||
Aggregate Amortization Expense for the Year |
$11,869 | $14,032 |
Estimated amortization expense for the five years subsequent to December 31, 2012 is as follows:
in thousands |
||||
Estimated Amortization Expense for Five Subsequent Years |
||||
2013 |
$12,043 | |||
2014 |
12,090 | |||
2015 |
12,255 | |||
2016 |
12,792 | |||
2017 |
13,980 |
|
The major classes of assets and liabilities of assets classified as held for sale as of December 31 are as follows:
in thousands | 2012 | 2011 | ||||||
Held for Sale |
||||||||
Current assets |
$809 | $0 | ||||||
Property, plant & equipment, net |
14,274 | 0 | ||||||
Total assets held for sale |
$15,083 | $0 | ||||||
Noncurrent liabilities |
$801 | $0 | ||||||
Total liabilities of assets held for sale |
$801 | $0 |
|
The following is a summary of selected quarterly financial information (unaudited) for each of the years ended December 31, 2012 and 2011:
2012 | ||||||||||||||||
Three Months Ended | ||||||||||||||||
in thousands, except per share data | March 31 | June 30 | Sept 30 | Dec 31 | ||||||||||||
Net sales |
$499,851 | $648,890 | $687,616 | $574,886 | ||||||||||||
Total revenues |
535,882 | 694,136 | 728,861 | 608,431 | ||||||||||||
Gross profit |
21,958 | 105,939 | 126,923 | 79,206 | ||||||||||||
Operating earnings (loss) 1, 2 |
(46,279 | ) | 19,662 | 55,866 | 55,532 | |||||||||||
Earnings (loss) from continuing operations 1, 2 |
(57,050 | ) | (16,985 | ) | 15,621 | 4,488 | ||||||||||
Net earnings (loss) 1, 2 |
(52,053 | ) | (18,283 | ) | 14,260 | 3,483 | ||||||||||
Basic earnings (loss) per share from continuing operations |
($0.44 | ) | ($0.13 | ) | $0.12 | $0.03 | ||||||||||
Diluted earnings (loss) per share from continuing operations |
(0.44 | ) | (0.13 | ) | 0.12 | 0.03 | ||||||||||
Basic net earnings (loss) per share |
($0.40 | ) | ($0.14 | ) | $0.11 | $0.03 | ||||||||||
Diluted net earnings (loss) per share |
(0.40 | ) | (0.14 | ) | 0.11 | 0.03 |
1 Includes exchange offer costs as described in Note 1, as follows (in thousands): Q1 $10,065, Q2 $32,060, Q3 $1,206 and Q4 $49.
2 Includes restructing costs as described in Note 1, as follows (in thousands): Q1 $1,411, Q2 $4,551, Q3 $3,056 and Q4 $539.
2011 | ||||||||||||||||
Three Months Ended | ||||||||||||||||
in thousands, except per share data | March 31 | June 30 | Sept 30 | Dec 31 | ||||||||||||
Net sales |
$456,316 | $657,457 | $714,947 | $578,189 | ||||||||||||
Total revenues |
487,200 | 701,971 | 760,752 | 614,627 | ||||||||||||
Gross profit |
(7,106 | ) | 100,840 | 115,780 | 74,355 | |||||||||||
Operating earnings (loss) 1, 2 |
(61,184 | ) | 23,488 | 106,668 | (5,528 | ) | ||||||||||
Earnings (loss) from continuing operations 1, 2 |
(64,622 | ) | (7,102 | ) | 22,412 | (25,943 | ) | |||||||||
Net earnings (loss) 1, 2 |
(54,733 | ) | (8,139 | ) | 19,959 | (27,865 | ) | |||||||||
Basic earnings (loss) per share from continuing operations |
($0.50 | ) | ($0.05 | ) | $0.17 | ($0.20 | ) | |||||||||
Diluted earnings (loss) per share from continuing operations |
(0.50 | ) | (0.05 | ) | 0.17 | (0.20 | ) | |||||||||
Basic net earnings (loss) per share |
($0.42 | ) | ($0.06 | ) | $0.15 | ($0.22 | ) | |||||||||
Diluted net earnings (loss) per share |
(0.42 | ) | (0.06 | ) | 0.15 | (0.22 | ) |
1 Includes exchange offer costs as described in Note 1, as follows (in thousands): Q4 $2,227.
2 Includes restructing costs as described in Note 1, as follows (in thousands): Q1 $306, Q2 $1,831, Q3 $839 and Q4 $9,995.
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