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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 and a major producer of asphalt mix and ready-mixed concrete.
BASIS OF PRESENTATION
Our accompanying unaudited condensed consolidated financial statements were prepared in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Our condensed consolidated balance sheet as of December 31, 2013 was derived from the audited financial statement at that date. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K.
Due to the 2005 sale of our Chemicals business as presented in Note 2, the operating results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2014 presentation.
RESTRICTED CASH
Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.
RESTRUCTURING CHARGES
In 2012, our Board approved a Profit Enhancement Plan that further leveraged our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During the first three months of 2013, we incurred $1,509,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan. We do not anticipate any future material charges related to this Profit Enhancement Plan.
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:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Weighted-average common shares |
|||||
outstanding |
130,810 | 130,186 | |||
Dilutive effect of |
|||||
Stock options/SOSARs |
693 | 0 | |||
Other stock compensation plans |
811 | 0 | |||
Weighted-average common shares |
|||||
outstanding, assuming dilution |
132,314 | 130,186 |
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 are as follows: three months ended March 31, 2013 — 1,144,000.
The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price is as follows:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Antidilutive common stock equivalents |
2,373 | 2,907 |
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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. In March 2013, we received the final earn-out payment in the amount of $13,031,000. During 2012, we received an earn-out payment of $11,369,000. We were liable for a cash transaction bonus payable annually to certain former key Chemicals employees based on the prior years’ earn-out results. As of March 31, 2013, we had accrued $1,303,000 for the 2013 transaction bonus which was subsequently paid in 2013.
The financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income for all periods presented. There were no net sales or revenues from discontinued operations for the periods presented. Results from discontinued operations are as follows:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Discontinued Operations |
|||||
Pretax loss |
$ (842) |
$ (540) |
|||
Gain on disposal, net of transaction bonus |
0 | 11,728 | |||
Income tax (provision) benefit |
332 | (4,405) | |||
Earnings (loss) on discontinued operations, |
|||||
net of income taxes |
$ (510) |
$ 6,783 |
The pretax losses from discontinued operations noted above were due primarily to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business.
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Note 3: Income Taxes
Our estimated annual effective tax rate (EAETR) is based on full year expectations of pretax book earnings, statutory tax rates, permanent differences between book and tax accounting such as percentage depletion and tax planning alternatives available in the various jurisdictions in which we operate. For interim financial reporting, except in circumstances as described in the following paragraph, we calculate our quarterly income tax provision in accordance with the EAETR. Each quarter, we update our EAETR based on our revised full year expectation of pretax book earnings and calculate the income tax provision or benefit so that the year-to-date income tax provision reflects the EAETR. Significant judgment is required in determining our EAETR.
When expected pretax book earnings for the full year are at or near breakeven, the EAETR can distort the income tax provision for an interim period due to the size and nature of our permanent differences. In these circumstances, we calculate the interim income tax provision using the year-to-date effective tax rate. This method results in an income tax provision based solely on the year-to-date pretax book earnings as adjusted for permanent differences on a pro rata basis. In the first quarter of 2014, income taxes were calculated based on the EAETR. In the first quarter of 2013, income taxes were calculated based on the year-to-date effective tax rate.
We recorded an income tax provision from continuing operations of $22,900,000 in the first quarter of 2014 compared to an income tax benefit from continuing operations of $38,818,000 in the first quarter of 2013. The change in our income tax provision for the year resulted largely from applying the statutory rate to the increase in our pretax book earnings.
We recognize a tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. 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 tax benefits.
We recognize deferred tax assets and liabilities based on the differences between the financial statement’s carrying amounts of assets and liabilities and the amounts used for income tax purposes. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period.
Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. A summary of our deferred tax assets is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2013.
On an annual basis, we perform a comprehensive analysis of all forms of positive and negative evidence based on year end results. During each interim period, we update our annual analysis for significant changes to the positive and negative evidence.
Based on our first quarter 2014 analysis, we believe it is more likely than not that we will realize the benefit of all our deferred tax assets with the exception of the state net operating loss carryforwards for which a valuation allowance has been recorded. For 2014, we project a valuation allowance of $54,919,000 against our state net operating loss deferred tax asset carryforwards; an increase of $8,639,000 from the prior year-end. Of the $54,919,000 valuation allowance, $53,490,000 relates to our Alabama net operating loss carryforward. The remaining valuation allowance of $1,429,000 relates to other state net operating loss carryforwards. This change in the valuation allowance is reflected as a component of our income tax provision.
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Note 4: deferred revenue
We have entered into two transactions (September 2013 and December 2012) through which we sold a percentage of the future production from aggregates reserves at eight quarries (seven owned and one leased). These sales were structured as volumetric production payments (VPPs). We received net cash proceeds of $153,282,000 and $73,644,000 for the 2013 and 2012 transactions, respectively. These proceeds were recorded as deferred revenue on the balance sheet and are amortized on a unit-of-sales basis to revenue over the terms of the VPPs. Concurrently, we entered into marketing agreements with the purchaser through which we are designated the exclusive sales agent for the purchaser’s percentage of future production. Acting as the purchaser’s agent, our consolidated total revenues exclude these sales proceeds.
The common key terms of both VPP transactions are:
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the purchaser has a nonoperating interest in reserves entitling them to a percentage of future production |
§ |
there is no minimum annual or cumulative production or sales volume, nor any minimum sales price guarantee |
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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 of future production under the terms of a separate marketing agreement |
§ |
the purchaser's percentage of future production is 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 key terms specific to the 2013 VPP transaction are:
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terminates at the earlier to occur of September 30, 2051 or the sale of 250.8 million tons of aggregates from the specified quarries subject to the VPP; based on historical and projected volumes from the specified quarries, it is expected that 250.8 million tons will be sold prior to September 30, 2051 |
§ |
the purchaser's percentage of the maximum 250.8 million tons of future production is estimated, based on current sales volume projection, to be 11.5% (approximately 29 million tons); the actual percentage may vary |
The key terms specific to the 2012 VPP transaction are:
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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; based on historical and projected volumes from the specified quarries, it is expected that 143.2 million tons will be sold prior to December 31, 2052 |
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the purchaser's percentage of the maximum 143.2 million tons of future production is estimated, based on current sales volume projection, to be 10.5% (approximately 15 million tons); the actual percentage may vary |
The impact to our net sales and gross margin related to the VPPs is outlined as follows:
Three Months Ended |
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March 31 |
|||||
in thousands |
2014 | 2013 | |||
Amortization of deferred revenue |
$ 984 |
$ 253 |
|||
Purchaser's proceeds from sale of production |
(2,944) | (829) | |||
Decrease to net sales and gross margin |
$ (1,960) |
$ (576) |
Based on expected aggregates sales from the specified quarries, we anticipate recognizing a range of $4,600,000 to $5,600,000 of deferred revenue during the 12-month period ending March 31, 2015.
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Note 5: Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as described below:
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Inputs that are derived principally from or corroborated by observable market data
Level 3: Inputs that are unobservable and significant to the overall fair value measurement
Our assets subject to fair value measurement on a recurring basis are summarized below:
Level 1 |
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March 31 |
December 31 |
March 31 |
||||||
in thousands |
2014 | 2013 | 2013 | |||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Mutual funds |
$ 14,257 |
$ 15,255 |
$ 13,628 |
|||||
Equities |
15,502 | 12,828 | 11,207 | |||||
Total |
$ 29,759 |
$ 28,083 |
$ 24,835 |
Level 2 |
||||||||
March 31 |
December 31 |
March 31 |
||||||
in thousands |
2014 | 2013 | 2013 | |||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Common/collective trust funds |
$ 1,274 |
$ 1,244 |
$ 1,545 |
|||||
Total |
$ 1,274 |
$ 1,244 |
$ 1,545 |
We have established two Rabbi Trusts for the purpose of providing a level of security for the employee nonqualified retirement and deferred compensation plans and for the directors' nonqualified deferred compensation plans. The fair values of these investments are estimated using a market approach. The Level 1 investments include mutual funds and equity securities for which quoted prices in active markets are available. Level 2 investments are stated at estimated fair value based on the underlying investments in those funds (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).
Net trading gains of the Rabbi Trust investments were $2,395,000 and $1,848,000 for the three months ended March 31, 2014 and 2013, respectively. The portions of the net trading gains related to investments still held by the Rabbi Trusts at March 31, 2014 and 2013 were $1,995,000 and $1,706,000, 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 other current liabilities approximate their fair values because of the short-term nature of these instruments. Additional disclosures for derivative instruments and interest-bearing debt are presented in Notes 6 and 7, respectively.
There were no assets or liabilities subject to fair value measurement on a nonrecurring basis in 2013. Assets that were subject to fair value measurement on a nonrecurring basis as of March 31, 2014 are summarized below:
As of March 31, 2014 |
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Impairment |
|||||
in thousands |
Level 2 |
Charges |
|||
Fair Value Nonrecurring |
|||||
Property, plant & equipment |
$ 2,280 |
$ 2,987 |
|||
Total |
$ 2,280 |
$ 2,987 |
We recorded a $2,987,000 loss on impairment of long-lived assets in the first quarter of 2014 reducing the carrying value of these assets to their estimated fair value of $2,280,000. Fair value was estimated using a market approach (observed transactions involving comparable assets in similar locations).
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Note 6: 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. 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. This amortization was reflected in the accompanying Condensed Consolidated Statements of Comprehensive Income as follows:
Three Months Ended |
|||||||
Location on |
March 31 |
||||||
in thousands |
Statement |
2014 | 2013 | ||||
Cash Flow Hedges |
|||||||
Loss reclassified from AOCI |
Interest |
||||||
(effective portion) |
expense |
$ (4,934) |
$ (1,415) |
The 2014 loss reclassified from AOCI includes the acceleration of a proportional amount of the deferred loss in the amount of $3,762,000 referable to the debt purchase as disclosed in Note 7.
For the 12-month period ending March 31, 2015, we estimate that $3,994,000 of the pretax loss in AOCI will be reclassified to earnings.
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 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 Condensed Consolidated Statements of Comprehensive Income as follows:
Three Months Ended |
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March 31 |
|||||||
in thousands |
2014 | 2013 | |||||
Deferred Gain on Settlement |
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Amortized to earnings as a reduction |
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to interest expense |
$ 9,194 |
$ 1,056 |
The 2014 amortized deferred gain includes the acceleration of a proportional amount of the deferred gain in the amount of $8,032,000 referable to the debt purchase as disclosed in Note 7.
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Note 7: Debt
Debt is summarized as follows:
March 31 |
December 31 |
March 31 |
||||||||
in thousands |
2014 | 2013 | 2013 | |||||||
Long-term Debt |
||||||||||
6.30% notes due 2013 1 |
$ 0 |
$ 0 |
$ 140,430 |
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10.125% notes due 2015 2 |
151,674 | 151,897 | 152,520 | |||||||
6.50% notes due 2016 3 |
127,678 | 511,627 | 514,221 | |||||||
6.40% notes due 2017 4 |
218,578 | 349,907 | 349,892 | |||||||
7.00% notes due 2018 5 |
399,783 | 399,772 | 399,741 | |||||||
10.375% notes due 2018 6 |
248,888 | 248,843 | 248,716 | |||||||
7.50% notes due 2021 7 |
600,000 | 600,000 | 600,000 | |||||||
7.15% notes due 2037 8 |
239,564 | 239,561 | 239,555 | |||||||
Medium-term notes |
6,000 | 6,000 | 6,000 | |||||||
Industrial revenue bonds |
14,000 | 14,000 | 14,000 | |||||||
Other notes |
788 | 806 | 949 | |||||||
Total long-term debt including current maturities |
$ 2,006,953 |
$ 2,522,413 |
$ 2,666,024 |
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Less current maturities |
171 | 170 | 140,604 | |||||||
Total long-term debt |
$ 2,006,782 |
$ 2,522,243 |
$ 2,525,420 |
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Estimated fair value of long-term debt |
$ 2,313,964 |
$ 2,820,399 |
$ 2,851,237 |
1 |
Includes decreases for unamortized discounts, as follows: March 31, 2013 — $14 thousand. |
2 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: March 31, 2014 — $1,837 thousand, December 31, 2013 — $2,082 thousand and March 31, 2013 — $2,766 thousand. Additionally, includes decreases for unamortized discounts, as follows: March 31, 2014 — $163 thousand, December 31, 2013 — $185 thousand and March 31, 2013 — $246 thousand. The effective interest rate for these notes is 9.58%. |
3 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: March 31, 2014 — $2,677 thousand, December 31, 2013 — $11,627 thousand and March 31, 2013 — $14,221 thousand. The effective interest rate for these notes is 6.00%. |
4 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $55 thousand, December 31, 2013 — $93 thousand and March 31, 2013 — $108 thousand. The effective interest rate for these notes is 7.41%. |
5 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $217 thousand, December 31, 2013 — $228 thousand and March 31, 2013 — $259 thousand. The effective interest rate for these notes is 7.87%. |
6 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $1,112 thousand, December 31, 2013 — $1,157 thousand and March 31, 2013 — $1,284 thousand. The effective interest rate for these notes is 10.63%. |
7 |
The effective interest rate for these notes is 7.75%. |
8 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $624 thousand, December 31, 2013 — $627 thousand and March 31, 2013 — $633 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 and deferred gains 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 5) available to us as of their 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.
There were no material scheduled debt payments during the first quarter of 2014. However, as described below we purchased $506,366,000 principal amount of outstanding debt through a tender offer in the first quarter of 2014. Scheduled debt payments during 2013 included $10,000,000 in January to retire the 8.70% medium-term note and $140,444,000 in June to retire the 6.30% notes.
In March 2014, we purchased $506,366,000 principal amount of outstanding debt through a tender offer as follows: $374,999,000 of 6.50% notes due in 2016 and $131,367,000 of 6.40% notes due in 2017. This debt purchase was funded by the sale of our cement and concrete businesses in the Florida area as described in Note 16. The March 2014 debt purchases cost $579,659,000, including a $71,829,000 premium above the principal amount of the notes and transaction costs of $1,464,000. The premium primarily reflects the trading prices of the notes relative to par prior to the tender offer commencement. Additionally, we recognized a net benefit of $344,000 associated with the acceleration of a proportional amount of unamortized discounts, deferred gains, deferred financing costs and amounts accumulated in OCI. The combined expense of $72,949,000 is presented in the accompanying Condensed Consolidated Statement of Comprehensive Income as a component of interest expense for the three month period ended March 31, 2014.
Additionally, in March 2014, we amended our $500,000,000 line of credit to, among other things, extend the term from March 2018 to March 2019, eliminate the borrowing capacity governor of eligible accounts receivable and eligible inventory, and provide for the line of credit to become unsecured upon achievement of certain credit metrics and/or credit ratings. Until such metrics/ratings are achieved, the line of credit is secured by accounts receivable and inventory. As of March 31, 2014, our available borrowing capacity was $425,750,000.
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 1.50% to 2.25% based on our total debt to EBITDA ratio, or an alternative rate derived from the lender’s prime rate. Borrowings on our line of credit are classified as short-term due to our intent to repay any borrowings within twelve months. As of March 31, 2014, the applicable margin for LIBOR based borrowing was 2.25%.
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Note 8: Commitments and Contingencies
LETTERS OF CREDIT
We provide, in the normal course of business, certain third party beneficiaries standby letters of credit to support our obligations to pay or perform according to the requirements of an underlying agreement. Such letters of credit typically have an initial term of one year, typically renew automatically, and can only be modified or cancelled with the approval of the beneficiary. All of our letters of credit are issued by banks that participate in our $500,000,000 line of credit, and reduce the borrowing capacity thereunder. We pay a fee for all letters of credit equal to the margin (ranges from 1.50% to 2.25%) applicable to LIBOR based borrowings under the line of credit, plus 0.175%. Our standby letters of credit as of March 31, 2014 are summarized by purpose in the table below:
in thousands |
||
Standby Letters of Credit |
||
Risk management insurance |
$ 32,839 |
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Industrial revenue bond |
14,230 | |
Reclamation/restoration requirements |
6,250 | |
Total |
$ 53,319 |
LITIGATION AND ENVIRONMENTAL MATTERS
We are a defendant in various lawsuits in the ordinary course of business. It is not possible to determine with precision the outcome, or the amount of liability, if any, under these lawsuits, especially where the cases involve possible jury trials with as yet undetermined jury panels.
In addition to these lawsuits in which we are involved in the ordinary course of business, certain other material legal proceedings are more specifically described below. At this time, we cannot determine the likelihood or reasonably estimate a range of loss pertaining to these matters.
Perchloroethylene cases
We are a defendant in cases 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. We are vigorously defending these cases:
§ |
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 8residents 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.” This matter was settled in the first quarter of 2014 for an immaterial amount. We will not report on this case going forward. |
§ |
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. Since no suit has been filed with respect to this issue, we will no longer report on this matter. |
lower passaic river matter
§ |
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 Passaic River (River). As an interim step related to the 2007 AOC, Vulcan and 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. These remedial actions are expected to be completed sometime in 2014. 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. |
Separately, on April 11, 2014, the EPA issued a proposed Focused Feasibility Study (FFS) that calls for a bank-to-bank dredging remedy for the lower 8 miles of the River. The EPA estimates that the cost of implementing this proposal is approximately $950 million to $1.73 billion. The period for public comment on the proposed FFS remains open and may be further extended. After the comments are received, the EPA will issue its final record of decision, probably sometime in 2015.
At this time, our ultimate liability related to this matter is not known because the RI/FS is ongoing and the FFS is not final. The AOC does not obligate us to fund or perform the remedial action contemplated by either the RI/FS or the FFS. Additionally, the Company has found no evidence that it contributed, through its discontinued Chemicals business, any of the primary contaminants of concern to the Passaic River. Therefore, neither the ultimate remedial approach and associated costs, nor the parties who will participate in funding the remediation and their respective allocations have yet been determined.
Based on the facts available at this time, we believe our liability related to any remedial actions is immaterial.
OTHER LITIGATION
§ |
TEXAS BRINE MATTER — During the operation of its former Chemicals Division, Vulcan was the lessee under a salt lease from 1976 – 2005 in an underground salt dome formation in Assumption Parish, Louisiana. The Texas Brine Company operated this salt mine for the account of Vulcan. Vulcan sold its Chemicals Division in 2005 and assigned the lease to the purchaser, and Vulcan has had no association with the leased premises or Texas Brine Company since that time. In August 2012, a sinkhole developed near the salt dome and numerous lawsuits were filed in state court in Assumption Parish, Louisiana. Other lawsuits, including class action litigation, were also filed in August 2012 in federal court in the Eastern District of Louisiana in New Orleans. The plaintiffs in the Federal court class action and Texas Brine have recently announced a proposed settlement for $48.1 million. This proposed settlement is still subject to certain court procedures, including notice to the class, before it can be approved and finalized. We understand that Vulcan will be named as a released party in the settlement agreement, although Texas Brine and its insurers are not themselves releasing Vulcan from their claims for contribution and indemnity against Vulcan. |
There are numerous defendants to the litigation in state and federal court. Vulcan was first brought into the litigation as a third-party defendant in August 2013 by the Texas Brine Company. Vulcan has since been added as a direct and third-party defendant by other parties, including a direct claim by the State of Louisiana. The damages alleged in the litigation range from individual plaintiffs’ claims for property damage, to the State of Louisiana’s claim for response costs, to claims for alleged physical damages to oil pipelines, to various alleged business interruption claims, and to claims for indemnity and contribution from Texas Brine. It is alleged that the sinkhole was caused, in whole or in part, by Vulcan’s negligent actions or failure to act. It is also alleged that Vulcan breached the salt lease, as well as an operating agreement with Texas Brine. Vulcan denies any liability in this matter and will vigorously defend the litigation. We cannot reasonably estimate any liability related to this matter.
It is not possible to predict with certainty the ultimate outcome of these and other legal proceedings in which we are involved, and a number of factors, including developments in ongoing discovery or adverse rulings, or the verdict of a particular jury, could cause actual losses to differ materially from accrued costs. No liability was recorded for claims and litigation for which a loss was determined to be only reasonably possible or for which a loss could not be reasonably estimated. Legal costs incurred in defense of lawsuits are expensed as incurred. In addition, losses on certain claims and litigation described above may be subject to limitations on a per occurrence basis by excess insurance, as described in our most recent Annual Report on Form 10-K.
|
Note 9: Asset Retirement Obligations
Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets.
Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the ARO is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement.
We record all AROs for which we have legal obligations for land reclamation at estimated fair value. Essentially all these AROs relate to our underlying land parcels, including both owned properties and mineral leases. For the three month period ended March 31, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
ARO Operating Costs |
|||||
Accretion |
$ 2,940 |
$ 2,006 |
|||
Depreciation |
997 | 779 | |||
Total |
$ 3,937 |
$ 2,785 |
ARO operating costs are reported in cost of goods sold. AROs are reported within other noncurrent liabilities in our accompanying Condensed Consolidated Balance Sheets.
Reconciliations of the carrying amounts of our AROs are as follows:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Asset Retirement Obligations |
|||||
Balance at beginning of year |
$ 228,234 |
$ 150,072 |
|||
Liabilities incurred |
0 | 0 | |||
Liabilities settled |
(5,250) | (1,292) | |||
Accretion expense |
2,940 | 2,006 | |||
Revisions up (down), net |
(93) | 5,672 | |||
Balance at end of period |
$ 225,831 |
$ 156,458 |
The increase in the carrying amounts of our AROs between the ending balance as of March 31, 2013 and the beginning balance as of January 1, 2014 relates primarily to liabilities incurred during the second quarter of 2013 for reclamation activities required under a development agreement and a conditional use permit at an aggregates facility on owned property in Southern California.
|
Note 10: Benefit 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. In addition to these qualified plans, we sponsor three unfunded, nonqualified pension plans.
Effective July 15, 2007, we amended our defined benefit pension plans to no longer accept new participants. In December 2013, we amended our defined benefit pension plans so that future service accruals for salaried pension participants will cease effective December 31, 2013. This change included a special transition provision which will allow covered compensation through December 31, 2015 to be considered in the participants’ benefit calculations. The amendment resulted in a curtailment and remeasurement of the salaried and nonqualified pension plans as of May 31, 2013 that reduced our 2013 pension expense by approximately $7,600,000 (net of the one-time curtailment loss) of which $800,000 relates to discontinued operations.
The following table sets forth the components of net periodic pension benefit cost:
PENSION BENEFITS |
Three Months Ended |
||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Components of Net Periodic Benefit Cost |
|||||
Service cost |
$ 1,039 |
$ 6,070 |
|||
Interest cost |
11,098 | 10,346 | |||
Expected return on plan assets |
(12,701) | (11,759) | |||
Amortization of prior service cost |
47 | 95 | |||
Amortization of actuarial loss |
2,805 | 6,420 | |||
Net periodic pension benefit cost |
$ 2,288 |
$ 11,172 |
|||
Pretax reclassification from AOCI included in |
|||||
net periodic pension benefit cost |
$ 2,852 |
$ 6,515 |
In addition to pension benefits, we provide certain healthcare and life insurance benefits for 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. In the third quarter of 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.
Prior contributions, along with the existing funding credits, are sufficient to cover required contributions to the qualified plans through 2014. However, we anticipate making an approximate $4,000,000 discretionary pension contribution in 2014.
The following table sets forth the components of net periodic postretirement benefit cost:
OTHER POSTRETIREMENT BENEFITS |
Three Months Ended |
||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Components of Net Periodic Benefit Cost |
|||||
Service cost |
$ 536 |
$ 708 |
|||
Interest cost |
824 | 815 | |||
Curtailment gain |
(3,832) | 0 | |||
Amortization of prior service credit |
(1,082) | (1,216) | |||
Amortization of actuarial loss |
57 | 343 | |||
Net periodic postretirement benefit cost |
$ (3,497) |
$ 650 |
|||
Pretax reclassification from AOCI included in |
|||||
net periodic postretirement benefit cost |
$ (4,857) |
$ (873) |
The reclassifications from AOCI noted in the tables above are related to curtailment gains, amortization of prior service costs or credits and actuarial losses as shown in Note 11.
The March 2014 sale of our cement and concrete businesses in the Florida area (see Note 16) significantly reduced total expected future service of our postretirement plans resulting in a one-time curtailment gain of $3,832,000. This gain was reflected within gain on sale of property, plant & equipment, net in our accompanying Condensed Consolidated Statement of Comprehensive Income.
|
Note 11: other Comprehensive Income
Comprehensive income comprises two subsets: net earnings and other comprehensive income (OCI). The components of other comprehensive income are presented in the accompanying Condensed Consolidated Statements of Comprehensive Income, net of applicable taxes.
Amounts in accumulated other comprehensive income (AOCI), net of tax, are as follows:
March 31 |
December 31 |
March 31 |
||||||||
in thousands |
2014 | 2013 | 2013 | |||||||
AOCI |
||||||||||
Cash flow hedges |
$ (22,193) |
$ (25,178) |
$ (27,316) |
|||||||
Pension and postretirement benefit plans |
(72,733) | (74,453) | (193,915) | |||||||
Total |
$ (94,926) |
$ (99,631) |
$ (221,231) |
Changes in AOCI, net of tax, for the three months ended March 31, 2014 are as follows:
Pension and |
||||||||||
Cash Flow |
Postretirement |
|||||||||
in thousands |
Hedges |
Benefit Plans |
Total |
|||||||
AOCI |
||||||||||
Balance as of December 31, 2013 |
$ (25,178) |
$ (74,453) |
$ (99,631) |
|||||||
Other comprehensive income (loss) |
||||||||||
before reclassifications 1 |
0 | 2,942 | 2,942 | |||||||
Amounts reclassified from AOCI |
2,985 | (1,222) | 1,763 | |||||||
Net current period OCI changes |
2,985 | 1,720 | 4,705 | |||||||
Balance as of March 31, 2014 |
$ (22,193) |
$ (72,733) |
$ (94,926) |
1 |
Remeasurement of the postretirement obligation as a result of the March 2014 sale of our cement and concrete businesses in the Florida area (see Note 16). |
Amounts reclassified from AOCI to earnings, are as follows:
Three Months Ended |
|||||||
March 31 |
|||||||
in thousands |
2014 | 2013 | |||||
Reclassification Adjustment for Cash Flow |
|||||||
Hedges Losses |
|||||||
Interest expense |
$ 4,934 |
$ 1,415 |
|||||
Benefit from income taxes |
(1,949) | (561) | |||||
Total |
$ 2,985 |
$ 854 |
|||||
Amortization of Pension and Postretirement |
|||||||
Plan Actuarial Loss and Prior Service Cost |
|||||||
Cost of goods sold |
$ (1,587) |
$ 4,457 |
|||||
Selling, administrative and general expenses |
(418) | 1,185 | |||||
(Benefit from) provision for income taxes |
783 | (2,210) | |||||
Total |
$ (1,222) |
$ 3,432 |
|||||
Total reclassifications from AOCI to earnings |
$ 1,763 |
$ 4,286 |
|
Note 12: Equity
Our capital stock consists solely of common stock, par value $1.00 per share. Holders of our common stock are entitled to one vote per share. Our Certificate of Incorporation also authorizes preferred stock of which no shares have been issued. The terms and provisions of such shares will be determined by our Board of Directors upon any issuance of preferred shares in accordance with our Certificate of Incorporation.
We occasionally sell shares of common stock to the trustee of our 401(k) retirement plans 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 were as follows:
§ |
three months ended March 31, 2014 — issued 357,039 shares for cash proceeds of $22,808,000 |
§ |
twelve months ended December 31, 2013 — issued 71,208 shares for cash proceeds of $3,821,000 |
§ |
three months ended March 31, 2013 — no shares issued |
Changes in total equity for the three months ended March 31, 2014 are summarized below:
Total |
|||||
in thousands |
Equity |
||||
Balance at December 31, 2013 |
$ 3,938,106 |
||||
Net earnings |
53,995 | ||||
Common stock issued |
|||||
401(k) Trustee |
22,808 | ||||
Share-based compensation plans |
10,719 | ||||
Share-based compensation expense |
4,319 | ||||
Excess tax benefits from share-based compensation |
2,997 | ||||
Cash dividends on common stock ($0.05 per share) |
(6,531) | ||||
Other comprehensive income |
4,705 | ||||
Other |
1 | ||||
Balance at March 31, 2014 |
$ 4,031,119 |
There were no shares held in treasury as of March 31, 2014, December 31, 2013 and March 31, 2013. As of March 31, 2014, 3,411,416 shares may be repurchased under the current purchase authorization of our Board of Directors.
|
Note 13: Segment Reporting
We have four operating (and reportable) segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. The vast majority of our activities are domestic. We sell a relatively small amount of construction aggregates outside the United States. 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. Management reviews earnings from the product line reporting segments principally at the gross profit level.
segment financial disclosure
Three Months Ended |
|||||||
March 31 |
|||||||
in millions |
2014 | 2013 | |||||
Total Revenues |
|||||||
Aggregates 1 |
|||||||
Segment revenues |
$ 404.2 |
$ 359.0 |
|||||
Intersegment sales |
(43.4) | (33.6) | |||||
Net sales |
360.8 | 325.4 | |||||
Concrete 2 |
|||||||
Segment revenues |
96.0 | 99.9 | |||||
Net sales |
96.0 | 99.9 | |||||
Asphalt Mix |
|||||||
Segment revenues |
83.0 | 67.3 | |||||
Net sales |
83.0 | 67.3 | |||||
Cement 3 |
|||||||
Segment revenues |
17.9 | 22.7 | |||||
Intersegment sales |
(9.2) | (10.7) | |||||
Net sales |
8.7 | 12.0 | |||||
Totals |
|||||||
Net sales |
548.5 | 504.6 | |||||
Delivery revenues |
25.9 | 33.6 | |||||
Total revenues |
$ 574.4 |
$ 538.2 |
|||||
Gross Profit |
|||||||
Aggregates |
$ 38.5 |
$ 24.8 |
|||||
Concrete 2 |
(9.2) | (10.0) | |||||
Asphalt Mix |
4.7 | 1.9 | |||||
Cement 3 |
0.1 | 1.0 | |||||
Total |
$ 34.1 |
$ 17.7 |
|||||
Depreciation, Depletion, Accretion |
|||||||
and Amortization (DDA&A) |
|||||||
Aggregates |
$ 54.6 |
$ 55.9 |
|||||
Concrete 2 |
6.0 | 8.0 | |||||
Asphalt Mix |
2.4 | 2.0 | |||||
Cement 3 |
1.1 | 3.9 | |||||
Other |
5.3 | 5.8 | |||||
Total |
$ 69.4 |
$ 75.6 |
|||||
Identifiable Assets 4 |
|||||||
Aggregates |
$ 7,004.2 |
$ 6,737.2 |
|||||
Concrete 2 |
240.4 | 380.4 | |||||
Asphalt Mix |
225.4 | 268.9 | |||||
Cement 3 |
14.6 | 412.2 | |||||
Total identifiable assets |
$ 7,484.6 |
$ 7,798.7 |
|||||
General corporate assets |
118.8 | 91.7 | |||||
Cash items |
268.8 | 188.1 | |||||
Total |
$ 7,872.2 |
$ 8,078.5 |
1 |
Includes crushed stone, sand and gravel, sand, other aggregates, as well as transportation and service revenues associated with the aggregates business. |
2 |
Includes ready-mixed concrete, concrete block, precast concrete, as well as building materials purchased for resale. On March 7, 2014, we sold our concrete business in the Florida area (see Note 16). |
3 |
Includes cement and calcium products. On March 7, 2014, we sold our cement business in the Florida area (see Note 16). |
4 |
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 as the related DDA&A is excluded from segment gross profit. |
|
Note 14: Supplemental Cash Flow Information
Supplemental information referable to our Condensed Consolidated Statements of Cash Flows is summarized below:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Cash Payments |
|||||
Interest (exclusive of amount capitalized) |
$ 83,801 |
$ 1,426 |
|||
Income taxes |
3,209 | 584 | |||
Noncash Investing and Financing Activities |
|||||
Accrued liabilities for purchases of property, plant |
|||||
& equipment |
$ 16,035 |
$ 5,404 |
|
Note 15: Goodwill
Goodwill is recognized when the consideration paid for a business combination (acquisition) exceeds the fair value of the tangible and identifiable 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 three month periods ended March 31, 2014 and 2013.
We have four reportable segments organized around our principal product lines: aggregates, concrete, asphalt mix and cement. There were no changes in the carrying amount of goodwill by reportable segment from December 31, 2013 to March 31, 2014 summarized below:
GOODWILL
in thousands |
Aggregates |
Concrete |
Asphalt Mix |
Cement |
Total |
|||||||||||
Goodwill, Gross Carrying Amount |
||||||||||||||||
Total as of December 31, 2013 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 252,664 |
$ 3,334,185 |
|||||||||||
Total as of March 31, 2014 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 252,664 |
$ 3,334,185 |
|||||||||||
Goodwill, Accumulated Impairment Losses |
||||||||||||||||
Total as of December 31, 2013 |
$ 0 |
$ 0 |
$ 0 |
$ (252,664)
|
$ (252,664) |
|||||||||||
Total as of March 31, 2014 |
$ 0 |
$ 0 |
$ 0 |
$ (252,664)
|
$ (252,664) |
|||||||||||
Goodwill, net of Accumulated Impairment Losses |
||||||||||||||||
Total as of December 31, 2013 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 0 |
$ 3,081,521 |
|||||||||||
Total as of March 31, 2014 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 0 |
$ 3,081,521 |
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.
|
Note 16: Acquisitions and Divestitures
In the first quarter of 2014, we sold our cement and concrete businesses in the Florida area for net pretax cash proceeds of $720,056,000 resulting in a pretax gain of $230,061,000. We retained all of our Florida aggregates operations, our Cement segment’s calcium operation in Brooksville, Florida and real estate associated with certain former ready-mixed concrete facilities. Under a separate supply agreement, we will continue to provide aggregates to the divested concrete facilities, at market prices, for a period of 20 years. As a result of the continuing involvement (supply agreement) and the retained operation and assets, the disposition is not reported as discontinued operations.
Additionally, in the first quarter of 2014, we sold the following Aggregates segment properties:
§ |
a previously mined and subsequently reclaimed tract of land for net pretax cash proceeds of $10,727,000 resulting in a pretax gain of $168,000 |
§ |
unimproved land previously containing a sales yard for net pretax cash proceeds of $5,820,000 resulting in a pretax gain of $5,790,000 |
In 2013, we acquired:
§ |
Fourth quarter — land containing 136 million tons of aggregates reserves at an existing quarry for $117,000,000. We previously mined these reserves under a lease which was scheduled to expire in 2017 |
§ |
Second quarter — an aggregates production facility and four ready-mixed concrete facilities for $29,983,000 |
§ |
First quarter — two aggregates production facilities for $59,968,000. The initial accounting for the business combination was not finalized until the third quarter as appraisals of amortizable intangible assets (contractual rights in place) and property, plant & equipment were not completed. Provisional amounts for contractual rights in place and property, plant & equipment were subsequently adjusted to the appraised values. These adjustments resulted in an increase in contractual rights in place from $800,000 to $3,620,000, an increase in property, plant & equipment from $45,888,000 to $52,583,000, a decrease in goodwill from $9,759,000 to $0 and other minor adjustments to working capital. The Condensed Consolidated Balance Sheet as of March 31, 2013 has been retrospectively adjusted. The Condensed Consolidated Statement of Comprehensive Income has not been retrospectively adjusted as the impact was immaterial |
In 2013, we sold:
§ |
Fourth quarter — mitigation credits for net pretax cash proceeds of $1,463,000 resulting in a pretax gain of $1,377,000 |
§ |
Third quarter — reclaimed land associated with a former site of a ready-mixed concrete facility for net pretax cash proceeds of $11,261,000 resulting in a pretax gain of $9,027,000 |
§ |
Third quarter — a percentage of the future production from aggregates reserves at certain owned quarries. The sale was structured as a volumetric production payment (VPP) for which we received gross cash proceeds of $154,000,000 and incurred transaction costs of $905,000. The net proceeds were recorded as deferred revenue and are amortized on a unit-of-sales basis to revenues over the term of the VPP. See Note 4 for the key terms of the VPP |
§ |
Second quarter — four aggregates production facilities resulting in net pretax cash proceeds of $34,743,000 and a pretax gain of $21,183,000. We allocated $4,521,000 of goodwill to these dispositions based on the relative fair values of the businesses disposed of and the portion of the reporting unit retained |
§ |
First quarter — an aggregates production facility and its related replacement reserve land resulting in net pretax cash proceeds of $5,133,000 and a pretax gain of $2,802,000. We allocated $674,000 of goodwill to this disposition based on the relative fair values of the business disposed of and the portion of the reporting unit retained |
§ |
First quarter — equipment and other personal property from two idled prestress concrete production facilities resulting in net pretax cash proceeds of $622,000 and a pretax gain of $457,000 |
Effective land management is both a business strategy and a social responsibility. We strive to achieve value through our mining activities as well as incremental value through effective post-mining land management. Our land management strategy includes routinely reclaiming and selling our previously mined land. Additionally, this strategy includes developing conservation banks by preserving land as a suitable habitat for endangered or sensitive species. These conservation banks have received approval from the United States Fish and Wildlife Service to offer mitigation credits for sale to third parties who may be required to compensate for the loss of habitats of endangered or sensitive species.
No assets meet the criteria for held for sale at March 31, 2014. As of December 31, 2013 and March 31, 2013, a previously mined and subsequently reclaimed tract of land within our Aggregates segment is presented in the accompanying Condensed Consolidated Balance Sheets as assets held for sale. This land tract sold in the first quarter of 2014. In addition, as of March 31, 2013, reclaimed land associated with a former site of a ready-mixed concrete facility within our Concrete segment is presented in the accompanying Condensed Consolidated Balance Sheet as assets held for sale. This land subsequently sold in the third quarter of 2013. The major classes of assets and liabilities of assets classified as held for sale are as follows:
December 31 |
March 31 |
|||||||
in thousands |
2013 | 2013 | ||||||
Held for Sale |
||||||||
Property, plant & equipment, net |
$ 10,559 |
$ 12,929 |
||||||
Total assets held for sale |
$ 10,559 |
$ 12,929 |
|
Note 17: New Accounting Standards
ACCOUNTING STANDARDS RECENTLY ADOPTED
GUIDANCE ON FINANCIAL STATEMENT PRESENTATION OF UNRECOGNIZED TAX BENEFITS As of and for the interim period ended March 31, 2014, we adopted Accounting Standards Update (ASU) No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." Under this ASU, an unrecognized tax benefit, or portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except when specific conditions are met as outlined in the ASU. When these specific conditions are met, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.
GUIDANCE FOR OBLIGATIONS RESULTING FROM JOINT AND SEVERAL LIABILITY ARRANGEMENTS As of and for the interim period ended March 31, 2014, we adopted ASU 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date." This ASU provides guidance for the recognition, measurement and disclosure of such obligations that are within the scope of the ASU. Obligations within the scope of this ASU include debt arrangements, other contractual obligations and settled litigation and judicial rulings. Under this ASU, an entity (1) recognizes such obligations at the inception of the arrangement, (2) measures such obligations as the sum of (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors and (3) discloses the nature and amount of such obligations as well as other information about those obligations. Our adoption of this standard had no material impact on our financial position, results of operations or liquidity.
TANGIBLE PROPERTY REGULATIONS As of January 1, 2014, the Internal Revenue Service’s new tangible property regulations became effective. These regulations apply to amounts paid to acquire, produce or improve tangible property, as well as dispose of such property. The effect of this tax law change had no material impact on our financial position, results of operations or liquidity.
ACCOUNTING STANDARDS PENDING ADOPTION
DISCONTINUED OPERATIONS REPORTING In April 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” which changes the definition of and expands the disclosure requirements for discontinued operations. Under the new definition, discontinued operations reporting is limited to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The expanded disclosures for discontinued operations are meant to provide users of financial statements with more information about the assets, liabilities, revenues, and expenses of discontinued operations. Additionally, this ASU requires an entity to disclose the pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. This ASU is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. We will adopt this standard as of the interim period ending March 31, 2015.
|
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 and a major producer of asphalt mix and ready-mixed concrete.
BASIS OF PRESENTATION
Our accompanying unaudited condensed consolidated financial statements were prepared in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Our condensed consolidated balance sheet as of December 31, 2013 was derived from the audited financial statement at that date. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three month period ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ended December 31, 2014. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K.
Due to the 2005 sale of our Chemicals business as presented in Note 2, the operating results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2014 presentation.
RESTRICTED CASH
Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements. The escrow accounts are administered by an intermediary. Pursuant to the like-kind exchange agreements, the cash remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Changes in restricted cash balances are reflected as an investment activity in the accompanying Condensed Consolidated Statements of Cash Flows.
RESTRUCTURING CHARGES
In 2012, our Board approved a Profit Enhancement Plan that further leveraged our streamlined management structure and substantially completed ERP and Shared Services platforms to achieve cost reductions and other earnings enhancements. During the first three months of 2013, we incurred $1,509,000 of costs (primarily project design, outside advisory and severance) related to the implementation of this plan. We do not anticipate any future material charges related to this Profit Enhancement Plan.
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:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Weighted-average common shares |
|||||
outstanding |
130,810 | 130,186 | |||
Dilutive effect of |
|||||
Stock options/SOSARs |
693 | 0 | |||
Other stock compensation plans |
811 | 0 | |||
Weighted-average common shares |
|||||
outstanding, assuming dilution |
132,314 | 130,186 |
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 are as follows: three months ended March 31, 2013 — 1,144,000.
The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price is as follows:
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Antidilutive common stock equivalents |
2,373 | 2,907 |
|
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Weighted-average common shares |
|||||
outstanding |
130,810 | 130,186 | |||
Dilutive effect of |
|||||
Stock options/SOSARs |
693 | 0 | |||
Other stock compensation plans |
811 | 0 | |||
Weighted-average common shares |
|||||
outstanding, assuming dilution |
132,314 | 130,186 |
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Antidilutive common stock equivalents |
2,373 | 2,907 |
|
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Discontinued Operations |
|||||
Pretax loss |
$ (842) |
$ (540) |
|||
Gain on disposal, net of transaction bonus |
0 | 11,728 | |||
Income tax (provision) benefit |
332 | (4,405) | |||
Earnings (loss) on discontinued operations, |
|||||
net of income taxes |
$ (510) |
$ 6,783 |
|
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Amortization of deferred revenue |
$ 984 |
$ 253 |
|||
Purchaser's proceeds from sale of production |
(2,944) | (829) | |||
Decrease to net sales and gross margin |
$ (1,960) |
$ (576) |
|
Level 1 |
||||||||
March 31 |
December 31 |
March 31 |
||||||
in thousands |
2014 | 2013 | 2013 | |||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Mutual funds |
$ 14,257 |
$ 15,255 |
$ 13,628 |
|||||
Equities |
15,502 | 12,828 | 11,207 | |||||
Total |
$ 29,759 |
$ 28,083 |
$ 24,835 |
Level 2 |
||||||||
March 31 |
December 31 |
March 31 |
||||||
in thousands |
2014 | 2013 | 2013 | |||||
Fair Value Recurring |
||||||||
Rabbi Trust |
||||||||
Common/collective trust funds |
$ 1,274 |
$ 1,244 |
$ 1,545 |
|||||
Total |
$ 1,274 |
$ 1,244 |
$ 1,545 |
As of March 31, 2014 |
|||||
Impairment |
|||||
in thousands |
Level 2 |
Charges |
|||
Fair Value Nonrecurring |
|||||
Property, plant & equipment |
$ 2,280 |
$ 2,987 |
|||
Total |
$ 2,280 |
$ 2,987 |
|
Three Months Ended |
|||||||
Location on |
March 31 |
||||||
in thousands |
Statement |
2014 | 2013 | ||||
Cash Flow Hedges |
|||||||
Loss reclassified from AOCI |
Interest |
||||||
(effective portion) |
expense |
$ (4,934) |
$ (1,415) |
Three Months Ended |
|||||||
March 31 |
|||||||
in thousands |
2014 | 2013 | |||||
Deferred Gain on Settlement |
|||||||
Amortized to earnings as a reduction |
|||||||
to interest expense |
$ 9,194 |
$ 1,056 |
|
March 31 |
December 31 |
March 31 |
||||||||
in thousands |
2014 | 2013 | 2013 | |||||||
Long-term Debt |
||||||||||
6.30% notes due 2013 1 |
$ 0 |
$ 0 |
$ 140,430 |
|||||||
10.125% notes due 2015 2 |
151,674 | 151,897 | 152,520 | |||||||
6.50% notes due 2016 3 |
127,678 | 511,627 | 514,221 | |||||||
6.40% notes due 2017 4 |
218,578 | 349,907 | 349,892 | |||||||
7.00% notes due 2018 5 |
399,783 | 399,772 | 399,741 | |||||||
10.375% notes due 2018 6 |
248,888 | 248,843 | 248,716 | |||||||
7.50% notes due 2021 7 |
600,000 | 600,000 | 600,000 | |||||||
7.15% notes due 2037 8 |
239,564 | 239,561 | 239,555 | |||||||
Medium-term notes |
6,000 | 6,000 | 6,000 | |||||||
Industrial revenue bonds |
14,000 | 14,000 | 14,000 | |||||||
Other notes |
788 | 806 | 949 | |||||||
Total long-term debt including current maturities |
$ 2,006,953 |
$ 2,522,413 |
$ 2,666,024 |
|||||||
Less current maturities |
171 | 170 | 140,604 | |||||||
Total long-term debt |
$ 2,006,782 |
$ 2,522,243 |
$ 2,525,420 |
|||||||
Estimated fair value of long-term debt |
$ 2,313,964 |
$ 2,820,399 |
$ 2,851,237 |
1 |
Includes decreases for unamortized discounts, as follows: March 31, 2013 — $14 thousand. |
2 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: March 31, 2014 — $1,837 thousand, December 31, 2013 — $2,082 thousand and March 31, 2013 — $2,766 thousand. Additionally, includes decreases for unamortized discounts, as follows: March 31, 2014 — $163 thousand, December 31, 2013 — $185 thousand and March 31, 2013 — $246 thousand. The effective interest rate for these notes is 9.58%. |
3 |
Includes an increase for the unamortized portion of the deferred gain realized upon the August 2011 settlement of interest rate swaps, as follows: March 31, 2014 — $2,677 thousand, December 31, 2013 — $11,627 thousand and March 31, 2013 — $14,221 thousand. The effective interest rate for these notes is 6.00%. |
4 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $55 thousand, December 31, 2013 — $93 thousand and March 31, 2013 — $108 thousand. The effective interest rate for these notes is 7.41%. |
5 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $217 thousand, December 31, 2013 — $228 thousand and March 31, 2013 — $259 thousand. The effective interest rate for these notes is 7.87%. |
6 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $1,112 thousand, December 31, 2013 — $1,157 thousand and March 31, 2013 — $1,284 thousand. The effective interest rate for these notes is 10.63%. |
7 |
The effective interest rate for these notes is 7.75%. |
8 |
Includes decreases for unamortized discounts, as follows: March 31, 2014 — $624 thousand, December 31, 2013 — $627 thousand and March 31, 2013 — $633 thousand. The effective interest rate for these notes is 8.05%. |
|
in thousands |
||
Standby Letters of Credit |
||
Risk management insurance |
$ 32,839 |
|
Industrial revenue bond |
14,230 | |
Reclamation/restoration requirements |
6,250 | |
Total |
$ 53,319 |
|
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
ARO Operating Costs |
|||||
Accretion |
$ 2,940 |
$ 2,006 |
|||
Depreciation |
997 | 779 | |||
Total |
$ 3,937 |
$ 2,785 |
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Asset Retirement Obligations |
|||||
Balance at beginning of year |
$ 228,234 |
$ 150,072 |
|||
Liabilities incurred |
0 | 0 | |||
Liabilities settled |
(5,250) | (1,292) | |||
Accretion expense |
2,940 | 2,006 | |||
Revisions up (down), net |
(93) | 5,672 | |||
Balance at end of period |
$ 225,831 |
$ 156,458 |
|
PENSION BENEFITS |
Three Months Ended |
||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Components of Net Periodic Benefit Cost |
|||||
Service cost |
$ 1,039 |
$ 6,070 |
|||
Interest cost |
11,098 | 10,346 | |||
Expected return on plan assets |
(12,701) | (11,759) | |||
Amortization of prior service cost |
47 | 95 | |||
Amortization of actuarial loss |
2,805 | 6,420 | |||
Net periodic pension benefit cost |
$ 2,288 |
$ 11,172 |
|||
Pretax reclassification from AOCI included in |
|||||
net periodic pension benefit cost |
$ 2,852 |
$ 6,515 |
OTHER POSTRETIREMENT BENEFITS |
Three Months Ended |
||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Components of Net Periodic Benefit Cost |
|||||
Service cost |
$ 536 |
$ 708 |
|||
Interest cost |
824 | 815 | |||
Curtailment gain |
(3,832) | 0 | |||
Amortization of prior service credit |
(1,082) | (1,216) | |||
Amortization of actuarial loss |
57 | 343 | |||
Net periodic postretirement benefit cost |
$ (3,497) |
$ 650 |
|||
Pretax reclassification from AOCI included in |
|||||
net periodic postretirement benefit cost |
$ (4,857) |
$ (873) |
|
March 31 |
December 31 |
March 31 |
||||||||
in thousands |
2014 | 2013 | 2013 | |||||||
AOCI |
||||||||||
Cash flow hedges |
$ (22,193) |
$ (25,178) |
$ (27,316) |
|||||||
Pension and postretirement benefit plans |
(72,733) | (74,453) | (193,915) | |||||||
Total |
$ (94,926) |
$ (99,631) |
$ (221,231) |
Pension and |
||||||||||
Cash Flow |
Postretirement |
|||||||||
in thousands |
Hedges |
Benefit Plans |
Total |
|||||||
AOCI |
||||||||||
Balance as of December 31, 2013 |
$ (25,178) |
$ (74,453) |
$ (99,631) |
|||||||
Other comprehensive income (loss) |
||||||||||
before reclassifications 1 |
0 | 2,942 | 2,942 | |||||||
Amounts reclassified from AOCI |
2,985 | (1,222) | 1,763 | |||||||
Net current period OCI changes |
2,985 | 1,720 | 4,705 | |||||||
Balance as of March 31, 2014 |
$ (22,193) |
$ (72,733) |
$ (94,926) |
1 |
Remeasurement of the postretirement obligation as a result of the March 2014 sale of our cement and concrete businesses in the Florida area (see Note 16). |
Three Months Ended |
|||||||
March 31 |
|||||||
in thousands |
2014 | 2013 | |||||
Reclassification Adjustment for Cash Flow |
|||||||
Hedges Losses |
|||||||
Interest expense |
$ 4,934 |
$ 1,415 |
|||||
Benefit from income taxes |
(1,949) | (561) | |||||
Total |
$ 2,985 |
$ 854 |
|||||
Amortization of Pension and Postretirement |
|||||||
Plan Actuarial Loss and Prior Service Cost |
|||||||
Cost of goods sold |
$ (1,587) |
$ 4,457 |
|||||
Selling, administrative and general expenses |
(418) | 1,185 | |||||
(Benefit from) provision for income taxes |
783 | (2,210) | |||||
Total |
$ (1,222) |
$ 3,432 |
|||||
Total reclassifications from AOCI to earnings |
$ 1,763 |
$ 4,286 |
|
Total |
|||||
in thousands |
Equity |
||||
Balance at December 31, 2013 |
$ 3,938,106 |
||||
Net earnings |
53,995 | ||||
Common stock issued |
|||||
401(k) Trustee |
22,808 | ||||
Share-based compensation plans |
10,719 | ||||
Share-based compensation expense |
4,319 | ||||
Excess tax benefits from share-based compensation |
2,997 | ||||
Cash dividends on common stock ($0.05 per share) |
(6,531) | ||||
Other comprehensive income |
4,705 | ||||
Other |
1 | ||||
Balance at March 31, 2014 |
$ 4,031,119 |
|
Three Months Ended |
|||||||
March 31 |
|||||||
in millions |
2014 | 2013 | |||||
Total Revenues |
|||||||
Aggregates 1 |
|||||||
Segment revenues |
$ 404.2 |
$ 359.0 |
|||||
Intersegment sales |
(43.4) | (33.6) | |||||
Net sales |
360.8 | 325.4 | |||||
Concrete 2 |
|||||||
Segment revenues |
96.0 | 99.9 | |||||
Net sales |
96.0 | 99.9 | |||||
Asphalt Mix |
|||||||
Segment revenues |
83.0 | 67.3 | |||||
Net sales |
83.0 | 67.3 | |||||
Cement 3 |
|||||||
Segment revenues |
17.9 | 22.7 | |||||
Intersegment sales |
(9.2) | (10.7) | |||||
Net sales |
8.7 | 12.0 | |||||
Totals |
|||||||
Net sales |
548.5 | 504.6 | |||||
Delivery revenues |
25.9 | 33.6 | |||||
Total revenues |
$ 574.4 |
$ 538.2 |
|||||
Gross Profit |
|||||||
Aggregates |
$ 38.5 |
$ 24.8 |
|||||
Concrete 2 |
(9.2) | (10.0) | |||||
Asphalt Mix |
4.7 | 1.9 | |||||
Cement 3 |
0.1 | 1.0 | |||||
Total |
$ 34.1 |
$ 17.7 |
|||||
Depreciation, Depletion, Accretion |
|||||||
and Amortization (DDA&A) |
|||||||
Aggregates |
$ 54.6 |
$ 55.9 |
|||||
Concrete 2 |
6.0 | 8.0 | |||||
Asphalt Mix |
2.4 | 2.0 | |||||
Cement 3 |
1.1 | 3.9 | |||||
Other |
5.3 | 5.8 | |||||
Total |
$ 69.4 |
$ 75.6 |
|||||
Identifiable Assets 4 |
|||||||
Aggregates |
$ 7,004.2 |
$ 6,737.2 |
|||||
Concrete 2 |
240.4 | 380.4 | |||||
Asphalt Mix |
225.4 | 268.9 | |||||
Cement 3 |
14.6 | 412.2 | |||||
Total identifiable assets |
$ 7,484.6 |
$ 7,798.7 |
|||||
General corporate assets |
118.8 | 91.7 | |||||
Cash items |
268.8 | 188.1 | |||||
Total |
$ 7,872.2 |
$ 8,078.5 |
1 |
Includes crushed stone, sand and gravel, sand, other aggregates, as well as transportation and service revenues associated with the aggregates business. |
2 |
Includes ready-mixed concrete, concrete block, precast concrete, as well as building materials purchased for resale. On March 7, 2014, we sold our concrete business in the Florida area (see Note 16). |
3 |
Includes cement and calcium products. On March 7, 2014, we sold our cement business in the Florida area (see Note 16). |
4 |
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 as the related DDA&A is excluded from segment gross profit. |
|
Three Months Ended |
|||||
March 31 |
|||||
in thousands |
2014 | 2013 | |||
Cash Payments |
|||||
Interest (exclusive of amount capitalized) |
$ 83,801 |
$ 1,426 |
|||
Income taxes |
3,209 | 584 | |||
Noncash Investing and Financing Activities |
|||||
Accrued liabilities for purchases of property, plant |
|||||
& equipment |
$ 16,035 |
$ 5,404 |
|
in thousands |
Aggregates |
Concrete |
Asphalt Mix |
Cement |
Total |
|||||||||||
Goodwill, Gross Carrying Amount |
||||||||||||||||
Total as of December 31, 2013 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 252,664 |
$ 3,334,185 |
|||||||||||
Total as of March 31, 2014 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 252,664 |
$ 3,334,185 |
|||||||||||
Goodwill, Accumulated Impairment Losses |
||||||||||||||||
Total as of December 31, 2013 |
$ 0 |
$ 0 |
$ 0 |
$ (252,664)
|
$ (252,664) |
|||||||||||
Total as of March 31, 2014 |
$ 0 |
$ 0 |
$ 0 |
$ (252,664)
|
$ (252,664) |
|||||||||||
Goodwill, net of Accumulated Impairment Losses |
||||||||||||||||
Total as of December 31, 2013 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 0 |
$ 3,081,521 |
|||||||||||
Total as of March 31, 2014 |
$ 2,989,888 |
$ 0 |
$ 91,633 |
$ 0 |
$ 3,081,521 |
|
December 31 |
March 31 |
|||||||
in thousands |
2013 | 2013 | ||||||
Held for Sale |
||||||||
Property, plant & equipment, net |
$ 10,559 |
$ 12,929 |
||||||
Total assets held for sale |
$ 10,559 |
$ 12,929 |
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