þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
New Jersey | 20-8579133 | |
(State or other jurisdiction | (I.R.S. Employer | |
of incorporation) | Identification No.) | |
1200 Urban Center Drive, Birmingham, Alabama | 35242 | |
(Address of principal executive offices) | (zip code) |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Shares outstanding | ||
Class | at June 30, 2008 | |
Common Stock, $1 Par Value | 109,834,181 |
2
(Amounts in thousands) | ||||||||||||
June 30 | December 31 | June 30 | ||||||||||
(Condensed and unaudited) | 2008 | 2007 | 2007 | |||||||||
Assets |
||||||||||||
Cash and cash equivalents |
$ | 151,210 | $ | 34,888 | $ | 34,593 | ||||||
Accounts and notes receivable: |
||||||||||||
Accounts and notes receivable, gross |
530,759 | 427,876 | 464,165 | |||||||||
Less: Allowance for doubtful accounts |
(7,456 | ) | (6,015 | ) | (3,246 | ) | ||||||
Accounts and notes receivable, net |
523,303 | 421,861 | 460,919 | |||||||||
Inventories: |
||||||||||||
Finished products |
309,868 | 286,591 | 251,486 | |||||||||
Raw materials |
29,009 | 28,330 | 11,803 | |||||||||
Products in process |
3,113 | 4,115 | 2,494 | |||||||||
Operating supplies and other |
41,510 | 37,282 | 20,329 | |||||||||
Inventories |
383,500 | 356,318 | 286,112 | |||||||||
Deferred income taxes |
62,074 | 44,210 | 18,531 | |||||||||
Prepaid expenses |
19,392 | 40,177 | 14,711 | |||||||||
Assets held for sale |
| 259,775 | | |||||||||
Total current assets |
1,139,479 | 1,157,229 | 814,866 | |||||||||
Investments and long-term receivables |
24,265 | 25,445 | 5,004 | |||||||||
Property, plant and equipment: |
||||||||||||
Property, plant and equipment, cost |
6,047,065 | 5,805,789 | 4,119,748 | |||||||||
Less: Reserve for depr., depl. & amort. |
(2,325,181 | ) | (2,185,695 | ) | (2,114,125 | ) | ||||||
Property, plant and equipment, net |
3,721,884 | 3,620,094 | 2,005,623 | |||||||||
Goodwill |
3,895,267 | 3,789,091 | 650,205 | |||||||||
Other assets |
353,587 | 344,511 | 213,951 | |||||||||
Total assets |
$ | 9,134,482 | $ | 8,936,370 | $ | 3,689,649 | ||||||
Liabilities and Shareholders Equity |
||||||||||||
Current maturities of long-term debt |
$ | 330,081 | $ | 35,181 | $ | 727 | ||||||
Short-term borrowings |
1,209,500 | 2,091,500 | 224,000 | |||||||||
Trade payables and accruals |
215,835 | 219,548 | 161,032 | |||||||||
Other current liabilities |
178,775 | 175,649 | 126,350 | |||||||||
Liabilities of assets held for sale |
| 6,309 | | |||||||||
Total current liabilities |
1,934,191 | 2,528,187 | 512,109 | |||||||||
Long-term debt |
2,183,584 | 1,529,828 | 321,365 | |||||||||
Deferred income taxes |
685,432 | 671,518 | 293,199 | |||||||||
Other noncurrent liabilities |
415,096 | 446,827 | 340,386 | |||||||||
Minority interest |
410 | 410 | | |||||||||
Total liabilities |
5,218,713 | 5,176,770 | 1,467,059 | |||||||||
Other commitments and contingencies (Notes 13 & 19) |
||||||||||||
Shareholders equity: |
||||||||||||
Common stock, $1 par value |
109,834 | 108,234 | 139,705 | |||||||||
Capital in excess of par value |
1,702,946 | 1,607,865 | 248,153 | |||||||||
Retained earnings |
2,129,554 | 2,083,718 | 3,124,385 | |||||||||
Accumulated other comprehensive income (loss) |
(26,565 | ) | (40,217 | ) | 2,924 | |||||||
Treasury stock at cost |
| | (1,292,577 | ) | ||||||||
Shareholders equity |
3,915,769 | 3,759,600 | 2,222,590 | |||||||||
Total liabilities and shareholders equity |
$ | 9,134,482 | $ | 8,936,370 | $ | 3,689,649 | ||||||
3
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
(Condensed and unaudited) | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Net sales |
$ | 965,957 | $ | 807,818 | $ | 1,737,718 | $ | 1,438,005 | ||||||||
Delivery revenues |
55,594 | 71,026 | 101,172 | 128,026 | ||||||||||||
Total revenues |
1,021,551 | 878,844 | 1,838,890 | 1,566,031 | ||||||||||||
Cost of goods sold |
720,731 | 522,585 | 1,338,042 | 985,577 | ||||||||||||
Delivery costs |
55,594 | 71,026 | 101,172 | 128,026 | ||||||||||||
Cost of revenues |
776,325 | 593,611 | 1,439,214 | 1,113,603 | ||||||||||||
Gross profit |
245,226 | 285,233 | 399,676 | 452,428 | ||||||||||||
Selling, administrative and general expenses |
84,781 | 71,308 | 177,357 | 145,710 | ||||||||||||
Gain on sale of property, plant & equipment and
businesses, net |
80,498 | 4,852 | 84,443 | 51,239 | ||||||||||||
Other operating expense, net |
2,613 | 1,544 | 1,817 | 3,578 | ||||||||||||
Minority interest in losses of a consolidated
subsidiary |
139 | | 283 | | ||||||||||||
Operating earnings |
238,469 | 217,233 | 305,228 | 354,379 | ||||||||||||
Other income (expense), net |
3,444 | (113 | ) | 792 | 1,089 | |||||||||||
Interest income |
997 | 1,117 | 1,669 | 2,440 | ||||||||||||
Interest expense |
38,193 | 8,091 | 81,652 | 14,726 | ||||||||||||
Earnings from continuing operations before
income taxes |
204,717 | 210,146 | 226,037 | 343,182 | ||||||||||||
Provision for income taxes |
63,492 | 66,465 | 70,327 | 110,162 | ||||||||||||
Earnings from continuing operations |
141,225 | 143,681 | 155,710 | 233,020 | ||||||||||||
Discontinued operations (Note 3): |
||||||||||||||||
Loss from results of discontinued
operations |
(784 | ) | (2,787 | ) | (1,704 | ) | (3,564 | ) | ||||||||
Income tax benefit |
314 | 1,117 | 682 | 1,429 | ||||||||||||
Loss on discontinued operations, net of tax |
(470 | ) | (1,670 | ) | (1,022 | ) | (2,135 | ) | ||||||||
Net earnings |
$ | 140,755 | $ | 142,011 | $ | 154,688 | $ | 230,885 | ||||||||
Basic earnings (loss) per share: |
||||||||||||||||
Earnings from continuing operations |
$ | 1.28 | $ | 1.50 | $ | 1.42 | $ | 2.44 | ||||||||
Discontinued operations |
| (0.01 | ) | | (0.02 | ) | ||||||||||
Net earnings per share |
$ | 1.28 | $ | 1.49 | $ | 1.42 | $ | 2.42 | ||||||||
Diluted earnings (loss) per share: |
||||||||||||||||
Earnings from continuing operations |
$ | 1.27 | $ | 1.46 | $ | 1.41 | $ | 2.38 | ||||||||
Discontinued operations |
| (0.01 | ) | (0.01 | ) | (0.02 | ) | |||||||||
Net earnings per share |
$ | 1.27 | $ | 1.45 | $ | 1.40 | $ | 2.36 | ||||||||
Weighted-average common shares outstanding: |
||||||||||||||||
Basic |
109,922 | 95,578 | 109,286 | 95,376 | ||||||||||||
Assuming dilution |
111,117 | 98,157 | 110,515 | 98,023 | ||||||||||||
Cash dividends declared per share of common stock |
$ | 0.49 | $ | 0.46 | $ | 0.98 | $ | 0.92 | ||||||||
Depreciation, depletion, accretion and amortization
from continuing operations |
$ | 96,919 | $ | 63,903 | $ | 192,775 | $ | 124,705 | ||||||||
Effective tax rate from continuing operations |
31.0 | % | 31.6 | % | 31.1 | % | 32.1 | % |
4
(Amounts in thousands) | ||||||||
Six Months Ended | ||||||||
June 30 | ||||||||
(Condensed and unaudited) | 2008 | 2007 | ||||||
Operating Activities |
||||||||
Net earnings |
$ | 154,688 | $ | 230,885 | ||||
Adjustments to reconcile net earnings to
net cash provided by operating activities: |
||||||||
Depreciation, depletion, accretion and amortization |
192,775 | 124,705 | ||||||
Net gain on sale of property, plant & equipment and businesses |
(84,443 | ) | (51,239 | ) | ||||
Contributions to pension plans |
(1,593 | ) | (584 | ) | ||||
Share-based compensation |
9,169 | 8,282 | ||||||
Increase in assets before initial effects of business
acquisitions and dispositions |
(81,985 | ) | (113,828 | ) | ||||
Increase (decrease) in liabilities before initial effects of business
acquisitions and dispositions |
(623 | ) | 19,570 | |||||
Other, net |
(6,566 | ) | 148 | |||||
Net cash provided by operating activities |
181,422 | 217,939 | ||||||
Investing Activities |
||||||||
Purchases of property, plant and equipment |
(246,027 | ) | (234,800 | ) | ||||
Proceeds from sale of property, plant & equipment |
13,576 | 55,492 | ||||||
Proceeds from sale of businesses |
225,783 | 8,418 | ||||||
Payment for businesses acquired, net of acquired cash |
(79,822 | ) | (58,861 | ) | ||||
Decrease in investments and long-term receivables |
578 | 1,660 | ||||||
Proceeds from loan on life insurance policies |
28,646 | | ||||||
Withdrawal from nonconsolidated companies, net |
469 | | ||||||
Other, net |
4,430 | 718 | ||||||
Net cash used for investing activities |
(52,367 | ) | (227,373 | ) | ||||
Financing Activities |
||||||||
Net short-term borrowings (payments) |
(882,000 | ) | 25,100 | |||||
Payment of short-term debt and current maturities |
(483 | ) | (367 | ) | ||||
Proceeds from issuance of long-term debt, net of discounts |
949,078 | | ||||||
Debt issuance cost |
(5,633 | ) | | |||||
Settlements of forward starting swaps |
(32,474 | ) | | |||||
Purchases of common stock |
| (4,800 | ) | |||||
Proceeds from issuance of common stock |
55,072 | | ||||||
Dividends paid |
(106,976 | ) | (87,610 | ) | ||||
Proceeds from exercise of stock options |
6,850 | 32,963 | ||||||
Excess tax benefits from share-based compensation |
3,605 | 23,511 | ||||||
Other, net |
228 | | ||||||
Net cash used for financing activities |
(12,733 | ) | (11,203 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
116,322 | (20,637 | ) | |||||
Cash and cash equivalents at beginning of year |
34,888 | 55,230 | ||||||
Cash and cash equivalents at end of period |
$ | 151,210 | $ | 34,593 | ||||
5
1. | Basis of Presentation | |
Our accompanying unaudited condensed consolidated financial statements have been 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. 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 six month period ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ended December 31, 2008. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K. | ||
On November 16, 2007, we acquired 100% of the outstanding common stock of Florida Rock Industries Inc. (Florida Rock). Accordingly, the financial position, results of operations and cash flows for Florida Rock operations are reflected in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 and the Condensed Consolidated Statements of Earnings and Cash Flows for the three and six months ended June 30, 2008. | ||
Due to the 2005 sale of our Chemicals business, as presented in Note 3, the operating results of the Chemicals business have been presented as discontinued operations in the accompanying Condensed Consolidated Statements of Earnings. | ||
2. | Accounting Changes | |
FAS 157 On January 1, 2008, we adopted Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements (FAS 157) with respect to financial assets and liabilities and elected to defer our adoption of FAS 157 for nonfinancial assets and liabilities as permitted by Financial Accounting Standards Board (FASB) Staff Position No. FAS 157-2 (FSP FAS 157-2). FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of FAS 157 for financial assets and liabilities had no effect on our financial position, results of operations or cash flows. See Note 7 for disclosures related to financial assets and liabilities pursuant to the requirements of FAS 157. We will adopt FAS 157 for nonfinancial assets and liabilities on January 1, 2009, and currently are evaluating the impact such adoption will have on our financial statements. | ||
FAS 158 On January 1, 2008, we adopted the measurement date provision of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) (FAS 158). In addition to the recognition provisions (which we adopted December 31, 2006), FAS 158 requires an employer to measure the plan assets and benefit obligations as of the date of its year-end balance sheet. This requirement is effective for fiscal years ending after December 15, 2008. Upon adopting the measurement date provision, we remeasured plan assets and benefit obligations as of January 1, 2008, pursuant to the transition requirements of FAS 158. The transition adjustment resulted in an increase to noncurrent assets of $15,011,000, an increase to noncurrent liabilities of $2,238,000, an increase to deferred tax liabilities of $5,104,000, a decrease to retained earnings of $1,312,000 and a credit to accumulated other comprehensive income, net of tax, of $8,981,000. |
6
3. | Discontinued Operations | |
In June 2005, we sold substantially all the assets of our Chemicals business, known as Vulcan Chemicals, to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. These assets consisted primarily of chloralkali facilities in Wichita, Kansas; Geismar, Louisiana and Port Edwards, Wisconsin; and the facilities of our Chloralkali joint venture located in Geismar. Basic Chemicals also assumed certain liabilities relating to the Chemicals business, including the obligation to monitor and remediate hazardous materials at or from the Wichita, Geismar and Port Edwards plant facilities. The decision to sell the Chemicals business was based on our desire to focus our resources on the Construction Materials business. | ||
In consideration for the sale of the Chemicals business, Basic Chemicals made an initial cash payment of $214,000,000 and agreed to make contingent cash payments under two separate earn-out agreements. Concurrent with the sale transaction, we acquired the minority partners 49% interest in the joint venture for an initial cash payment of $62,701,000, and conveyed such interest to Basic Chemicals. The net initial cash proceeds of $151,299,000 were subject to adjustments for actual working capital balances at the closing date, transaction costs and income taxes. In 2006 we received additional cash proceeds of $10,202,000 related to adjustments for the actual working capital balance at the closing date. | ||
Basic Chemicals has completed payments under one of the earn-out agreements and is required to make additional payments under a separate earn-out agreement subject to certain conditions. The first earn-out agreement was based on ECU (electrochemical unit) and natural gas prices during the five-year period beginning July 1, 2005, and was capped at $150,000,000 (ECU earn-out or ECU derivative). During 2007, we received the final payment under the ECU earn-out of $22,142,000, bringing cumulative cash receipts to the $150,000,000 cap. The ECU earn-out was accounted for as a derivative instrument; accordingly, it was reported at fair value. Changes to the fair value of the ECU derivative were recorded within continuing operations pursuant to the Securities and Exchange Commission (SEC) Staff Accounting Bulletin Topic 5:Z:5, Classification and Disclosure of Contingencies Relating to Discontinued Operations (SAB Topic 5:Z:5). Proceeds under the second earn-out agreement are determined 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). Under this earn-out agreement, cash plant margin for 5CP, as defined in the Asset Purchase Agreement, in excess of an annual threshold amount is shared equally between Vulcan and Basic Chemicals. The primary determinant of the value for this earn-out is the level of growth in 5CP sales volume. | ||
The carrying amounts of the ECU and 5CP earn-outs are reflected in accounts and notes receivable and other noncurrent assets in the accompanying Condensed Consolidated Balance Sheets. The carrying amount of the ECU earn-out as of June 30, 2007 was $22,141,000 (classified entirely as current). During 2007, we recognized gains related to changes in the fair value of the ECU earn-out of $1,929,000 (which was reflected as a component of other income, net in our Condensed Consolidated Statements of Earnings for the six months ended June 30, 2007). | ||
In March 2008, we received a payment of $10,014,000 under the 5CP earn-out related to the year ended December 31, 2007. During 2007, we received a payment of $8,418,000 related to the year ended December 31, 2006. The carrying amount of the 5CP earn-out was as follows: June 30, 2008 $10,814,000 (of which $9,737,000 was current), December 31, 2007 $20,828,000 (of which $8,799,000 was current) and June 30, 2007 $20,828,000 (of which $8,895,000 was current). | ||
At the closing date, the fair value of the consideration received in connection with the sale of the Chemicals business, including anticipated cash flows from the two earn-out agreements, was expected to exceed the net carrying value of the assets and liabilities sold. However, pursuant to |
7
SFAS No. 5, Accounting for Contingencies, since the proceeds under the earn-out agreements were contingent in nature, no gain was recognized on the Chemicals sale and the value recorded at the June 7, 2005 closing date referable to these two earn-outs was limited to $128,167,000. Furthermore, under SAB Topic 5:Z:5, upward adjustments to the fair value of the ECU earn-out subsequent to closing, which totaled $51,070,000, were reported in continuing operations, and therefore did not contribute to the gain or loss on the sale of the Chemicals business. Ultimately, any gain or loss on disposal of the Chemicals business will be recognized to the extent future cash receipts under the 5CP earn-out related to the remaining five-year performance period from January 1, 2008 to December 31, 2012 exceed or fall short of its $10,814,000 carrying amount. | ||
We potentially are liable for a cash transaction bonus payable in the future to certain key former Chemicals employees. This transaction bonus will be payable only if cash receipts realized from the two earn-out agreements described above exceed an established minimum threshold. Amounts due would be payable annually based on the prior years results. Based on our current estimate of 2008 results, the 2009 payout is projected to be $500,000. As such, we have accrued $250,000 as of June 30, 2008, representing the prorata portion of the estimated 2009 payout. Future expense, if any, is dependent upon our receiving sufficient cash receipts under the remaining earn-out and will be accrued in the period the bonus is earned, the year prior to payment. | ||
Under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (FAS 144), the financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Earnings for all periods presented. | ||
There were no net sales or revenues from discontinued operations during the six month periods ended June 30, 2008 or June 30, 2007. Pretax losses from discontinued operations are as follows (in thousands of dollars): |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Pretax loss |
$ | (784 | ) | $ | (2,787 | ) | $ | (1,704 | ) | $ | (3,564 | ) |
The pretax losses primarily reflect charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals businesses. Additionally, the three and six month pretax losses for 2008 include $250,000 related to the cash transaction bonus as noted above. | ||
4. | 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 of shares): |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Weighted-average common shares outstanding |
109,922 | 95,578 | 109,286 | 95,376 | ||||||||||||
Dilutive effect of: |
||||||||||||||||
Stock options |
991 | 2,136 | 993 | 2,177 | ||||||||||||
Other |
204 | 443 | 236 | 470 | ||||||||||||
Weighted-average common shares outstanding,
assuming dilution |
111,117 | 98,157 | 110,515 | 98,023 | ||||||||||||
8
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. The number of antidilutive common stock equivalents are as follows (in thousands of shares): |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Antidilutive common stock equivalents |
804 | 407 | 804 | 407 |
5. | Income Taxes | |
Our effective tax rate is based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual tax rate based on projected taxable income for the full year and record a quarterly income tax provision in accordance with the anticipated annual rate. As the year progresses, we refine the estimates of the years taxable income as new information becomes available, including year-to-date financial results. This continual estimation process often results in a change to our expected effective tax rate for the year. When this occurs, we adjust the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate. Significant judgment is required in determining our effective tax rate and in evaluating our tax positions. | ||
In accordance with our January 1, 2007 adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, 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 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 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 effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management. | ||
The 2008 second quarter effective tax rate from continuing operations of 31.0% was down 0.6% from the 31.6% 2007 second quarter rate. The effective tax rate from continuing operations for the six months ended June 30, 2008 was 31.1%, down from the 32.1% rate during the same period of 2007. Both of these decreases result primarily from a greater favorable effect of statutory depletion. | ||
6. | 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. | ||
In December 2007, we issued $325,000,000 of 3-year floating (variable) rate notes that bear interest at 3-month London Interbank Offered Rate (LIBOR) plus 1.25% per annum. Concurrently, we entered into an interest rate swap agreement with a counterparty in the stated (notional) amount of $325,000,000. Under this agreement, we pay a fixed interest rate of 5.25% and receive 3-month LIBOR plus 1.25% per annum from the counterparty. We have designated this interest rate swap agreement as a cash flow hedge of the interest payments on the $325,000,000 of 3-year floating rate notes. The interest rate swap agreement is scheduled to terminate December 15, 2010, coinciding with the maturity of the $325,000,000 of 3-year floating rate notes. Concurrent with each quarterly |
9
interest payment, the portion of this swap related to that interest payment is settled and the associated realized gain or loss is recognized. At June 30, 2008, we recognized a liability of $2,788,000 equal to the fair value of this swap (included in other noncurrent liabilities), and an accumulated other comprehensive loss of $1,685,000, net of tax of $1,103,000, equal to the highly effective portion of this swap. At December 31, 2007, we recognized a liability of $1,099,000 equal to the fair value of this swap (included in other noncurrent liabilities), and an accumulated other comprehensive loss of $664,000, net of tax of $435,000, equal to the highly effective portion of this swap. | ||
Additionally, during 2007, we entered into fifteen forward starting interest rate swap agreements for a total notional amount of $1,500,000,000. The objective of these swap agreements was to hedge against the variability of future interest payments attributable to changes in interest rates on a portion of the then anticipated fixed-rate debt issuance in 2007 to fund the cash portion of the Florida Rock acquisition. We entered into five 5-year swap agreements with a blended swap rate of 5.29% on an aggregate notional amount of $500,000,000, seven 10-year swap agreements with a blended swap rate of 5.51% on an aggregate notional amount of $750,000,000 and three 30-year swap agreements with a blended swap rate of 5.58% on an aggregate notional amount of $250,000,000. On December 11, 2007, upon the issuance of the related fixed-rate debt, we terminated and settled for a cash payment of $57,303,000 a portion of these forward starting swaps with an aggregate notional amount of $900,000,000 ($300,000,000 5-year, $350,000,000 10-year and $250,000,000 30-year). Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), amounts accumulated in other comprehensive loss totaling $31,738,000, net of tax of $20,791,000, as of June 30, 2008 related to the effective portion of these cash flow hedges will be amortized to interest expense over the remaining term of the related debt. | ||
In December 2007, the remaining forward starting swaps were extended to August 29, 2008, and were composed of two 5-year swap agreements with a blended swap rate of 5.71% on an aggregate notional amount of $200,000,000 and four 10-year swap agreements with a blended swap rate of 5.65% on an aggregate notional amount of $400,000,000. These remaining forward starting swap agreements were designated as cash flow hedges against the variability of future interest payments attributable to changes in interest rates on the then anticipated fixed-rate long-term debt to be issued during 2008. On June 20, 2008, upon the issuance of $650,000,000 of related fixed-rate debt, we terminated and settled for a cash payment of $32,474,000 the remaining forward starting swaps. Pursuant to FAS 133, amounts accumulated in other comprehensive loss totaling $18,618,000, net of tax of $12,197,000, as of June 30, 2008 related to the effective portion of these cash flow hedges will be amortized to interest expense over the remaining term of the related debt. At December 31, 2007, we recognized a liability of $41,312,000 equal to the fair value of these swaps (included in other noncurrent liabilities), and an accumulated other comprehensive loss of $22,711,000, net of tax of $14,867,000, equal to the highly effective portion of these swaps. | ||
During the six months ended June 30, 2008, we recognized a gain of $2,169,000 (included in other income (expense), net) due to hedge ineffectiveness related to the forward-starting interest rate swap agreements. There was no impact to earnings due to hedge ineffectiveness during the six months ended June 30, 2007. | ||
In connection with the sale of our Chemicals business, we entered into an earn-out agreement that required the purchaser, Basic Chemicals, to make payments capped at $150,000,000 based on ECU (electrochemical unit) and natural gas prices during the five-year period beginning July 1, 2005. We did not designate the ECU earn-out as a hedging instrument and, accordingly, gains and losses resulting from changes in the fair value were recognized in current earnings. Further, pursuant to SAB Topic 5:Z:5, changes in fair value were recognized in continuing operations. During the third quarter of 2007, we received the final payment under the ECU earn-out of $22,142,000, bringing |
10
cumulative cash receipts to the $150,000,000 cap. During the three and six month periods ended June 30, 2007, we recorded gains referable to the ECU earn-out of $1,229,000 and $1,929,000, respectively, which are reflected in other income, net of other charges, in our accompanying Condensed Consolidated Statements of Earnings. | ||
7. | Fair Value Measurements | |
On January 1, 2008, we adopted FAS 157 for financial assets and liabilities as described in Note 2. Fair value under FAS 157 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. FAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: |
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. |
The following table presents a summary of our financial assets and liabilities as of June 30, 2008 that are subject to fair value measurement on a recurring basis (in thousands of dollars): |
Quoted | ||||||||||||||||
Prices in | ||||||||||||||||
Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Foreign currency derivative |
$ | 32 | $ | | $ | 32 | $ | | ||||||||
Interest rate derivative |
(2,788 | ) | | (2,788 | ) | | ||||||||||
Net liability |
$ | (2,756 | ) | $ | | $ | (2,756 | ) | $ | | ||||||
The foreign currency derivative consists of a forward foreign currency exchange contract and is measured at fair value based on the foreign currency spot rate from an actively quoted market. The interest rate derivative consists of an interest rate swap agreement as more fully described in Note 6, and is measured at fair value based on the prevailing market interest rate as of the measurement date. | ||
8. | Comprehensive Income (Loss) | |
Comprehensive income includes charges and credits to equity from nonowner sources and comprises two subsets: net earnings and other comprehensive income (loss). Total comprehensive income (loss) comprises the following (in thousands of dollars): |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net earnings |
$ | 140,755 | $ | 142,011 | $ | 154,688 | $ | 230,885 | ||||||||
Other comprehensive income: |
||||||||||||||||
Fair value adjustments to cash flow
hedges, net of tax |
24,100 | 6,669 | 2,006 | 6,703 | ||||||||||||
Reclassification adjustment for cash
flow hedge amounts included in net
earnings, net of tax |
1,181 | | 2,304 | | ||||||||||||
Amortization of pension and post-
retirement plan actuarial loss and
prior service cost, net of tax |
34 | 645 | 361 | 1,174 | ||||||||||||
Total comprehensive income |
$ | 166,070 | $ | 149,325 | $ | 159,359 | $ | 238,762 | ||||||||
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Amounts accumulated in other comprehensive income (loss), net of tax, are as follows (in thousands of dollars): |
June 30 | Dec 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Cash flow hedges |
$ | (51,537 | ) | $ | (55,847 | ) | $ | 6,778 | ||||
Pension and postretirement plans |
24,972 | 15,630 | (3,854 | ) | ||||||||
Accumulated other
comprehensive income (loss) |
$ | (26,565 | ) | $ | (40,217 | ) | $ | 2,924 | ||||
9. | Shareholders Equity | |
During the first quarter of 2008, we issued 798,859 shares of common stock in connection with the acquisition of substantially all the assets of Elmer Larson, LLC and certain assets of MSJ Larson, Inc., including specifically an aggregates production facility located in DeKalb County, Illinois. We originally issued the shares to an exchange accommodation titleholder (selling shareholder) in a private placement pursuant to a planned Section 1031 reverse exchange under the Internal Revenue Code. The selling shareholder assumed our rights and obligations under the asset purchase agreement, and we registered the shares for public resale by the selling shareholder in order to fund its obligation. The selling shareholder qualifies as a variable interest entity under the provisions of FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, for which we are the primary beneficiary. Accordingly, we have consolidated the financial position, results of operations and cash flows of the selling shareholder for the period ended June 30, 2008, which principally consist of the receipt of net cash proceeds from the issuance of shares of $55,072,000 and the acquisition noted above for a cash payment of $56,560,000, including acquisition costs and net of acquired cash. | ||
During the second quarter of 2008, we issued 352,779 shares of common stock in connection with the acquisition of an aggregates production facility in California from Webber-Plyley, Inc. | ||
On February 10, 2006, the Board of Directors increased to 10,000,000 shares the existing authorization to purchase common stock. On November 16, 2007, pursuant to the terms of the agreement to acquire Florida Rock, all treasury stock held immediately prior to the close of the transaction was canceled. Our Board of Directors resolved to carry forward the existing authorization to purchase common stock. As of June 30, 2008, 3,411,416 shares remained under the current authorization. | ||
The number and cost of shares purchased during the periods presented and shares held in treasury at period end are shown below: |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Shares purchased: |
||||||||||||||||
Number |
| | | 44,123 | ||||||||||||
Total cost (thousands) |
$ | | $ | | $ | | $ | 4,800 | ||||||||
Average cost |
$ | | $ | | $ | | $ | 108.78 |
June 30 | Dec. 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Shares in treasury at period end: |
||||||||||||
Number |
| | 44,154,588 | |||||||||
Average cost |
$ | | $ | | $ | 29.27 |
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All shares purchased in the six months ended June 30, 2007 were purchased directly from employees to satisfy income tax withholding requirements on shares issued pursuant to incentive compensation plans. | ||
10. | Benefit Plans | |
The following tables set forth the components of net periodic benefit cost (in thousands of dollars): |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
PENSION BENEFITS | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||||||
Service cost |
$ | 4,096 | $ | 5,172 | $ | 9,583 | $ | 10,344 | ||||||||
Interest cost |
9,322 | 8,646 | 19,951 | 17,292 | ||||||||||||
Expected return on plan assets |
(12,980 | ) | (11,607 | ) | (25,958 | ) | (23,214 | ) | ||||||||
Amortization of prior service cost |
115 | 189 | 230 | 378 | ||||||||||||
Amortization of actuarial (gain) loss |
(106 | ) | 455 | 280 | 911 | |||||||||||
Net periodic pension benefit cost |
$ | 447 | $ | 2,855 | $ | 4,086 | $ | 5,711 | ||||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
OTHER POSTRETIREMENT BENEFITS | 2008 | 2007 | 2008 | 2007 | ||||||||||||
Components of Net Periodic Benefit Cost: |
||||||||||||||||
Service cost |
$ | 1,306 | $ | 1,133 | $ | 2,612 | $ | 2,267 | ||||||||
Interest cost |
1,727 | 1,398 | 3,455 | 2,796 | ||||||||||||
Amortization of prior service credit |
(210 | ) | (42 | ) | (420 | ) | (84 | ) | ||||||||
Amortization of actuarial loss |
255 | 253 | 510 | 506 | ||||||||||||
Net periodic postretirement benefit cost |
$ | 3,078 | $ | 2,742 | $ | 6,157 | $ | 5,485 | ||||||||
The net periodic benefit costs for pension plans during the three and six months ended June 30, 2008 include pretax reclassifications from other comprehensive income totaling $9,000 and $510,000, respectively. The net periodic benefit costs for pension plans during the three and six months ended June 30, 2007 include pretax reclassifications from other comprehensive income totaling $644,000 and $1,289,000, respectively. The decrease in net periodic benefit costs for pension plans during the second quarter of 2008 compared with the first quarter of 2008 results from a change in estimated annual net periodic benefit costs. The 2008 annual expense estimates were not completed until the second quarter due principally to the incorporation of Florida Rock employees and plans into these estimates. During the six months ended June 30, 2008 and 2007, contributions of $1,593,000 and $584,000, respectively, were made to our pension plans. | ||
The net periodic benefit costs for postretirement plans during the three and six months ended June 30, 2008 include pretax reclassifications from other comprehensive income totaling $45,000 and $90,000, respectively. The net periodic benefit costs for postretirement plans during the three and six months ended June 30, 2007 include pretax reclassifications from other comprehensive income totaling $211,000 and $422,000, respectively. These reclassifications from other comprehensive income are related to amortization of prior service costs and actuarial losses. |
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11. | Credit Facilities, Short-term Borrowings and Long-term Debt | |
Short-term borrowings are summarized as follows (in thousands of dollars): |
June 30 | Dec. 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Bank borrowings |
$ | 1,209,500 | $ | 1,260,500 | $ | 14,000 | ||||||
Commercial paper |
| 831,000 | 210,000 | |||||||||
Total short-term borrowings |
$ | 1,209,500 | $ | 2,091,500 | $ | 224,000 | ||||||
Bank borrowings: |
||||||||||||
Maturity |
1 to 28 days | 2 to 22 days | July 2007 | |||||||||
Weighted average interest rate |
2.63 | % | 4.88 | % | 5.545 | % | ||||||
Commercial paper |
||||||||||||
Maturity |
| 2 to 28 days | 2 days | |||||||||
Weighted average interest rate |
| 4.92 | % | 5.49 | % |
We utilize our bank lines of credit as liquidity back-up for outstanding commercial paper or draw on the bank lines to access LIBOR-based short-term loans to fund our borrowing requirements. Periodically, we issue commercial paper for general corporate purposes, including working capital requirements. We plan to continue this practice from time to time as circumstances warrant. | ||
Our policy is to maintain committed credit facilities at least equal to our outstanding commercial paper. Unsecured bank lines of credit totaling $2,015,000,000 were maintained at June 30, 2008, of which $500,000,000 expires November 14, 2008, $15,000,000 expires January 28, 2009 and $1,500,000,000 expires November 16, 2012. We currently expect to renew the $500,000,000 credit facility expiring November 14, 2008. Upon issuing the $650,000,000 of 5-year and 10-year fixed-rate debt in June 2008, as described below, a credit facility in the amount of $785,000,000 that was set to expire November 14, 2008 was terminated. As of June 30, 2008, $1,209,500,000 of the lines of credit was drawn. Interest rates referable to borrowings under these lines of credit are determined at the time of borrowing based on current market conditions. | ||
As of June 30, 2008, we have $4,997,000 of secured long-term debt assumed with the November 2007 acquisition of Florida Rock. All other debt obligations, both short-term borrowings and long-term debt, are unsecured. | ||
In June 2008, we issued $650,000,000 of long-term notes in two series (tranches), as follows: $250,000,000 of 5-year 6.30% coupon notes and $400,000,000 of 10-year 7.00% coupon notes. These notes are presented in the table below net of discounts from par in the amounts of $500,000 and $419,000, respectively. These discounts are being amortized using the effective interest method over the respective lives of the notes. The effective interest rates for the 5-year and 10-year 2008 note issuances, including the effects of underwriting commissions and the settlement of the forward starting interest rate swap agreements (see Note 6), are 7.47% and 7.86%, respectively. | ||
Additionally, in June 2008 we established a $300,000,000 3-year syndicated term loan with a floating rate based on a spread over LIBOR (1, 2, 3 or 6-month LIBOR options). As of June 30, 2008, the spread was 1.0% above the selected LIBOR option. The spread is subject to increase if our long-term credit ratings are downgraded. This loan requires quarterly principal payments of $15,000,000 starting in December 2008 and a termination principal payment of $135,000,000 in June 2011. |
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Long-term debt is summarized as follows (in thousands of dollars): |
June 30 | Dec. 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
3-year floating loan dated 2008 |
$ | 300,000 | $ | | $ | | ||||||
6.30% 5-year notes issued 20081 |
249,500 | | | |||||||||
7.00% 10-year notes issued 20082 |
399,581 | | | |||||||||
3-year floating notes issued 2007 |
325,000 | 325,000 | | |||||||||
5.60% 5-year notes issued 20073 |
299,518 | 299,471 | | |||||||||
6.40% 10-year notes issued 20074 |
349,815 | 349,808 | | |||||||||
7.15% 30-year notes issued 20075 |
249,308 | 249,305 | | |||||||||
6.00% 10-year notes issued 1999 |
250,000 | 250,000 | 250,000 | |||||||||
Private placement notes |
48,610 | 48,844 | 49,090 | |||||||||
Medium-term notes |
21,000 | 21,000 | 21,000 | |||||||||
Industrial revenue bonds |
17,550 | 17,550 | | |||||||||
Other notes |
3,783 | 4,031 | 2,002 | |||||||||
Total debt excluding short-term borrowings |
$ | 2,513,665 | $ | 1,565,009 | $ | 322,092 | ||||||
Less current maturities of long-term debt |
330,081 | 35,181 | 727 | |||||||||
Total long-term debt |
$ | 2,183,584 | $ | 1,529,828 | $ | 321,365 | ||||||
Estimated fair value of total long-term debt |
$ | 2,168,874 | $ | 1,548,084 | $ | 329,346 | ||||||
1 | Includes a decrease in valuation for unamortized discounts of $500 thousand as of June 30, 2008. The effective interest rate for these 5-year notes is 7.47%. | |
2 | Includes a decrease in valuation for unamortized discounts of $419 thousand as of June 30, 2008. The effective interest rate for these 10-year notes is 7.86%. | |
3 | Includes a decrease in valuation for unamortized discounts of $482 thousand and $529 thousand as of June 30, 2008 and December 31, 2007, respectively. The effective interest rate for these 5-year notes is 6.58%. | |
4 | Includes a decrease in valuation for unamortized discounts of $185 thousand and $192 thousand as of June 30, 2008 and December 31, 2007, respectively. The effective interest rate for these 10-year notes is 7.39%. | |
5 | Includes a decrease in valuation for unamortized discounts of $692 thousand and $695 thousand as of June 30, 2008 and December 31, 2007, respectively. The effective interest rate for these 30-year notes is 8.04% |
The estimated fair value amounts of long-term debt presented in the table above have been determined by discounting expected future cash flows based on credit-adjusted interest rates on U.S. Treasury bills, notes or bonds, as appropriate. The fair value estimates are based on information available to management as of the respective balance sheet dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued since those dates. | ||
Our debt agreements do not subject us to contractual restrictions with regard to working capital or the amount we may expend for cash dividends and purchases of our stock. The percentage of consolidated debt to total capitalization (total debt as a percentage of total capital), as defined in our bank credit facility agreements, must be less than 65%. Our total debt as a percentage of total capital was 48.8% as of June 30, 2008; 49.3% as of December 31, 2007; and 19.7% as of June 30, 2007. | ||
12. | Asset Retirement Obligations | |
SFAS No. 143, Accounting for Asset Retirement Obligations (FAS 143) applies to legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. | ||
FAS 143 requires recognition of a liability for an asset retirement obligation 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 asset retirement |
15
obligation is settled for other than the carrying amount of the liability, we recognize a gain or loss on settlement. | ||
We record all asset retirement obligations for which we have legal obligations for land reclamation at estimated fair value. Essentially all these asset retirement obligations relate to our underlying land parcels, including both owned properties and mineral leases. FAS 143 results in ongoing recognition of costs related to the depreciation of the assets and accretion of the liability. For the three and six month periods ended June 30, we recognized operating costs related to FAS 143 as follows: 2008 $5,640,000 and $11,318,000, respectively; and 2007 $4,674,000 and $9,219,000, respectively. FAS 143 operating costs for our continuing operations are reported in cost of goods sold. FAS 143 asset retirement obligations are reported within other noncurrent liabilities in our accompanying Condensed Consolidated Balance Sheets. | ||
Reconciliations of the carrying amounts of our asset retirement obligations are as follows (in thousands of dollars): |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Balance at beginning of period |
$ | 131,455 | $ | 114,869 | $ | 131,383 | $ | 114,829 | ||||||||
Liabilities incurred |
931 | 10 | 1,148 | 184 | ||||||||||||
Liabilities (settled) |
(4,757 | ) | (3,262 | ) | (8,220 | ) | (6,347 | ) | ||||||||
Accretion expense |
1,610 | 1,439 | 3,229 | 2,878 | ||||||||||||
Revisions up (down) |
12,131 | (582 | ) | 13,830 | 930 | |||||||||||
Balance at end of period |
$ | 141,370 | $ | 112,474 | $ | 141,370 | $ | 112,474 | ||||||||
The increase in the balance at the beginning of the three and six month periods ended June 30, 2008, over the comparable 2007 period beginning balances results primarily to asset retirement obligations added in connection with the acquisition of Florida Rock in November 2007. Upward revisions to our asset retirement obligations during 2008 relate primarily to changes in cost estimates at numerous sites. The increase in cost estimates during the first half of 2008 was largely attributable to rising energy-related costs, including diesel fuel. | ||
13. | Standby Letters of Credit | |
We provide certain third parties with irrevocable standby letters of credit in the normal course of business. We use commercial banks to issue standby letters of credit to back our obligations to pay or perform when required to do so pursuant to the requirements of an underlying agreement or the provision of goods and services. The standby letters of credit listed below are cancelable only at the option of the beneficiary who is authorized to draw drafts on the issuing bank up to the face amount of the standby letter of credit in accordance with its terms. Since banks consider 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 are renewable annually at the option of the beneficiary. |
16
Our standby letters of credit as of June 30, 2008 are summarized in the table below (in thousands of dollars): |
Amount | ||||
Risk management requirement for insurance claims |
$ | 43,534 | ||
Payment surety required by utilities |
443 | |||
Contractual reclamation/restoration requirements |
52,915 | |||
Financing requirement for industrial revenue bond |
14,230 | |||
Total standby letters of credit1 |
$ | 111,122 | ||
1 | Substantially all of the standby letters of credit have a one-year term and are renewable annually |
14. | Acquisitions and Divestitures | |
As a result of the November 2007 Florida Rock acquisition, we entered into a Final Judgment with the Antitrust Division of the U.S. Department of Justice (DOJ) that required us to divest certain Florida Rock and Vulcan assets at nine sites. During the first quarter of 2008, in a transaction with Luck Stone Corporation, we completed the divestiture of two Florida Rock sites, an aggregates production facility and a distribution yard located in Virginia, by exchanging these assets for two aggregates production facilities in Virginia and cash. | ||
During the second quarter of 2008, we completed the required divestitures. In a transaction with Martin Marietta Materials, Inc. (Martin Marietta), we divested four aggregates production facilities and a greenfield (undeveloped) aggregates site located in Georgia, and an aggregates production facility located in Tennessee. In return, we received cash, an aggregates production facility near Sacramento, California, real property with proven and permitted reserves adjacent to one of our aggregates production facilities in San Antonio, Texas, and fee ownership of property at one of our aggregates production facilities in North Carolina that we had previously leased from Martin Marietta. In a separate transaction, we sold our interest in an aggregates production facility in Georgia to The Concrete Company, which had been the joint venture partner with Florida Rock in this operation. | ||
Two of the divested sites included in the transaction with Martin Marietta were owned by Vulcan prior to our acquisition of Florida Rock. Accordingly, during the second quarter of 2008, we recognized a pretax gain of $73,874,000 on the sale of these assets. | ||
In addition to the acquisitions in the aforementioned exchanges, during the six months ended June 30, 2008, we acquired the following assets for approximately $104,463,000 (total cash and stock consideration paid) including acquisition costs and net of acquired cash: |
| an aggregates production facility in Illinois | ||
| four aggregates production facilities, one asphalt mix plant, a recycling facility and vacant land in California |
The acquisition payments reported above exclude contingent consideration not to exceed $3,000,000. Upon resolution of the contingency, distributions to the seller, if any, will be considered additional acquisition cost. | ||
As a result of the acquisitions (including the exchanges), we recognized $29,111,000 of goodwill, all of which is expected to be fully deductible for income tax purposes. The purchase price allocations for these 2008 acquisitions are preliminary and subject to adjustment. | ||
As of December 31, 2007, the assets and related liabilities referable to the sites that we were required to divest under the Final Judgment with the DOJ are classified as held for sale in the accompanying Condensed Consolidated Balance Sheets under two captions: assets held for sale and |
17
liabilities of assets held for sale. The major classes of assets and liabilities of assets classified as held for sale were as follows (in thousands of dollars): |
Dec. 31 | ||||
2007 | ||||
Current assets |
$ | 12,417 | ||
Property, plant and equipment, net |
105,170 | |||
Goodwill and intangibles |
142,166 | |||
Other assets |
22 | |||
Total assets held for sale |
$ | 259,775 | ||
Current liabilities |
$ | 299 | ||
Minority interest |
6,010 | |||
Total liabilities of assets held for sale |
$ | 6,309 | ||
15. | Goodwill | |
Changes in the carrying amount of goodwill by reportable segment for the periods presented are summarized below (in thousands of dollars): |
Asphalt mix | ||||||||||||||||
Aggregates | and Concrete | Cement | Total | |||||||||||||
Goodwill as of June 30, 2007 |
$ | 558,572 | $ | 91,633 | $ | | $ | 650,205 | ||||||||
Goodwill of acquired businesses |
2,972,284 | | 297,662 | 3,269,946 | ||||||||||||
Less goodwill classified as assets held
for sale |
131,060 | | | 131,060 | ||||||||||||
Goodwill as of December 31, 2007 |
$ | 3,399,796 | $ | 91,633 | $ | 297,662 | $ | 3,789,091 | ||||||||
Goodwill of acquired businesses1 |
29,111 | | | 29,111 | ||||||||||||
Purchase price allocation adjustment2 |
77,065 | | | 77,065 | ||||||||||||
Goodwill as of June 30, 2008 |
$ | 3,505,972 | $ | 91,633 | $ | 297,662 | $ | 3,895,267 | ||||||||
1 | The goodwill of acquired businesses for 2008 relates to the acquisitions listed in Note 14. We are currently evaluating the final purchase price allocations; therefore, the goodwill amount is subject to change. When finalized, the goodwill from these 2008 acquisitions is expected to be fully deductible for income tax purposes. | |
2 | The purchase price allocation adjustment relates primarily to the November 16, 2007 acquisition of Florida Rock. Further refinements to our purchase price allocation are likely to be made as valuation analyses and other studies are completed. We expect to complete the purchase price allocation related to the Florida Rock acquisition during the third quarter of 2008, which may result in material adjustments to goodwill. |
16. | New Accounting Standards | |
See Note 2 for a discussion of the accounting standards adopted in 2008. |
18
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations [FAS 141(R)], which requires the acquirer in a business combination to measure all assets acquired and liabilities assumed at their acquisition date fair value. FAS 141(R) applies whenever an acquirer obtains control of one or more businesses. Additionally, the new standard requires that in a business combination: |
| Acquisition related costs, such as legal and due diligence costs, be expensed as incurred. | ||
| Acquirer shares issued as consideration be recorded at fair value as of the acquisition date. | ||
| Contingent consideration arrangements be included in the purchase price allocation at their acquisition date fair value. | ||
| With certain exceptions, pre-acquisition contingencies be recorded at fair value. | ||
| Negative goodwill be recognized as income rather than as a pro rata reduction of the value allocated to particular assets. | ||
| Restructuring plans be recorded in purchase accounting only if the requirements in FASB Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, are met as of the acquisition date. |
FAS 141(R) requires prospective application for business combinations consummated in fiscal years beginning on or after December 15, 2008; we expect to adopt FAS 141(R) as of January 1, 2009. | ||
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (FAS 160). The standard requires all entities to report noncontrolling interests, sometimes referred to as minority interests, in subsidiaries as equity in the consolidated financial statements. Noncontrolling interest under FAS 160 is defined as the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The standard requires that ownership interests in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parents equity. The amount of consolidated net earnings attributable to the parent and to the noncontrolling interest should be presented separately on the face of the consolidated statement of earnings. When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be measured at fair value, and a gain or loss recognized accordingly. FAS 160 is effective for fiscal years beginning on or after December 15, 2008; we expect to adopt FAS 160 as of January 1, 2009. | ||
In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133 (FAS 161). The enhanced disclosure requirements of FAS 161 are intended to help investors better understand how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133, and how derivative instruments and hedging activities affect an entitys financial position, financial performance and cash flows. The enhanced disclosures include, for example: |
| Qualitative disclosure about the objectives and strategies for using derivative instruments. | ||
| Tabular disclosures of the fair value amounts of derivative instruments, their gains and losses and locations within the financial statements. | ||
| Disclosure of any features in a derivative instrument that are credit-risk related. |
FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We expect to adopt the disclosure requirements of FAS 161 no later than our interim period ending March 31, 2009. | ||
In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (FSP FAS 142-3). This position amends the factors an entity should consider when developing renewal or extension assumptions used in determining the useful life over which to amortize the cost of a recognized intangible asset under SFAS No. 142, Goodwill and Other |
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Intangible Assets. FSP FAS 142-3 requires an entity to consider its own historical experience in renewing or extending similar arrangements in determining the amortizable useful life. Additionally, this position requires expanded disclosure regarding renewable intangible assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. We expect to adopt FSP FAS 142-3 as of January 1, 2009. | ||
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (FAS 162). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. FAS 162 is effective 60 days following SEC approval. | ||
17. | Segment Reporting Continuing Operations | |
Prior to the November 2007 acquisition of Florida Rock, our Construction Materials business was organized in seven regional divisions that produced and sold aggregates and related products and services. All these divisions exhibited similar economic characteristics, production processes, products and services, types and classes of customers, methods of distribution and regulatory environments. Accordingly, they were aggregated into one reporting segment for financial statement purposes. | ||
Subsequent to our acquisition of Florida Rock, we redefined our operating segments, and as a result, we have three reporting segments organized around our principal product lines: aggregates, asphalt mix, concrete and cement. For reporting purposes, we have combined our Asphalt mix and Concrete operating segments into one reporting segment as the products are similar in nature and the businesses exhibit similar economic characteristics, product processes, types and classes of customer, methods of distribution and regulatory environments. We have recast our June 30, 2007 segment disclosure to reflect this change in reportable segments. Management reviews earnings from the product line reporting units principally at the gross profit level. | ||
The majority of our activities are domestic. We sell a relatively small amount of aggregates outside the United States. Transactions between our reportable segments are recorded at prices approximating market levels. |
Three Months Ended | Six Months Ended | |||||||||||||||
Segment Financial Disclosure | June 30 | June 30 | ||||||||||||||
Amounts in millions | 2008 | 2007 | 2008 | 2007 | ||||||||||||
TOTAL REVENUES |
||||||||||||||||
Aggregates |
$ | 679.3 | $ | 652.9 | $ | 1,215.3 | $ | 1,163.5 | ||||||||
Asphalt mix and Concrete |
325.4 | 183.8 | 592.0 | 329.7 | ||||||||||||
Cement |
29.2 | | 60.2 | | ||||||||||||
Intersegment sales |
(67.9 | ) | (28.9 | ) | (129.8 | ) | (55.2 | ) | ||||||||
Total net sales |
966.0 | 807.8 | 1,737.7 | 1,438.0 | ||||||||||||
Delivery revenues |
55.6 | 71.0 | 101.2 | 128.0 | ||||||||||||
Total revenues |
$ | 1,021.6 | $ | 878.8 | $ | 1,838.9 | $ | 1,566.0 | ||||||||
GROSS PROFIT |
||||||||||||||||
Aggregates |
$ | 217.9 | $ | 250.9 | $ | 344.8 | $ | 398.2 | ||||||||
Asphalt mix and Concrete |
23.2 | 34.3 | 43.3 | 54.2 | ||||||||||||
Cement |
4.1 | | 11.6 | | ||||||||||||
Total gross profit |
$ | 245.2 | $ | 285.2 | $ | 399.7 | $ | 452.4 | ||||||||
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18. | Supplemental Cash Flow Information | |
Supplemental information referable to our Condensed Consolidated Statements of Cash Flows for the six months ended June 30 is summarized below (in thousands of dollars): |
2008 | 2007 | |||||||
Cash payments: |
||||||||
Interest (exclusive of amount capitalized) |
$ | 89,532 | $ | 14,904 | ||||
Income taxes |
37,055 | 61,994 | ||||||
Noncash investing and financing activities: |
||||||||
Accrued liabilities for purchases of property, plant
and equipment |
24,834 | 26,518 | ||||||
Carrying value of noncash assets and liabilities exchanged |
42,974 | | ||||||
Debt issued for purchases of property, plant and equipment |
8 | 10 | ||||||
Proceeds receivable from exercise of stock options |
| 216 | ||||||
Fair value of stock issued in business acquisitions |
25,023 | | ||||||
Other noncash transactions |
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19. | Other Commitments and Contingencies | |
We are a defendant in various lawsuits and legal proceedings which were specifically described in our most recent Annual Report on Form 10-K. Legal proceedings for which events have occurred subsequent to the filing of our most recent Annual Report on Form 10-K, which we believe are material to the development of such proceedings, are described below. | ||
Perchloroethylene Litigation | ||
Modesto Cases: | ||
City of Modesto On October 12, 2007, we reached an agreement with the City of Modesto in the case styled City of Modesto, et al. v. Dow Chemical Company, et al., filed in San Francisco County Superior Court, California, to resolve all claims against Vulcan for a sum of $20 million. The agreement provides for a release and dismissal or withdrawal without prejudice of all claims against Vulcan. The agreement also expressly states that the settlement paid by Vulcan is for compensatory damages only and not for any punitive damages, and that Vulcan denies any conduct capable of giving rise to an assignment of punitive damages. The settlement has been approved by the San Francisco Superior Court judge presiding over this case and thus is now final. While we believe the verdicts rendered and damages awarded during the first phase of the trial are contrary to the evidence presented, we settled the citys claims in order to avoid the costs and uncertainties of protracted litigation. The $20 million was paid during the fourth quarter of 2007. We believe the settlement damages, legal defense costs, and other potential claims are covered by insurance policies purchased by Vulcan, and we are pursuing recovery from these insurers. | ||
R.R. Street Indemnity Although the Companys $20 million settlement resolved all claims against Vulcan by the City of Modesto, certain ancillary claims related to this matter remain unresolved. Such an ancillary claim includes the litigation filed against the Company by RR Street and Company and National Union Fire Insurance Company of Pittsburgh, PA, in the United States District Court for the Northern District of Illinois, Eastern Division. Street, a former distributor of perchloroethylene manufactured by Vulcan, and, also a defendant in the City of Modesto, Halfords, and Garcia litigation alleges, that Vulcan owes Street, and its insurer, National Union, a defense and indemnity in all of these litigation matters. National Union alleges that Vulcan is obligated to contribute to National Unions share of defense fees, costs and any indemnity payments made on Streets behalf. At this time we cannot determine the likelihood or reasonably estimate a range of loss resulting from any claims asserted by Street or National Union. |
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Halfords In addition, on or about September 18, 2007, Vulcan was served with a third-party complaint filed in the U.S. District Court for the Eastern District of California (Fresno Division). The underlying action was brought by the United States of America on behalf of the U.S. Environmental Protection Agency against various individuals associated with a dry cleaning facility in Modesto called Halfords, seeking recovery of unreimbursed costs incurred by it for activities undertaken in response to the release or threatened release of hazardous substances at the Modesto Groundwater Superfund Site in Modesto, Stanislaus County, California. The complaint also seeks certain civil penalties against the named defendants. Vulcan was sued by the original defendants as a third-party defendant in this action. No discovery has been conducted in this matter. At this time we cannot determine the likelihood or reasonably estimate a range of loss pertaining to this matter. | ||
Garcia We are also a defendant in the matter of Garcia v. Dow Chemical Company, et al., filed in Modesto, Stanislaus County, California. This is a wrongful death action that generally alleges the water supply and environment in the City of Modesto were contaminated with toxic chlorinated solvents by the defendants, including Vulcan, and that Ms. Garcia was hurt and injured in her health as a result of exposure to said solvents. Ms. Garcia died in December 2004. This case is in the early stages of discovery. At this time we cannot determine the likelihood or reasonably estimate a range of loss pertaining to this matter. | ||
Team Enterprises On June 5, 2008, we were named as a defendant in the matter of Team Enterprises, Inc., v. Century Centers, Ltd., et al., filed in Modesto, Stanislaus County, California. This is an action filed by Team Enterprises as the former operator of a dry cleaners located in Modesto, California. The plaintiff is seeking damages from the defendants associated with the remediation of perchloroethylene from the site of the dry cleaners. The complaint also seeks other damages against the named defendants. No discovery has been conducted in this matter. At this time we cannot determine the likelihood or reasonably estimate a range of loss pertaining to this matter. | ||
California Water Service Company: | ||
On June 9, 2008, we were served in the action styled California Water Service Company v. Dow, et al, now pending in the United States District Court for the Northern District of California. According to the complaint, California Water Service Company owns and/or operates public drinking water systems, and supplies drinking water to hundreds of thousands of residents and businesses throughout California. The complaint alleges that water systems in a number of communities have been contaminated with perchloroethylene (perc). Our former Chemicals Division produced and sold perc. The plaintiff is seeking compensatory damages, treble damages and punitive damages. No discovery has been conducted in this matter. At this time we cannot determine the likelihood or reasonably estimate a range of loss pertaining to this matter. | ||
Sunnyvale, California: | ||
The law firm representing the California Water Service Company in the above-referenced matter also sent a letter dated May 2, 2008 on behalf of the Redevelopment Agency of the City of Sunnyvale, California, claiming that we are a potentially responsible party for one or more suspected releases of perc at the Sunnyvale Town Center Redevelopment Site. No suit has been filed in connection with this matter, and thus, no discovery has been conducted. At this time we cannot determine the likelihood or reasonably estimate a range of loss pertaining to this matter. | ||
Other Litigation | ||
Florida Lake Belt Litigation: | ||
On March 22, 2006, the United States District Court for the Southern District of Florida (in a case captioned Sierra Club, National Resources Defense Council and National Parks Conservation Association v. Lt. Gen. Carl A. Stock, et al.) ruled that the mining permit issued for our Miami quarry, which was acquired in the Florida Rock transaction in November 2007, as well as several |
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permits issued to competitors in the same region, had been improperly issued. The Court remanded the permitting process to the U. S. Army Corps of Engineers (Corps of Engineers) for further review and consideration. On July 13, 2007, the Court ordered us to cease mining excavation on a large portion of our Miami quarry, effective on July 17, 2007, pending the issuance by the U.S. Army Corps of Engineers of a Supplemental Environmental Impact Statement (SEIS). The order suspended our ability to excavate a substantial amount of reserves at this site. The court based its decision to shut down mining activity at the Miami quarry and two quarries owned by competitors on concern that levels of benzene had been detected in an area of the Biscayne Aquifer known as the Northwest Wellfield, which supplies a significant portion of the water supply to the Miami area. At this time, we do not have any information to indicate that the benzene was produced by our mining activities or that the levels of benzene pose a risk to human health. The District Court decision was appealed to the U. S. Court of Appeals for the Eleventh Circuit, and the Eleventh Circuit has reversed and remanded the case to the District Court. With issuance of the Mandate for the Eleventh Circuits ruling on July 1, 2008, we have resumed operations at the Miami Quarry. | ||
Other Matters | ||
On March 13, 2008, the Internal Revenue Service (IRS) issued to one of our subsidiaries an unsigned Notice of Proposed Adjustment, proposing adjustments in federal excise tax liability imposed under Section 4681 of the Internal Revenue Code on the sale or use of ozone-depleting chemicals. The sales were made by our former Chemicals business which was divested in June 2005. As of March 31, 2008, we believed that substantially all of the proposed adjustment was inconsistent with existing law and that meritorious legal defenses were available to us. However, we accrued approximately $48,000 after income taxes related to two particular items included in the Notice of Proposed Adjustment for which we believed a loss was probable. On June 16, 2008, the IRS issued a Revised Notice of Proposed Adjustment in which all but about $30,000 of their proposed adjustment was withdrawn. Furthermore, in a letter dated July 15, 2008, the IRS confirmed that it had accepted the federal excise tax examination report for the tax periods in question, and specifically stated that it did not plan to make any additional changes. The $30,000 revised adjustment plus associated interest and penalty will be charged against the accrual referenced above that was established in the first quarter of 2008. All charges referable to this matter are included in discontinued operations. | ||
It is not possible to predict with certainty the ultimate outcome of these and other legal proceedings in which we are involved. We believe the amounts accrued in our financial statements as of June 30, 2008 are sufficient to address claims and litigation for which a loss was determined to be probable and reasonably estimable. In addition, losses on certain claims and litigation 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. |
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June 30 | Dec. 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Short-term investments: |
||||||||||||
Cash equivalents |
$ | 133,213 | $ | 32,981 | $ | 22,980 | ||||||
Total short-term investments |
$ | 133,213 | $ | 32,981 | $ | 22,980 | ||||||
Short-term borrowings: |
||||||||||||
Bank borrowings |
$ | 1,209,500 | $ | 1,260,500 | $ | 14,000 | ||||||
Commercial paper |
| 831,000 | 210,000 | |||||||||
Total short-term borrowings |
$ | 1,209,500 | $ | 2,091,500 | $ | 224,000 | ||||||
Net short-term borrowings |
$ | (1,076,287 | ) | $ | (2,058,519 | ) | $ | (201,020 | ) | |||
Bank borrowings: |
||||||||||||
Maturity |
1 to 28 days | 2 to 22 days | July 2007 | |||||||||
Weighted average interest rate |
2.63 | % | 4.88 | % | 5.545 | % | ||||||
Commercial paper |
||||||||||||
Maturity |
| 2 to 28 days | 2 days | |||||||||
Weighted average interest rate |
| 4.92 | % | 5.49 | % |
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June 30 | Dec. 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
3-year floating loan dated 2008 |
$ | 45,000 | $ | | $ | | ||||||
6.00% 10-year notes issued 1999 |
250,000 | | | |||||||||
Private placement notes |
33,000 | 33,000 | | |||||||||
Other notes |
2,081 | 2,181 | 727 | |||||||||
Total |
$ | 330,081 | $ | 35,181 | $ | 727 | ||||||
June 30 | Dec. 31 | June 30 | ||||||||||
2008 | 2007 | 2007 | ||||||||||
Debt: |
||||||||||||
Current maturities of long-term debt |
$ | 330,081 | $ | 35,181 | $ | 727 | ||||||
Short-term borrowings |
1,209,500 | 2,091,500 | 224,000 | |||||||||
Long-term debt |
2,183,584 | 1,529,828 | 321,365 | |||||||||
Total debt |
$ | 3,723,165 | $ | 3,656,509 | $ | 546,092 | ||||||
Capital: |
||||||||||||
Total debt |
$ | 3,723,165 | $ | 3,656,509 | $ | 546,092 | ||||||
Shareholders equity |
3,915,769 | 3,759,600 | 2,222,590 | |||||||||
Total capital |
$ | 7,638,934 | $ | 7,416,109 | $ | 2,768,682 | ||||||
Total debt as a percentage of total capital |
48.7 | % | 49.3 | % | 19.7 | % |
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Payments Due by Year | ||||||||||||||||||||
Total | 2008 | 2009-2010 | 2011-2012 | Thereafter | ||||||||||||||||
Cash Contractual Obligations |
||||||||||||||||||||
2008 Debt Issuances |
||||||||||||||||||||
Long-term debt |
||||||||||||||||||||
Principal payments |
$ | 950.0 | $ | 15.0 | $ | 120.0 | $ | 165.0 | $ | 650.0 | ||||||||||
Interest payments |
382.7 | 26.5 | 103.9 | 90.4 | 161.9 | |||||||||||||||
Total |
$ | 1,332.7 | $ | 41.5 | $ | 223.9 | $ | 255.4 | $ | 811.9 | ||||||||||
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Amount | ||||
Risk management requirement for insurance claims |
$ | 43,534 | ||
Payment surety required by utilities |
443 | |||
Contractual reclamation/restoration requirements |
52,915 | |||
Financing requirement for industrial revenue bond |
14,230 | |||
Total standby letters of credit1 |
$ | 111,122 | ||
1 | Substantially all of the standby letters of credit have a one-year term and are renewable annually |
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1. | The shareholders elected the following directors to hold office until the annual meeting in the year indicated: |
Term | Number of Shares | |||||||||||
Director | Expiring | For | Withheld | |||||||||
Donald M. James |
2011 | 94,157,945 | 2,091,143 | |||||||||
Ann M. Korologos |
2011 | 94,194,644 | 2,054,444 | |||||||||
Philip J. Carroll, Jr. |
2010 | 82,262,533 | 13,986,555 | |||||||||
Orin R. Smith |
2009 | 94,018,584 | 2,230,504 |
2. | The shareholders ratified the appointment of the firm Deloitte & Touche LLP as our independent registered public accountants to audit our books for the year 2008: |
Number of | ||||
Shares | ||||
For |
94,913,067 | |||
Against |
609,823 | |||
Abstain |
726,198 |
3. | The shareholders adopted the restated Certification of Incorporation for Legacy Vulcan Corp.: |
Number of | ||||
Shares | ||||
For |
94,654,097 | |||
Against |
562,024 | |||
Abstain |
1,032,967 |
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/s/ Ejaz A. Khan | ||||
Ejaz A. Khan | ||||
Vice President, Controller and Chief Information Officer | ||||
/s/ Daniel F. Sansone | ||||
Daniel F. Sansone | ||||
Senior Vice President, Chief Financial Officer | ||||
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