VMC 10-Q Quarter ended June 30, 2017

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



VULCAN MATERIALS COMPANY
(Exact name of registrant as specified in its charter)





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part I financial information

ITEM 1

FINANCIAL STATEMENTS

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED BALANCE SHEETS





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VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF
C OMPREHENSIVE INCOME





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VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS













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notes to condensed consolidated financial statements



Note 1: summary of significant accounting policies



NATURE OF OPERATIONS



Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation's largest supplier of construction aggregates (primarily crushed stone, sand and gravel) and a major producer of asphalt mix and ready-mixed concrete.



We operate primarily in the United States and our principal product — aggregates — is used in virtually all types of public and private construction projects and in the production of asphalt mix and ready-mixed concrete. We serve markets in twenty states, Washington D.C., and the local markets surrounding our operations in Mexico and the Bahamas. Our primary focus is serving metropolitan markets in the United States that are expected to experience the most significant growth in population, households and employment. These three demographic factors are significant drivers of demand for aggregates. While aggregates is our focus and primary business, we produce and sell asphalt mix and/or ready-mixed concrete in our mid-Atlantic, Georgia, Southwestern, Tennessee and Western markets.



BASIS OF PRESENTATION



Our accompanying unaudited condensed consolidated financial statements were prepared in compliance with the instructions to Form 10-Q and Article 10 of Regulation S-X and thus do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Our Condensed Consolidated Balance Sheet as of December 31, 2016 was derived from the audited financial statement, but it does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of our management, the statements reflect all adjustments, including those of a normal recurring nature, necessary to present fairly the results of the reported interim periods. Operating results for the three and six month period s ended June 30 , 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes included in our most recent Annual Report on Form 10-K.



Due to the 2005 sale of our Chemicals business as described in Note 2, the results of the Chemicals business are presented as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income.



SHARE-BASED COMPENSATION – ACCOUNTING STANDARDS UPDATE



We adopted Accounting Standards Update (ASU) 2016-09, “Improvement to Employee Share-Based Payment Accounting,” in the fourth quarter of 2016. The provisions of this standard were applied as of the beginning of the year of adoption resulting in revisions to our 2016 interim financial statements.



Under ASU 2016-09, tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are reflected as discrete income tax benefits in the period of exercise or issuance. Before the adoption of this standard, excess tax benefits were recorded directly to equity (APIC). Net excess tax benefits are reflected as a reduction to our income tax expense f or the three and six months ended June 30 , 2017 ( $1,245,000 and $16,758,000 , respectively ) and revised three and six months ended June 30, 2016 ( $959,000 and $22,192,000 , respectively ). As a result, we also revised our June 3 0 , 2016 diluted share calculation to exclude the assumption that proceeds from excess tax benefits would be used to purchase shares, resulting in an increase in dilutive shares of 813,000 for the quarter and 766,000 year-to-date.



Under ASU 2016-09, gross excess tax benefits are classified as operating cash flows rather than financing cash flows. As a result, for the six months ended June 3 0 , 2016 we increased our operating cash flows and decreased our financing cash flows by $23,749,000 . Additionally, this ASU requires cash paid for shares withheld to satisfy statutory income tax withholding obligations be classified as financing activities rather than operating activities. As a result, for the six months ended June 30 , 2016 we increased our operating cash flows and decreased our financing cash flows by $ 28,721,000 .



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RECLASSIFICATIONS



Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2017 presentation.



EARNINGS PER SHARE (EPS)



Earnings per share are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:







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



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





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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. The financial results of the Chemicals business are classified as discontinued operations in the accompanying Condensed Consolidated Statements of Comprehensive Income for all periods presented. There were no revenues from discontinued operations for the periods presented. Results from discontinued operations are as follows:







Our discontinued operations include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The 2017 results noted above primarily reflect charges and related insurance recoveries , including those associated with the Texas Brine matter , as further discussed in Note 8.

Note 3: Income Taxes



Our estimated annual effective tax rate (EAETR) is based on full-year expectations of pretax earnings, statutory tax rates, permanent differences between book and tax accounting such as percentage depletion, and tax planning alternatives available in the various jurisdictions in which we operate. For interim financial reporting, we calculate our quarterly income tax provision in accordance with the EAETR. Each quarter, we update our EAETR based on our revised full-year expectation of pretax earnings and calculate the income tax provision so that the year-to-date income tax provision reflects the EAETR. Significant judgment is required in determining our EAETR.



In the second quarter of 2017, we recorded income tax expense from conti nuing operations of $45,652,000 compared to income tax expense from continuing operations of $53,241,000 in the second quarter of 2016. The decrease in our income tax expense resulted largely from applying the statutory rate to the decrease in our pretax earnings.



For the first six months of 2017, we recorded income tax expense from continuing operations of $42,47 7,0 00 compared to $41,772,000 for the first six months of 2016 . The increase in our income tax expense resulted from lower excess tax benefits from share-based compensation in the first six months of 2017, largely offset by applying the statutory rate to the decrease in our pretax earnings.



We recognize deferred tax assets and liabilities (which reflect our best assessment of the future taxes we will pay) based on the differences between the book basis and tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns while deferred tax liabilities represent items that will result in additional tax in future tax returns.



Each quarter we analyze the likelihood that our deferred tax assets will be realized. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized.



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Based on our second q uarter 2017 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 certain state net operating loss carryforwards. For December 31, 2017, we project deferred tax assets related to state net operating loss carryforwards of $53,394,000 , of which $52,256,000 relates to Alabama. The Alabama net operating loss carryforward, if not utilized, would expire in years 2023 – 2029 . Before 2015, this Alabama deferred tax asset carried a full valuation allowance. During 2015, we restructured our legal entities which resulted in a partial release of the valuation allowance in the amount of $4,655,000. During the fourth quarter of 2016, we achieved three consecutive years of positive Alabama adjusted earnings which resulted in an additional partial release of the valuation allowance in the amount of $4,791,000 . We expect one additional partial release of this valuation allowance once we have returned to sustained profitability, which we project could occur in the fourth quarter of 2017 (“Alabama adjusted earnings” and “sustained profitability” are defined in our most recent Annual Report on Form 10-K).



We recognize a tax benefit associated with a tax position when, in our judgment, it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more likely than not recognition threshold, we measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. A liability is established for the unrecognized portion of any tax benefit. Our liability for unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation.



A summary of our deferred tax assets is included in Note 9 “Income Taxes” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Note 4: deferred revenue



In 2013 and 2012, we sold a percentage interest in future production structured as volumetric production payments (VPPs).



The VPPs:





Our consolidated total revenues exclude the sales of aggregates owned by the VPP purchaser.



We received net cash proceeds from the sale of the VPPs 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 to revenue on a unit-of-sales basis over the terms of the VPPs (expected to be approximately 25 years, limited by volume rather than time).



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







Based on expected sales from the specified quarries, we expect to recognize approximately $ 8,080,000 of deferred revenue as income during the 12-month period ending June 3 0 , 201 8 (reflected in other current liabilities in our 201 7 Condensed Consolidated Balance Sheet).

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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 a ssets subject to fair value measurement on a recurring basis are summarized below:









We have two Rabbi Trusts for the purpose of providing a level of security for the employee nonqualified retirement and deferred compensation plans and for the directors' nonqualified deferred compensation plans. The fair values of these investments are estimated using a market approach. The Level 1 investments include mutual funds and equity securities for which quoted prices in active markets are available. Level 2 investments are stated at estimated fair value based on the underlying investments in the fund (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).



Net gains of the Rabbi Trust investments were $848,000 and $ 535,000 for the six months ended June 30 , 2017 and 201 6 , respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at June 30 , 2017 and 201 6 were $ 413,000 and $( 571,000 ) , respectively.



The carrying values of our cash equivalents, restricted cash, accounts and notes receivable, short-term debt, trade payables and accruals, and other current liabilities approximate their fair values because of the short-term nature of these instruments. Additional disclosures for derivative instruments and interest-bearing debt are presented in Notes 6 and 7, respectively.



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Assets subject to fair value measurement on a nonrecurring basis are summarized below:







We recorde d $ 10,506,000 of losses on impairment of long-lived assets for the six m onths ended June 3 0 , 2 01 6 , reducing the carrying value of these Aggregates segment asset s to their estimated fair value of $0 . Fair value was estimated using a market approach (observed transactions involving comparable assets in similar locations).

Note 6: Derivative Instruments



During the normal course of operations, we are exposed to market risks including interest rates, foreign currency exchange rates and commodity prices. From time to time, and consistent with our risk management policies, we use derivative instruments to balance the cost and risk of such expenses. We do not use derivative instruments for trading or other speculative purposes.



The accounting for gains and losses that result from changes in the fair value of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationship. The interest rate lock agreements described below were designated as cash flow hedges. The changes in fair value of our cash flow hedges are recorded in accumulated other comprehensive income (AOCI) and are reclassified into interest expense in the same period the hedged items affect earnings.



CASH FLOW HEDGES



During 2007, we entered into fifteen forward starting interest rate locks on $1,500,000,000 of future debt issuances to hedge the risk of higher interest rates. Upon the 2007 and 2008 issuances of the related fixed-rate debt, underlying interest rates were lower than the rate locks and we terminated and settled these forward starting locks for cash payments of $89,777,000 . This amount was booked to AOCI and is 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:







For the 12-month period ending June 3 0 , 201 8 , we estimate that $ 2,198,000 of the pretax loss in AOCI will be reclassified to earnings.

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Note 7: Debt



Debt is detailed as follows:













Our total long-term debt - book value is presented in the table above net of unamortized discounts /premiums from par and unamortized deferred debt issuance costs. Discounts and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $2,233,000 of net interest expense for these items for the six months ended June 30, 2017.



The estimated fair value of our debt presented in the table above was determined by: (1) averaging several asking price quotes for the publicly traded notes and (2) assuming par value for the remainder of the debt. The fair value estimates for the publicly traded notes were based on Level 2 information (as defined in Note 5) as of their respective balance sheet dates.





LINE OF CREDIT



In December 2016, among other favorable changes, we extended the maturity date of our unsecured $750,000,000 line of credit from June 2020 to December 2021. The credit agreement contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility. The primary negative covenant limits our ability to incur secured debt. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5 :1 (upon certain acquisitions, the maximum ratio can be 3.75 :1 for three quarters), and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0 :1. As of June 30, 2017, we were in compliance with the line of credit covenants.



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Borrowings on our line of credit are classified as short-term debt if we intend to repay within twelve months and as long-term debt if we have the intent and ability to extend repayment beyond twelve months. Borrowings bear interest, at our option, at either LIBOR plus a credit margin ranging from 1.00% to 1.75% , or SunTrust Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.00% to 0.75% . The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. Standby letters of credit, which are issued under the line of credit and reduce availability, are charged a fee equal to the credit margin for LIBOR borrowings plus 0.175% . We also pay a commitment fee on the daily average unused amount of the line of credit that ranges from 0.10% to 0.25% determined by our credit ratings. As of June 30, 2017, the credit margin for LIBOR borrowings was 1.25% , the credit margin for base rate borrowings was 0.25% , and the commitment fee for the unused amount was 0.15% .



As of June 30, 2017, our available borrowing capacity was $706,462,000 . Utilization of the borrowing capacity was as follows:







TERM DEBT



All of our term debt is unsecured. $3,118,700,000 of such debt is governed by two essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in both indentures limits the amount of secured debt we may incur without ratably securing such debt. As of June 30, 2017, we were in compliance with all of the term debt covenants.



In June 2017, we issued $1,000,000,000 of debt composed of three issuances as follows: (1) $700,000,000 of 4.50% senior notes due June 2047, (2) $50,000,000 of 3.90% senior notes due April 2027 (these notes are a further issuance of, and form a single series with, the 3.90% notes issued in March 2017 ), and (3) $250,000,000 of floating-rate senior notes due June 2020. These issuances resulted in proceeds of $989,512,000 (net of original issue discounts /premiums , underwriter fees and other transaction costs). The proceeds will be used to partially finance the pending acquisition of Aggregates USA , LLC as described in Note 16 and to early retire the notes due in 2018 ( $272,512,000 @ 7.00% and $250,000,000 @ 10.375% ). This early retirement was completed in July at a cost of $565,559,000 including a $43,020,000 premium above the principal amount of the notes and transaction costs of $27,000 . As a result, in the third quarter we will recognize $3,029,000 of net noncash expense associated with the acceleration of unamortized discounts, deferred debt issuance costs and deferred interest rate derivative settlement losses.



In June 2017, we drew the full $250,000,000 on the unsecured delayed draw term loan entered into in December 2016 . These funds were used to repay the $235,000,000 borrowed on our line of credit and for general corporate purposes. Borrowings bear interest in the same manner as the line of credit. The term loan principal will be repaid quarterly beginning March 2018 as follows: quarters 5 - 8 @ $1,562,500 /quarter; 9 - 12 @ $3,125,000 /quarter; 13 - 19 @ $4,687,500 /quarter and $198,437,500 for quarter 20 (December 2022). The term loan may be prepaid at any time without penalty. The term loan is provided by the same group of banks that provides our line of credit, and is governed by the same credit agreement as the line of credit. As such, it is subject to the same affirmative, negative, and financial covenants.



In March 2017, we issued $350,000,000 of 3.90% senior notes due April 2027 for proceeds of $345,450,000 (net of original issue discounts, underwriter fees and other transaction costs). The proceeds were used for general corporate purposes. This series of notes now totals $400,000,000 due to the additional $50,000,000 of notes issued in June.





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STANDBY LETTERS OF CREDIT



We provide, in the normal course of business, certain third-party beneficiaries with 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 standby letters of credit are issued by banks that participate in our $750,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of June 30, 2017 are summarized by purpose in the table below:





Note 8: Commitments and Contingencies



As summarized by purpose directly above in Note 7, our standby letters of credit totaled $43,538,000 as of June 3 0 , 2017.



As described in Note 9, our asset retirement obligations totaled $223,953,000 as of June 3 0 , 2017.



LITIGATION AND ENVIRONMENTAL MATTERS



We are subject to occasional governmental proceedings and orders pertaining to occupational safety and health or to protection of the environment, such as proceedings or orders relating to noise abatement, air emissions or water discharges. As part of our continuing program of stewardship in safety, health and environmental matters, we have been able to resolve such proceedings and to comply with such orders without any material adverse effects on our business.



We have received notices from the United States Environmental Protection Agency (EPA) or similar state or local agencies that we are considered a potentially responsible party (PRP) at a limited number of sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state and local environmental laws. Generally, we share the cost of remediation at these sites with other PRPs or alleged PRPs in accordance with negotiated or prescribed allocations. There is inherent uncertainty in determining the potential cost of remediating a given site and in determining any individual party's share in that cost. As a result, estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, remediation methods, other PRPs and their probable level of involvement, and actions by or against governmental agencies or private parties.



We have reviewed the nature and extent of our involvement at each Superfund site, as well as potential obligations arising under other federal, state and local environmental laws. While ultimate resolution and financial liability is uncertain at a number of the sites, in our opinion based on information currently available, the ultimate resolution of claims and assessments related to these sites will not have a material effect on our consolidated results of operations, financial position or cash flows, although amounts recorded in a given period could be material to our results of operations or cash flows for that period.



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.



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In addition to these lawsuits in which we are involved in the ordinary course of business, other material legal proceedings are more specifically described below:





Efforts to remediate the River have been underway for many years and have involved hundreds of entities that have had operations on or near the River at some point during the past several decades. We formerly owned a chemicals operation near the mouth of the River, which was sold in 1974. The major risk drivers in the River have been identified as dioxins, PCBs, DDx and mercury. We did not manufacture any of these risk drivers and have no evidence that any of these were discharged into the River by Vulcan.



The AOC does not obligate us to fund or perform the remedial action contemplated by either the draft RI/FS or the ROD. Furthermore, the parties who will participate in funding the remediation and their respective allocations, have not been determined. We do not agree that a bank-to-bank remedy is warranted, and we are not obligated to fund any of the remedial action at this time; nevertheless, we previously estimated the cost to be incurred by us as a potential participant in a bank-to-bank dredging remedy and recorded an immaterial loss for this matter in 2015.





There are numerous defendants , including Texas Brine and Occidental, to the litigation in state and federal court. Vulcan was first brought into the litigation as a third-party defendant in August 2013 b y T exas Bri ne . We have since been added as a direct and third-party defendant by other parties, including a direct claim by the s tate of Louisian a. Damage categories encompassed within the litigation include individual plaintiffs’ claims for property damage, a claim by the s tate of Louisia na and Texas Brine for response costs , c laims for physical damages to nearby oil and gas pipeline s and storage facilities (pipelines) , and business interruption claims . In addition to the plaintiffs’ claims, we have also been sued for contractual indemnity and comparative fault by both Texas Brine and Occidenta l. I t is alleged that the sinkhole was caused, in whole or in part, by our negligent actions or failure to act. It is also alleged that we breached the salt lease, as well as an operating agreement and related contracts with Texas Brin e; that we are strictly liable for certain property damages in our capacity as a former assignee of the salt lease; and that we violated certain covenants and conditions in the agreement under which we sold our Chemicals Divisio n. We have made claims for contractual indemnity and comparative fault against Texas Brine and Occidental. Discovery is ongoin g.



In December 2016, we settled with the plaintiffs in one of these cases involving individual property damag es. I n the first quarter of 2017, we offered to settle with the plaintiffs in the cases involving physical damages t o pi pelines and settled with one such plaintiff group . In the second quarter of 2017, we settled with another pipeline plaintiff group. The insurers who have coverage of these settlement amounts agreed that the cases were covered by our policy and have funded the settled cases in excess of our self-insured retention amount. We are scheduled to go to trial in September 2017 against the remaining pipeline plaintiff group, which will include certain cross-party and third-party claims against Vulcan. This will be a bench trial to determine percentages of fault or liability among the defendants, with a damages trial to be held at a later date.



Ex cept for th e settled or offered to settle cases, at this time we cannot reasonably estimate a range of liability pertaining to this matter.



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We are also engaged in an ongoing dialogue with the EPA , the Los Angeles Department of Water and Power, and other stakeholders regarding the potential contribution of the Hewitt Landfill to groundwater contamination in the North Hollywood Operable Unit (NHOU) of the San Fernando Valle y Superfund Site. W e are gathering and analyzing data and deve loping techni cal information to determine the extent of possible contribution by the Hewitt Landfill to the groundwater contamination in the area. This work is also intended to assist in identification of other PRPs that may have contributed to groundwater contamination in the area .



In July 2016, the EPA sent us a lette r re questing that we enter into an AOC for remedial design work at the NHOU including, but not limited to, the design of two or more groundwater extraction wells to be located between the Hewitt Landfill and certain public drinking water wells . We have reached an agreement in principle with the EPA regarding an AOC and Statement of Work for the design of two extraction wells between the Hewitt Landfill site and the North Hollywood West well field. The AOC provides for Vulcan to undertake a preliminary evaluation of the appropriateness of the two-well remedy. We expect to finalize and execute the AOC in the third quarter of 2017. Until the remedial design work and evaluation of the two-well remedy is complete, we cannot identify an appropriate remedial action or reasonably estimate a loss pertaining 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.

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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 and six month periods ended June 3 0 , we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:







ARO operating costs are reported in cost of revenues. 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:







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Note 10: Benefit Plans



We sponsor three qualified , noncontributory defined benefit pension plans. These plans cover substantially all employees hired before July 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 and the Chemicals Hourly Plan are generally based on salaries or wages and years of service; the Construction Materials Hourly Plan provides 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 2007, we amended our defined benefit pension plans to no longer accept new participants. Effective December 2013, we amended our defined benefit pension plans to freeze future benefit accruals after December 2015 for salaried pension parti cipants .



The following table sets forth the components of net periodic pension benefit cost:





The contributions to pension plans for the six months ended June 3 0 , 2017 and 201 6 , as reflected on the Condensed Consolidated Statements of Cash Flows, pertain to benefit payments under nonqualified plans. While w e do not expect to be required to make contributions to the qualified plans during 2017, we do expect to make a discretionary qualified plan contribution of approximately $ 10,6 00,000.



In addition to pension benefits, we provide certain healthcare and life insurance benefits for some retired employees. In 2012, we amended our postretirement healthcare plan to cap our portion of the medical coverage cost at the 2015 level. Substantially all our salaried employees and, where applicable, certain of our hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain se rvice requirements. Generally, C ompany-provided healthcare benefits end when covered individuals become eligible for Medicare benefits, become eligible for other group insurance coverage or reach age 65, whichever occurs first.



The following table sets forth the components of net periodic other postretirement benefit cost:





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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:







Changes in AOCI, net of tax, for the six months ended June 3 0 , 2017 are as follows:







Amounts reclassified from AOCI to earnings, are as follows:



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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.



Changes in total equity are summarized below:







There were no shares held in treasury as of June 3 0 , 2017, December 31, 2016 and June 3 0 , 2016.



Our common stock purchases (all of which were open market purchases) were as follows:





As of June 3 0 , 2017, 9,489,717 shares may b e p urchased under the current purchase authorizatio n o f our Board of Directors.

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Note 13: Segment Reporting



We have four operating (and reportable) segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. 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 u sed in the production of asphalt mix and ready-mixed concrete. Management reviews earnings from the product line reporting segments principally at the gross profit level.





segment financial disclosure









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Note 14: Supplemental Cash Flow Information



Supplemental information referable to our Condensed Consolidated Statements of Cash Flows is summarized below:





Note 15: Goodwill



Goodwill is recognized when the consideration paid for a business 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 six month periods ended June 3 0 , 20 17 and 201 6 .



We have four reportable segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. Changes in the carrying amount of goodwill by reportable segment from December 31, 201 6 to June 3 0 , 2017 are summarized below:



GOODWILL









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.

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Note 16: Acquisitions and Divestitures



BUSINESS ACQUISITIONS AND PENDING ACQUISITIO N



During the second quarter of 2017, we announced the pending acquisition of Aggregates USA , LLC, an aggregates business that operates 3 2 facilities ( 15 aggregates facilities , 16 aggregates rail distribution yards and 1 aggregates truck distribution yard ) in F lorida, Georgia , S outh Carolina, Tennessee and Virginia for $900.0 million in cash. In order to expedite the regulatory approval process, we ma y di vest several quarries in Tennesse e. We intend to close this acquisition in the second half of 2017.



Through the six months ended June 3 0 , 2017, we purchased the following for total consideration of $ 21 2,406 ,000 :







The 2017 acquisitions listed above are reported in our condensed consolidated financial statements as of their respective acquisition dates. None of these acquisitions were material to our results of operations or financial position either individually or collectively.



The fair value of consideration transferred for these acquisitions and the preliminary amounts of assets acquired and liabilities assumed (based on their estimated fair values at their acquisition dates), are summarized below:









Estimated fair values of assets acquired and liabilities assumed are preliminary pending appraisals of contractual rights in place and property, plant & equipment.



As a result of these acquisitions, we recognized $ 73,153,000 of amortizable intangible assets (primarily contractual rights in place). The contractual rights in place noted above will be amortized against earnings ( $ 66,630,000 – straight-line over a weighted-average 18.8 years and $6,462,000 – units of sales over an estimated 20 years ) and deductible for income tax purposes over 15 years. The goodwill noted above will be deductible for income tax purposes over 15 years.



For the full year 2016, we purchased the following for total consideration of $33,287,000 ( $32,537,000 cash and $750,000 payable):





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None of the 2016 acquisitions listed above were material to our results of operations or financial position either individually or collectively. As a result of these 2016 acquisitions, we recognized $16,670,000 of amortizable intangible assets ( $15,213,000 contractual rights in place and $1,457,000 noncompetition agreement). The contractual rights in place are amortized against earnings ( $6,798,000 – straight-line over 20 years and $8,415,000 units of sales over an estimated 20 years) and deductible for income tax purposes over 15 years.



DIVESTITURES AND PENDING DIVESTITURES



No assets met the criteria for held for sale at June 3 0 , 2017, December 31, 2016 or June 3 0 , 2016. However, as stated above, we ma y d ivest several quarries in Tennessee in order to expedite the regulatory approval process for the pending Aggregates USA acquisition.



Note 17: New Accounting Standards



ACCOUNTING STANDARDS RECENTLY ADOPTED



MODIFICATION ACCOUNTING FOR SHARE-BASED COMPENSATION For the interim period ended June 30, 2017, we early adopted Accounting Standards Update (ASU) 2017-0 9 , “ Scope of Modification Accounting. ” The ASU provide s guidance on the types of changes to the terms or conditions of share-based payment awards to which modification accounting is applied . Specifically, modification accounting is not applied if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. We will apply this ASU on a prospective basis to awards modified on or after the adoption date. The adoption of this standard had no impact on our consolidated financial statements .



ACCOUNTING STANDARDS PENDING ADOPTION



PRESENTATION OF NET PERIODIC BENEFIT PLANS  In March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which changes the presentation of the net periodic benefit cost in the income statement. Employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs. The other components of net benefit cost will be included in nonoperating expense. Additionally, only the service cost component of net benefit cost is eligible for capitalization. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Retrospective application of the change in income statement presentation is required, while the change in capitalized benefit cost is to be applied prospectively. A practical expedient is provided that permits entities to use the components of cost disclosed in prior years as a basis for the retrospective application of the new income statement presentation. We will adopt ASU 2017-07 in the first quarter of 2018. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements; service cost for 2017 is estimated to be $7,782,000 while all other components are estimated to be a benefit of $8,083,000.



GOODWILL IMPAIRMENT TESTING  In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill (Step 2) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying value over its fair value. This ASU is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. We will early adopt this standard as of our November 1, 2017 annual impairment test. The results of our November 1, 2016 annual impairment test indicated that the fair value of all our reporting units substantially exceeded their carrying values. As a result, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



INTRA-ENTITY ASSET TRANSFERS  In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which requires the tax effects of intercompany transactions other than inventory to be recognized currently. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. We will adopt this standard in the first quarter of 2018. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



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CASH FLOW CLASSIFICATION  In August 2016, the F ASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which amends guidance on the classification of certain cash receipts and payments in the statement of cash flows. This ASU adds or clarifies guidance on eight specific cash flow issues. Additionally, guidance on the presentation of restricted cash is addressed in ASU 2016-18 which was issued in November 2016. Both of these standards are effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitted. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



CREDIT LOSSES  In June 2016, the FA SB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which amends guidance on the impairment of financial instruments. The new guidance estimates credit losses based on expected losses, modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019 , and interim reporting periods within those annual reporting periods. Early adoption is permitted for annual reporting periods beginning after December 15, 2018. While we are still evaluating the impact of ASU 2016-13, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



LEASE ACCOUNTING  In February 2016, the FASB issued ASU 2016-02, “Leases,” which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flow in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods. Early adoption is permitted and modified retrospective application is required. We will adopt this standard in the first quarter of 2019. We are currently evaluating the impact that the adoption of this standard will have on our consolidated financial statements and related disclosures.



CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS  In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which amends certain aspects of current guidance on the recognition, measurement and disclosure of financial instruments. Among other changes, this ASU requires most equity investments be measured at fair value. Additionally, the ASU eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value for instruments not recognized at fair value in our financial statements. This ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitte d. W e do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



REVENUE RECOGNITION  In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This ASU provides a more robust framework for addressing revenue issues and expands required revenue recognition disclosures. Th is ASU is effective for annual reporting periods beginning after December 15, 2017, and interim reporting periods within those annual reporting periods. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Further, in applying th is AS U an entity is permitted to use either the full retrospective or cumulative effect transition approach. While we are currently evaluating the impact of adoption of th is standard and subsequent amendments on our consolidated financial statements, we expect to identify similar performance obligations under ASU 2014-09 compared with the deliverables and separate units of account we have identified under existing accounting standards. As a result, we expect the timing of our revenues to remain generally the same. We will adopt th is standard using the cumulative effect transition approach.

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ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





GENERAL COMMENTS



Overview



We provide the basic materials for the infrastructure needed to maintain and expand the U.S. economy. We operate primarily in the U.S. and are the nation's largest supplier of construction aggregates ( primarily crushed stone, sand and gravel ) and a major producer of asphalt mix and ready-mixed concrete . Our strategy and competitive advantage is based on our strength in a ggregates . Aggregates are used in most types of construction and in the production of asphalt mix and ready-mixed concrete.



Demand for our products is dependent on construction activity and correlates positively with changes in population growth, household formation and employment . E nd u ses include public construction (e.g., highways, bridges, buildings, airports, schools , prison s, s ewer and waste disposal syst ems, water supply systems, dams and reservoirs ), private nonresidential construction (e.g., manufacturing, retail, offices, industrial and institutional) and private residential construction (e.g., single-family houses, duplexes, apartment buildings and condominiums). Customers for our products include heavy construction and paving contractors; commercial building contractors; concrete products manufacturers; residential building contractors; railroads and electric utilities ; and to a small er extent state, county and municipal governments .



A ggregates have a high weight-to-value ratio and, in most cases, must be produced near where they are used; if not, transportation can cost more than the materials , rendering them uncompetitive compared to locally produced materials . Exceptions to this typical market structure include areas along the U.S. Gulf Coast and the Eastern Seaboard where there are limited supplies of locally produced hig h - q uality aggregates. We serve these markets from quarries that have access to long-haul transportation — shipping by ba rge and rail — and from our quarry on Mexico's Yucatan Peninsula with our fleet of Panamax-class, self-unloading ships.



There are practically no substitutes for quality aggregates. Because of barriers to entry created in many metropolitan markets by zoning and permitting regulation and because of high transportation costs relative to the value of the product, the location of reserves is a critical factor to our long-term success.



N o material part of our business depends upon any single customer whose loss would have a significant adverse effect on our business. In 201 6 , our five largest customers accounted for 8.1 % of our total revenues (excluding internal sales), and no single customer accounted for more than 3.0 % of our total revenues. Our products typically are sold to private industry and not directly to governmental entities. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly funded construction, such as highways, airports and government buildings, relatively insignificant sales are made directly to federal, state, county or municipal governments/agencies. Therefore, although reductions in state and federal funding can curtail publicly funded construction, our business is not directly subject to renegotiation of profits or termination of contracts with state or federal governmen ts.



While aggregates is our focus and primary business, we believe vertical integration between aggregates and downstream products, such as asphalt mix and ready-mixed concrete, can be managed effectively in certain markets to generate attractive financial returns. We produce and sell asphalt mix and /or ready-mixed concrete primarily in our mid-Atlantic, Georgi a , S outhwestern , Tennessee and W estern markets. Aggregates comprise approximately 95 % of asphalt mix by weight and 8 0 % of ready-mixed concrete by weight. In both of these downstream businesse s, a ggregates are primarily supplied from our own operations.



Seasonality and cyclical nature of our business



Almost all our products are produced and consumed outdoors. Seasonal changes and other weather-related conditions can affect the production and sal e s volume o f our products. Therefore, the financial results for any quarter do not necessarily indicate the results expected for the year. Normally, the highest sales and earnings are in the third quarter and the lowest are in the first quarter. Furthermore, our sales and earnings are sensitive to national, regional and local economic conditions , d emographic and population fluctuation s, and particularly to cyclical swings in construction spending, primarily in the private sector.

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EXECUTIVE SUMMARY

Financial highlights for SeCOND Quarter 201 7

Compared to second quarter 201 6 :



Our second quarter results reflect record unit profitability in our Aggregates segment despite wet weather and difficult operating conditions across many of our Southeastern and mid-Atlantic markets . Extreme wet weather across the Southeast ( Alabama, Florida, Georgia, Louisiana and Mississippi) , and wea ker demand in Illinois and coastal Texas contributed to aggregates shipments that were 2 % below the prior year quarter , or 3% below on a same-store basis. This shortfall in second quarter aggregates shipments drove most of the difference in our reported results versus our plan. Freight-adjusted aggregates sales price increased $0.55 per ton, or 4%; same store freight-adjusted aggregates sale price increased $0.59 per ton, or 5%.



Despite the volume shortfall in the quarter, what is happening behind the reported numbers is encouraging. Private demand in our markets continued to strengthe n. Highway project starts accelerated in the second quarter, signaling an end to the softness in starts that we have been working through for the last year. Our shipment backlog for public highway work has not been this high in at least three year s . California and Virginia, important states for us , have return ed to shipment growth. O ur core profitability in the Aggregates segment continues to improve. Aggregates unit gross profit was a second quarter record despite the wet weather we experienced in some of our strongest markets. Aggregates pricing, adjusted fo r mix, was consistent with full- year expectations. These results are a good indication of the market’s visibility to fu r ther demand recovery.



As of June 30, year-to-date cash capital expenditures were $291.0 million. This amount included $107.0 million invested in internal growth projects to enhance our aggregates distribution network to markets without local aggregates reserves, as well as development of new sites and other growth investment projects. Core capital investments to replace existing property, plant and equipment made up the remaining $184.0 million , and are expected to be approxim ately $300 million for the full year.



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We remain active in the pursuit of bolt-on acquisitions and other value - creating growth investments. Since January, we have closed acquisitions totaling $212.4 million (see Note 16 to the condensed consolidated financial statements ). O ur recent acquisitions are performing well and complement our leading positions in certain California, Illinois, New Mexico and Tennessee markets. During the second half of 2017, we intend to close on the $900.0 million acquisition of Aggregates USA as described in Note 16 to the condensed consolidated financial statements.



At the end of the second quarter, total debt was $3.3 billion (including deferred financing costs) and cash was $1.1 billion. Total debt included $1.0 billion of new notes issued in June to help fund acquisitions and othe r g rowth investments , including the previously announced agreement to acquire the assets of Aggregates USA, and to retire $522.5 million of notes due in June and December of 201 8. R e tirement of the 2018 maturiti es was completed in July for $ 565.5 million using pr oceeds from the new notes. Full- year interest expense will be approximately $ 193.2 million, including $ 46.0 million of one-time c harges incurred in the third quarter for the early debt retirement.



During the quarter, we returned $44.1 million to shareholder s through dividends and share repurchases, bringing the year-to-date total to $126.5 million.



We are excited about the growth opportunities ahead of us. Leading indicators, such as growth in the pre - construction pipeline and in construction start s in our markets, as well as growth in our own order backlog s , point toward a return to growth in the secon d half of this year and beyond. Trailing -twelve-month construction start s i n our markets ha ve steadily improved from a year ago, outpacing non-Vulcan markets by a wide margin. Private construction starts r ema in s trong, led by continued growth in both residential and nonresidential buildings . Importantly, public construction starts have turn ed positive due to growth in highway and road spending . State and local governments have continued to pass funding measures to increase public infrastructure investment significantly, and more projects supported by federal FAST Act funding have moved further toward the active construction stage.



T he rate of growth through the remainder of this year will depend on the pace at which our customers catch up on deferred work and on the timing of shipments to large projects in our backlog. Given these factors and the significant shortfall to plan experienced in the second quarter, we have revised our outlook for aggregates shipments to between 18 2 million and 187 million tons. This anticipates 5% to 10% growth in shipments from August through the end of the year. Primarily due to this lower expectation for 2017 aggregates shipments, we now project full-year Adjusted EBITDA of between $1.05 billion and $1.13 billion. Other management expectations (e.g . aggregates price improvement , a sphalt and c oncrete gross profit growth , SAG expense , capital spending and effective tax rate ) remain as outline d in our fourth quarter 2016 earnings communications.



Our business remains on track with our longer-term goals and expectations. We remain confident in the sustained, multi-year recovery in materials demand across our markets and in the further, compounding improvement to our Aggregates segment unit profitability. Oper ational excellence, solid sales execution and cost control continue to have a strong impact on the bottom line, in spite of the last twelve months of uneven growth. We have the financial strength to continue making smart growth investments that fit us best and we are committed to continuous improvement in safet y, customer service and operational efficiencies.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES



Gross profi t margin excluding freight and delivery revenues is not a Generally Accepted Accounting Principle (GAAP) measure. We present this metric as it is consistent with the basis by which we review our operating results. Likewise, we believe that this presentation is consistent with our competitors and consistent with the basis by which investors analyze our operating results considering that freight and delivery services represent pass-through activities. Reconciliation of this metric to its nearest GAAP measure is presented below:



gross profit margin in accordance with gaap







gross profit margin excluding freight and delivery revenues









SAME-STORE



We have provided certain information on a same-store basis. When discussing our financial results in comparison to prior periods, we may exclude the operating results of recently acquired/divested businesses that do not have comparable results in the periods being discussed. These recently acquired/divested businesses are disclosed in Note 16 “Acquisitions and Divestitures.” This approach allows us to evaluate the performance of our operations on a comparable basis. We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our operations are performing period over period without the effects of acquisition and divestiture activity. Our same-store information may not be comparable to similar measures used by other entities.





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Aggregates segment gross profi t margin a s a percentage of freight-adjusted revenues is not a GAAP measure. We present this metric as it is consistent with the basis by which we review our operating results. We believe that this presentation is consistent with our competitors and meaningful to our investors as it excludes freight, delivery and transportation revenue s, w hich are pass-through activit ies . It also excludes immaterial other revenues related to services, such as landfill tipping fees, that are derived from our aggregates business. Incremental gross profit as a percentage of freight-adjusted revenues represents the year-over-year change in gross profit divided by the year-over-year change in freight-adjusted revenues. Reconciliation s of these metric s to their nearest GAAP measure s are presented below:



Aggregates segment gross profit margin in accordance with gaap







Aggregates segment gross profit as a percentage of
freight-adjusted revenues





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GAAP does not defin e “ cash gross profit ” and it should not be considered as an alternative to earnings measures defined by GAAP. We present th is metric for the convenience of investment professionals who use such metrics in their analyses and for shareholders who need to understand the metrics we use to assess performance . We and the investment community us e this metric to assess the operating performance of our business . Additionally, we present this metric as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. Aggregates segment c ash gross profit per ton is computed by dividing Aggregates segment cash gross profit by tons shipped. Reconciliation of th is metric to its nearest GAAP measur e i s presented below:



cash gross profit









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GAAP does not defin e “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) and it should not be considered as an alternative to earnings measures defined by GAAP. We present th is metric for the convenience of investment professionals who use such metrics in their analyses and for shareholders who need to understand the metrics we use to assess performance . We us e this metric to assess the operating performance of our business and for a basis of strategic planning and forecasting as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. We adjust EBITDA for certain items to provide a more consistent comparison of earnings performance from period to period . Reconciliation of th is metric to its nearest GAAP measur e is presented below:



EBITDA and adjusted ebitda









Adjusted EBITDA for 2016 has been revised to conform with the 2017 presentation which no longer includes an adjustment for charges associated with business development. We no longer exclude charges associated with business development as they are deemed to represent normal recurring operating expenses.





2017 projected ebitda



The following reconciliation to the mid-point of the range of 2017 Projected EBITDA excludes adjustments for cha r ges associated with divested operations, asset impairment and other unusual gains and losses . Due to the difficulty of forecasting the timing or amount of items that have not yet occurred, are out of our control, or cannot be reasonably predicted, we are unable to estimate the significance of this unavailable information.



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RESULTS OF OPERATIONS



Total revenues include sales of products to customers, net of any discounts and taxes, and freight and delivery revenues billed to customers. Related freight and delivery costs are included in cost of revenues. This presentation is consistent with the basis on which we review our consolidated results of operations. We discuss separately our discontinued operations, which consist of our former Chemicals business.



The following table highlights significant components of our consolidated operating results including E BITDA and Adjusted EBITDA .



con solidated operating Result highlight s







SECOND quarter 2017 Compared to SECOND Quarter 2016



Second quarter 201 7 total revenues were $ 1,030.8 million, up 8 % from the second quarter of 201 6 . Shipments de creased in aggregates ( - 2 %) w hile they were up in asphalt mix ( + 1 6 %) and ready-mixed conc rete ( + 21 %). Gross profit declined in the Aggregates (-$1.2 million or less than -1%) and Asphalt (-$2.0 million or -6%) segments while it was up in the Concrete segment (+$3. 3 million or + 54 %). Diesel fuel cost s were up $ 2.8 million as a result of a 15% increase in the unit cost of diesel fuel, with most ($1.9 million ) of this increased cost reflected in the Aggregates segment.



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Net earnings for the second quarter of 201 7 were $ 120.1 million, or $ 0.8 9 per diluted share, compared to $ 124.7 million, or $ 0.92 per diluted share, in the second quarter of 201 6 . Each period’s results were impacted by discrete items, as follows:





Continuing Operations — Changes in earnings from continuing operations before income taxes for the second quarter of 201 7 versus the second quarter of 201 6 are summarized below:



earnings from continuing operations before income taxes





Aggregates shipment trends varied widely across our footprint, largely due to weather and the timing of large projects. Aggregates shipment s decreased 2% versus the prior year ’s quarter and same-store shipments declined 3%. Our Alabama, Florida, Georgia, Louisiana and Mississippi markets combined saw shipments decline 12% versus the prior year’s second quarter. Severe wet weather and flooding slowed construction activity and impaired shipments in May and June, two key months of the construction seaso n. A ggregates shipments in Florida and Georgia, for example, declined double-digits in June despite very strong underlying market condition s . Coastal Texas and Illinois also experience d significant shipment declines. In Illinois, shipments declined 19% versus the prior year quarter due in part to the absence of a state budget to support public constructio n. Coastal Texas shipments in the quarter were impacted by a softer local economy and the relative timing of DOT spending and other large project activity; however, backlogs for that market remain strong. Markets outside of the se areas combined to grow 6 % versus the prior year’s second quarter — more in line with trend and despite the weather challenges in the Carolinas, Tennessee and Virginia . Shipments in California grew 10 % , driven by private construction activity and the catch-up on work deferred from the very wet first quarter. California’s passage of a long-term transportation bill resolved Caltrans’ funding uncertainty and should, along with other factors, support sustained shipping rate impr ovements over the coming years.



Broad pricing momentum continued across our footprint with substantially all markets realizing price growth in the second quarter. For the quarter, freight-adjusted average sales price for aggregates increased 4% v ersus the prior yea r , or $0.5 5 per ton (same-store 5%, or $0.59 per ton) , despite a negative mix impact. The overall pricing climate remains favorable as visibility to a sustained recovery improves and as construction materials producers stay focused on earning adequate returns on capital. California and Georgia each realized high-single digit price growth, again supported by clear and improving visibility to sustained growth in demand.



Second quarter Aggregates segment gross profit was $252.8 million, or $5.27 per ton. Segment results in the quarter were negatively impacted by product shipment mix, acquisition-related integration results , a 15% increase in the unit cost of diesel fuel and costs to begin our transition to two new, more efficient ships to transport aggregates from our quarry in Mexico. In total, these items negatively impacted Aggregates segment gross profit by $ 15.7 million in comparison to the prior year .



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Asphalt segment gross profit was $28.9 million in the second quarter of 2017 versus $30.9 million in the prior year period. Shipments increased 16% in total and 6% on a same-store basis. Arizona and California (our largest asphalt market) drove most of the same-store growth in shipments. Solid volume growth was offset by lower sales price , higher liquid asphalt unit cost and cost s related to integration of recent ac q uisitions .



Concrete segment gross profit was $9.5 million in the quarter compared to $6.1 million in the prior year period. Shipments increased 21% versus the prior year as volumes increased in most of our concrete markets, including Texas and Virginia (our largest concrete market). On a same-store basis, volumes increased 11%. Materials margins and unit gross profit in concrete also improved versus the prior year period.



Our Calcium segment reported gross profit of $0.6 million versus $1.1 million in the second quarter of 2016.



On a trailing-twelve-month basis, total gross profit in our non-aggregates segments was $132.0 million, an 11% increase from the prior year’s comparable period.



SAG expenses were $82.8 million versus $82.7 million in the prior year’s second quarter. Trailing-twelve-month SAG expenses were $320.8 million, in line with full - year expectations, which remain unchanged.



Gain on sale of property, plant & equipment and businesses was $2.8 million in the second quarter of 2017 compared to $ 0.4 million in the second quarter of 2016.



During the second quarter of 2016, we settled 17 of 22 business interruption claims related to the 2010 Gulf C oast oil spill, resulting in a gain of $11.0 million. There were no similar settlements in the second quarter of 2017.



During the second quarter of 2016, we wrote off $0.9 million of nonrecoverable project costs related to two Aggregates segment capital projects that we no longer intend to complete. There were no impairment charges during the second quarter of 2017.



Other operating expense, generally consisting of various cost items not included in cost of revenues, was $ 17.8 m illion in the second quarter of 2017 versus $ 6.2 million in the second quarter of 201 6 . Th is account includes the aforementioned discrete charges associated with divested operations of $ 15.0 million and $ 3. 9 million for the six months ended June 3 0 , 2017 and 2016, respectively. These charges were composed of the following: 2017 — environmental liability accrual associated with previously divested properties ($ 15.0 million , including $14.2 million related to the Hewitt Landfill matter ) and 2016 — a pension withdrawal settlement revision ($ 1.5 million) and environmental liability accruals associated with previously divested properties ($ 2.3 million).



Net interest expense was $ 38.5 million in the second quarter of 201 7 compared to $ 33. 3 million in 201 6. The higher interest expense was the result of interest incurred on the $1,000.0 million of debt issued in June 2017 and the $350.0 million of debt issued in M arch 2017, partially offset by lower interest expense on our line of credit.



Income tax expense from continuing operations was $ 45. 7 million in the second quarter of 201 7 compared to income tax expense of $ 53.2 million in the second quarter of 201 6 . The decrease in our income tax expense resulted largely from applying the statutory rate to the decrease in our pretax earnings. Expectations for the full- year 2017 effective tax rate continue to be 28%.



Earnings from continuing operations were $ 0.83 per diluted share in the second quarter of 201 7 compared to $0. 93 per diluted share in the second quarter of 2016 .



Discontinued Operations — Second quarter pretax earnings from discontinued operations were $ 1 2.8 million in 2017 compared with a pretax loss of $ 4.2 million in 2016. Both periods i nclude charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The current year results also include insurance recoveries from previously incurred general liability costs. For additional details, see Note 2 to the condensed consolidated financial statements.

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YEAR-TO-DATE JUNE 30, 2017 Compared to YEAR-TO-DATE JUNE 30, 2016



Total revenues for the first six months of 2017 were $ 1,818.1 million, up 6 % from the first six months of 201 6 . Shipments dec lined in aggregates ( - 2 %) w hile they were up in asphalt mix ( + 11 %) and ready-mixed conc rete ( + 22 %). Gross profit declined in the Aggregates (-$9.4 million or -2%) and Asphalt (-$ 5.6 million or - 13 %) segments while it was up in the Concrete segment (+$ 10.3 million or + 107 %). Diesel fuel costs were up $8.5 million as a result of a 24% increase in the unit cost of diesel fuel compared with the first six months of 2016, with most ($6.9 million) of this increased cost reflected in the Aggregates segment.



Net earnings for first six months of 201 7 were $ 165.1 million, or $ 1.22 per diluted share, compared to $ 1 64.9 million, or $ 1. 21 per diluted share, in the first six months of 201 6 . Each period’s results were impacted by discrete items, as follows:





Continuing Operations — Changes in earnings from continuing operations before income taxes for year-to-date June 30, 2017 versus year-to-date June 30, 2016 are summarized below:



earnings from continuing operations before income taxes





Gross profit for our Aggregates segment was $393.0 million for the first six months of 2017 versus $402.4 million in comparable 201 6 . Aggregates segment sales of $1,467.9 million were up 3% from the prior year’s first half, while aggregates freight-adjusted revenues of $1,128.2 million were up 2%. First - half aggregates shipment s declined 2%, or 1.8 million tons, compared to the prior year. Wet weather — severe flooding in California during the first quarter of 2017 and extreme rainfall in core Southeastern markets (Alabama, Florida, Georgia, Louisiana and Mississippi ) during the second quarter of 2017 — contributed to the shipment shortfall. Freight-adjusted average sales price for aggregates increased 5%, or $0.57 per ton, versus the first half of 2016, with all major markets realizing price improvement. First half 2017 unit cost of sales (freight-adjusted) in the Aggregates segment was up 7 % , or $0.58 per ton, versus the prior year’s first half; offsetting the increase in unit pricing. As noted above, higher diesel fuel costs accounted for $6.9 million of the cost increase in the Aggregates segment. Additionally, i nefficiencies and lower volume due to the wet weather/flooding conditions also contributed to the increased cost . Gross profit per ton was nearly flat at $4.56 per ton for the first half of 2017 compared with $4.57 per ton for the first half of 2016.



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Asphalt segment gross profit of $37.6 million was down $5.6 million from the first six months of 2016. Shipments increased 11% in total and 3% on a same-store basis. Arizona and New Mexico drove most of the same-store growth in shipments as California (our largest asphalt market) was down slightly due to wet weather/flooding in the first quarter of 2017 . Materials margins were lower as a result of lower unit sales price and higher liquid asphalt unit cost.



Concrete segment gross profit was $19.9 million for the first six months of 2017, up $10.3 million from the prior year period. Shipments increased 22% versus the first half of 2016 as ready-mixed concrete volumes increased in all of our markets. On a same-store basis, ready-mixed concrete shipments increased 16%. Concrete segment materials margins and unit gross profit also improved versus the first half of 2016.



Our Calcium segment reported gross profit of $1.3 million versus $1.7 million in the first half of 2016.



SAG expenses were $164.9 million versus $159.1 million in the prior year’s first half reflecting a 0.2 percentage point (20 basis point) reduction as a percentage of total revenues.



As previously discussed, d uring the second quarter of 2016, we recognized a gain of $11.0 million related to the settlement of business interruption claims from the 2010 Gulf C oast oil spill.



There were no asset impairment charges during the first six months of 2017. During the first six months of 2016, w e recorded $10.5 million of losses on impairment of long-lived assets , as follows: ($0.9 million) — wrote off nonrecoverable project costs related to two Aggregates segment capital projects that we no longer intend to complete and ($9.6 million ) — terminated a nonstrategic aggregates site lease we no longer intended to develop.



Other operating expense, net is composed of various cost items not included in cost of revenues and not specifically presented in the accompanying Condensed Consol i dated Statement of Comprehensive Income. The total other operating expens e , n et and significant items included in the total were:





Net interest expense was $ 72.5 million in the first six months of 201 7 compared to $ 67.1 million in 201 6. The higher interest expense result ed from interest incurred on the $1,000.0 million of debt issued in June 2017 and the $350.0 million of debt issued in M arch 2017, partially offset by lower interest expense on our line of credit.



Income tax expense from continuing operations was $ 42.5 million in the first six months of 201 7 compared to $ 41.8 million in the first six months of 201 6 . The increase in our income tax expense resulted from lower excess tax benefits from share-based compensation in the first six months of 2017, largely offset by applying the statutory rate to the decrease in our pretax earnings.



Earnings from continuing operations were $ 1.15 per diluted share in the first six months of 201 7 compared to $ 1.24 per diluted share in the first six months of 2016 .



Discontinued Operations — Year-to-date June pretax earnings from discontinued operations were $ 1 4.9 million in 2017 compared with a pretax loss of $7.2 million in 20 16. Our discontinued operations i nclude charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The current year results also include insurance recoveries from previously incurred general liability costs. For additional details, see Note 2 to the condensed consolidated financial statements.

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LIQUIDITY AND FINANCIAL RESOURCES



Our primary sources of liquidity are cash provided by our operating activities and a substantial, committed bank line of credit. A dditional sources of capital include access to the capital markets, the sale of surplus real estate, and dispositions of nonstrategic operating assets. We believe thes e f inancial resources a re sufficient to fund our business requirements for 201 7 , including :





Our balanced approach to capital deployment remain s unchanged. We intend to balance reinvestment in our business, growth through acquisitions and return of capital to shareholders , while sustaining financial strength and flexibility . We expect to increase the return of capital through div idends and share repurchase s a s earnings grow.



We actively manage our capital structure and resources in order to minimize the cost of capital while properly managing financial risk. We seek to meet these objectives by adhering to the following principles:







C ash



Included in our June 3 0 , 2017 cash and cash equivalents balance of $ 1,129.8 million is $ 69.9 million of cash held at our foreign subsidiaries. All of this $ 69.9 million of cash relates to earnings that are indefinitely reinvested offshore. Use of this cash is currently limited to our foreign operations.



cash from operating activities















Net cash provided by operating activities is derived primarily from net earnings before noncash deductions for depreciation, depletion, accretion and amortization. Net cash provided by operating activities was $ 155.2 million during the six months ended June 3 0 , 2017, a $ 0.2 million in crease compared to the same period of 2016. As indicated above, all line items comprising cash from operating activities were consistent year-over-year.



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cash from investing activities



Net cash used for investing activities was $ 483.6 million during the first six months of 201 7 , a $ 287.7 million in crease compared to the s ame period of 201 6 . We invested $ 291.0 millio n i n our existing operations in the first six months of 201 7 , a $ 91.3 million increase compared to the prior year period . Of this $ 291.0 million, $ 107.0 million was invested in shipping capacity enhancements , new site developments and other growth opportunities. Additionally, d uring the first six months of 201 7 , we acquired the following businesses for $ 210.6 million of cash consideration: California — ready-mixed concrete facilities, a n aggregates marine distribution yard and building materials yards; Illinois — two aggregates facilities; New Mexico — an aggregates facility and Tennesse e — an aggregates facility, asphalt mix operations, an asphalt paving business and a rail-served aggregates facility . There were no significant acquisitions in the first six months of 2016.



cash from financing activities



Net cash provided by financing activities in the first six months of 201 7 was $ 1,199.2 million, a n inc rease of $ 1,350.4 million compared with the cash used during the same period of 201 6 . This in crease was primarily attributable to the 2017 debt issuances (as described in the section below ) which provided net proceeds of $ 1,585.0 million partially offset by the repayment of ou r $235.0 million line of credit. Additionally, w e increase d the r eturn of capital to our shareholders by $ 4.0 millio n — i ncreased dividends ($ 0 .5 0 per share compared to $0. 4 0 per share ) partially offset by de creased share repurchase s ( 510,283 shares @ $ 118.18 per share compared to 636,659 shares @ $ 10 8.62 per share ) . Finally, cash paid for shares withheld to satisfy statutory income tax withholding obligations of $ 24.2 million de creased $ 4.5 million from the first six months of 2016 (s ee Note 1 to the condensed consolidated financial statements, caption Share-based Compensation – Accounting Standards Update) .

debt



Certain debt measures are outlined below:













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Line of credit



I n December 2016, among other favorable changes, we extended the maturity date of our unsecured $750.0 million line of credit from June 2020 to December 2021. The credit agreement contains affirmative, negative and financial covenants customary for an unsecured investment-grade faci lity. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5:1 (upon certain acquisitions, the maximum ratio can be 3.75:1 for three quarters) , and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of June 30, 2017, we were in compliance with the line of credit covenants.



Borrowings and other cost ranges and details are described in Note 7 to the condensed consolidated financial statements. As of June 30, 2017 , the credit margin for London Interbank Offered Rate (LIBOR) borrowings was 1.25 % , the credit margin for base rate borrowings was 0.25 % , and the commitment fee for the unused amount was 0.15 % .



A s of June 30, 2017, o ur available borrowing capacity under the line of credit was $ 706.5 million. Utilization of the borrowing capacity was as follows:





TERM DEBT



All of o u r term debt is unsecured . $ 3,118.7 million of such de bt is governed by two essentially identica l i ndentures that contain customary investment-grade type covenants . The primary covenant in both indentures limits the amount of secured debt we may incur without ratably securing such debt . As of June 30, 2017 , we were in compliance with all of the term debt covenants.



In June 2017, we issued $1,000.0 million of debt composed of three issuances as follows: (1) $700.0 million of 4.50 % senior notes due June 20 47, ( 2 ) $ 50.0 million of 3.90% senior notes due April 2027 (these notes are a further issuance of, and form a single series with, the 3.90% notes issued in March 2017 ), and ( 3 ) $250.0 million of floating-rate senior notes due June 2020 . These issuances resulted in proceeds of $ 989.5 million (net of original issue discounts /premiums , underwriter fees and other transaction costs). The proceeds will be used to partially finance the pending acquisition of Aggregates USA as described in Note 16 to the condensed consolidated financial statements and to early retire the notes due in 2018 ($272.5 million @ 7.00% and $250.0 million @ 10.375%). This early retirement was completed in July at a cost of $ 565. 5 million inc ludin g $ 4 3 .0 million in premium above the principal amount of the notes and transaction costs . As a result, in the third quarter we will recognize $3.0 million of net noncash expense associated with the acceleration of unamortized discounts, deferred debt issuance costs and deferred interest rate derivative settlement losses .



In June 2017, we drew the full $250.0 million on the unsecured delayed draw term loan entered into in December 2016 . These funds were used to re pay the $2 35 .0 million borrowed on our line of credit and for general corporate purposes . Borrowings bear interest in the same manner as the line of credi t. T he term loan principal will be repaid quarterly beginning March 201 8 a s follows: quarters 5 - 8 @ $1.6 million/quarter ; 9 - 12 @ $3.1 million/quarter ; 13 - 19 @ $4.7 million/quarter and $198.4 million for quarter 20 (December 2022) . The term loan may be prepaid at any time without penalty. The term loan is provided by the same group of banks that provides our line of credit, and is governed by the same credit agreement as the line of credit. As such, it is subject to the same affirmative, negative, and financial covenants.



In Marc h 2 017, we issued $ 350.0 million of 3.90 % senior notes due April 2027 for proceeds of $ 345.5 million (net of original issue discounts, underwriter fees and other transaction costs). The proceeds were used fo r g eneral corporate purposes. This series of notes now totals $400.0 million due to the additional $50.0 million of notes issued in June .





CURRENT MATURITIES of long-term debt



The $ 52 5.8 million of current maturities of long-term debt as of June 30, 2017 includes all long-term deb t that we intend to pay within twelve month s, a nd is due as follows:













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debt ratings



Our debt ratings and outlooks as of June 30, 2017 are as follows :









Equity



Our common stock issuances and purchases are as follows :









On February 10, 20 06 , our Board of Directors authorized us to purchase up to 10,000,000 shares of our common stock. On February 10, 2017, there were 1,756,757 shares remaining under this authorization and our Board of Directors authorized us to purchase an additional 8,243,243 shares to refresh the number of shares we were authorized to purchase to 10,000,000. As of June 3 0 , 2017 , t here were 9,489,717 shares remaining under th e a uthorizatio n. Depending upon market, business, legal and other conditions, we may make share purchases from time to time through open market (including plans designed to comply with Rule 10b5-1 of the Securities Ex c hange Act of 1934) and/or privately negotiated transactions . The authorizatio n has no time limit, do es not obligate us to purchase any specific number of shares, and may be suspended or discontinued at any time .



Our common stock purchases ( all of which were open market purchases) for the year-to-date periods end ed are detailed below:







There were no shares held in treasury as of June 3 0 , 20 17 , December 31, 201 6 and June 3 0 , 201 6 .

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off-balance sheet arrangements



We have no off-balance sheet arrangements, such as financing or unconsolidated variable interest entities, that either have or are reasonably likely to have a current or future material effect on our:







Standby Letters of Credit



For a discussion of our standby letters of credit, see Note 7 to the condensed con solidated financial statements.





Cash Contractual Obligations



Our obligation to make future payments under contracts is presented in our most re cent Annual Report on Form 10-K. Changes resulting from our March 2017 debt issuance as described in Note 7 to the condensed consolidated financial statements are outlined in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.



As a result of our June 2017 debt transactions as well as the July 2017 debt retirement , as described in Note 7 to the condensed consolidated financial statements, our obligations to make future payments under contracts increased (decreased) as follows:











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CRITICAL ACCOUNTING POLICIES



We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our Annual Report on Form 10-K for the year ended December 31, 201 6 (Form 10-K).



We prepare these financial statements to conform with accounting principles generally accepted in the United States of America. These principles require us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. We base our estimates on historical experience, current conditions and various other assumptions we believe reasonable under existing circumstances and evaluate these estimates and judgments on an ongoing basis. T hese estimates form the basis for the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.



We believe that the accounting policies described in the “Management's Discussion and Analysis of Financial Condition and Results of Operations” section of our Form 10-K require the most significant judgments and estimates used in the preparation of our financial statements, so we consider these to be our critical accounting policies. There have been no changes to our critical accounting policies during the six months ended June 3 0 , 2017 .







new Accounting standards



For a discussion of the accounting standards recently adopted or pending adoption and the e ffect such accounting changes will have on our results of operations, financial position or liquidity, see Note 17 to the condensed consolidated financial statements.





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FORWARD-LOOKING STATEMENTS



Certain matters discussed in this report, including expectations regarding future performance, contain forward-looking statements that are subject to assumptions, risks and uncertainties that could cause actual results to differ materially from those projected. These assumptions, risks and uncertainties include, but are not limited to:





All forward-looking statements are made as of the date of filing. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise , except to the extent required by law. Investors are cautioned not to rely unduly on such forward-looking statements when evaluating the information presented in our filings, and are advised to consult any of our future disclosures in filings made with the Securities and Exchange Commission (SEC) and our press releases with regard to our business and consolidated financial position, results of operations and cash flows.





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INVESTOR information



We make available on our website, www.vulcanmaterials.com , free of charge, copies of our:





Our website also includes amendments to those reports filed with or furnished to the Securities and Exchange Commission (SEC) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as well as all Forms 3, 4 and 5 filed with the SEC by our executive officers and directors, as soon as the filings are made publicly available by the SEC on its EDGAR database ( www.sec.gov ).



The public may read and copy materials filed with the SEC at the Public Reference Room of the SEC at 1 00 F Street, NE, Washington, D . C . 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330. In addition to accessing copies of our reports online, you may request a copy of our Annual Report on Form 10-K, including financial statements, by writing to Jerry F. Perkins Jr., General Counsel and Secretary, Vulcan Materials Company, 1200 Urban Center Drive, Birmingham, Alabama 35242.



We have a:





Copies of the Business Conduct Policy and the Code of Ethics are available on our website under the heading “Corporate Governance.” If we make any amendment to, or waiver of, any provision of the Code of Ethics, we will disclose such information on our website as well as through filings with the SEC.



Our Board of Directors has also adopted:





These documents meet all applicable SEC and New York Stock Exchange regulatory requirements.



The Charters of the Audit, Compensation and Governance Committees are available on our website under the heading, “Corporate Governance,” or you may request a copy of any of these documents by writing to Jerry F. Perkins Jr., General Counsel and Secretary, Vulcan Materials Company, 1200 Urban Center Drive, Birmingham, Alabama 35242.



Information included on our website is not incorporated into, or otherwise made a part of, this report.



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ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



MARKET RISK



We are exposed to certain market risks arising from transactions that are entered into in the normal course of business. T o manag e t hese market risks, we may use derivative financial instruments. We do not enter into derivative financial instruments for speculative or trading purposes.



As discussed in the Liquidity and Financial Resources section of Part I, Item 2, we actively manage our capital structure and resources to balance the cost of capital an d r isk of financial stress . Such activity includes balancing the cost and risk of interest expense. In addition to floating-rate borrowings, we at times use interest rate swaps to manage the mix of fixed- rate and floating-rate debt.



While floating-rate debt exposes us to rising interest rates, it is typically cheaper than issuing fixed-rate debt at any point in time but can become more expensive than previously issued fixed-rate debt . However, a rising interest rate environment is not necessarily harmful to our financial results. Since 200 2 , our EBITDA and Operating income are positively correlated to floating interest rates (as measured by 3-month LIBOR). As such, our business serves as a natural hedge to rising interest rates, and floating-rate debt serves as a natural hedge against weaker operating results due to general economic weakness .



At June 3 0 , 2017 , the estimated fair value of our long-term deb t i ncluding current maturities was $ 3,645.9 million compared to a book value of $ 3,335.1 million. The estimated fair value was determined by averaging several asking price quotes for the publicly traded notes and assuming par value for the remainder of the deb t. The fair value estimate is based on information available as of the balance sheet date. The effect of a decline in interest rates of one percentage point would increase the fair value of our debt by approximately $ 269.3 million.



We are exposed to certain economic risks related to the costs of our pension and other postretirement benefit plans. These economic risks include changes in the discount rate for high-quality bonds and the expected return on plan assets . The impact of a change in these assumptions on our annual pension and other postretirement benefits costs is discussed in our most recent Annual Report on Form 10-K.

ITEM 4

controls and procedures



disclosure controls and procedur es



We maintain a system of controls and procedures designed to ensure that information required to be disclosed in reports we file with the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. These disclosure controls and procedures (as defined in the Securitie s E xchange Act of 1934 Rules 13a - 15(e) or 15d - 15(e)), include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer, with the participation of other management officials, evaluated the effectiveness of the design and operation of the disclosure controls and procedures as of June 3 0 , 2017 . Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 3 0 , 2017 .



No material changes were made during the second quarter of 201 7 to our internal con trols ov er financial reporting , nor have there been other factors that materially affect these controls .

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part I i   other information

ITEM 1

legal proceedings





Certain legal proceedings in which we are involved are discussed in Note 12 to the consolidated financial statements and Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 201 6 , and in Note 8 to the condensed consolidated financial statements and Part II, Item 1 of our Q uarterly Report on Form 10-Q for the quarter ended March 31, 2017. See Note 8 to the condensed consolidated financial statements of this Form 10-Q for a discussion of certain recent developments concerning our legal proceedings.





ITEM 1A

risk factors





T here were no material changes to the risk factors disclosed in

Part I , Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.





ITEM 2

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Purchases of our equity securities during the quarter ended June 3 0 , 2017 are summarized below.







We did not have any unregistered sales of equity securities during the second quarter of 201 7 .





ITEM 4

MINE SAfETY DISCLOSURES





The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and C onsumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95 of this report.





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ITEM 6

exhibits









Our SEC file number for documents filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended, is 001-33841.

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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



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