Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

EXECUTIVE SUMMARY

FINANCIAL SUMMARY FOR 2016 (compared to 2015)

	§		Total revenues increased $170.5 million, or 5%, to $3,592.7 million

	§		Gross profit increased $143.3 million, or 17%, to $1,000.8 million

	§		Aggregates segment sales increased $184.1 million, or 7%, to $2,961.8 million

	§		Aggregates segment freight-adjusted revenues increased $181.8 million, or 9%, to $2,294.2 million

	§		Shipments increased 2%, or 3.1 million tons, to 181.4 million tons

	§		Freight-adjusted sales price increased 7%

	§		Segment gross profit increased $117.5 million, or 16%, to $873.1 million and segment gross profit margin was 29.5%

	§		Incremental gross profit as a percentage of freight-adjusted revenues was 64.6%

	§		Asphalt Mix, Concrete and Calcium segment gross profit increased $25.8 million, collectively

	§		SAG increased $28.1 million and 0.4 percentage points (40 basis points) as a percentage of total revenues

	§		Earnings from continuing operations were $422.4 million, or $3.11 per diluted share, compared to earnings of $232.9 million, or $1.72 per diluted share

	§		Discrete items in 2016 include:

	§		$36.1 million of tax benefits (including $24.8 million of excess tax benefits for share-based compensation), a pretax gain of $16.2 million on the sale of real estate, a pretax gain of $11.0 million for business interruption claims, pretax charges of $16.9 million for divested operations and pretax losses of $10.5 million from asset impairment

	§		Discrete items in 2015 include:

	§		a $6.5 million tax charge for a foreign tax credit carryforward impairment, a $4.7 million tax benefit for a partial release of the Alabama NOL carryforward valuation allowance, a pretax charge of $67.1 million for debt purchase costs, a pretax gain of $6.3 million for the sale of real estate and businesses, a pretax charge of $7.1 million for divested operations, a pretax loss of $5.2 million for asset impairment and a pretax charge of $5.0 million for restructuring

	§		Net earnings were $419.5 million, an increase of $198.3 million, or 90%

	§		Adjusted EBITDA was $966.0 million, an increase of $131.1 million, or 16%

	§		Increased return of capital to shareholders via higher dividends ($106.3 million versus $53.2 million) and share repurchases ($161.5 million versus $21.5 million)

KEY DRIVERS OF VALUE CREATION

*Source: Moody's Analytics



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OUR FIVE CORE DISCIPLINES

SALES AND MARKETING EXCELLENCE

Goal: Remain the market supplier of choice in order to increase our market share while earning full and fair value for our products and services.

Execution: We are winning more than our fair share of large project bids by leveraging our scale and extensive strong customer relationships.

OPERATIONAL EXCELLENCE

Goal: Run the industry’s safest and most efficient operations by successfully leveraging and driving cost efficiencies to achieve 60% flow through of incremental aggregates freight-adjusted revenues.

Execution: We are driving our cost of revenues down by leveraging our purchasing power and multi-modal logistics network and by better managing inventory levels. In 2016 and 2015, we exceeded our long-term flow through goal of 60% by achieving 65% and 67%, respectively, flow through of incremental aggregates freight-adjusted revenues.

SELLING, ADMINISTRATIVE AND GENERAL (SAG) PRODUCTIVITY

Goal: Continue to leverage SAG in order to achieve 6% of total revenues.

Execution: We are leveraging our recently implemented common ERP platform and reorganized central shared services to reduce administrative expenses and enable rapid integration of acquired operations. As a result, SAG as a percentage of total revenues has decreased from 9.1% in 2014 to 8.8% in 2016.

CAPITAL PRODUCTIVITY

Goal: Drive improvement in capital turnover while maintaining the longer term health of our asset base.

Execution: We are improving capital turnover by maximizing the lifecycle value of land holdings and optimizing working capital and inventory levels.

PORTFOLIO MANAGEMENT

Goal: Continue to pursue attractive bolt-on acquisitions and selectively enter new markets that meet our growth profile while divesting non-core businesses.

Execution: In 2016, we expanded our aggregates distribution capabilities in Georgia and completed two strategic bolt-on acquisitions in New Mexico and Texas. In 2015, we completed a swap of twelve ready-mixed concrete plants in California for thirteen asphalt plants primarily in Arizona. We also acquired three aggregates facilities and seven ready-mixed concrete plants in Arizona and New Mexico.



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OUR COMMITMENTS

We crush rocks for a living, but at its core, this is a relationship business. We are deeply committed to our customers and our people, and deeply embedded in our communities.

Our commitment to customers — We have the capabilities to fulfill our customers’ needs on large, complex jobs with unmatched performance and service and we aim to be the supplier of choice for smaller contractors. With all of our customers, we strive to maintain and improve our relationships, to provide outstanding value and service for a fair price by being a solution provider rather than simply an aggregates provider.

Our commitment to our employees — We work hard to ensure our employees’ safety and health, in a positive environment where each person can thrive. We are completely focused on the things that we can control, and it is here that our people continue to make all the difference: increasing unit profitability, delivering incremental earnings and improving our world-class aggregates franchise every day.

Our commitment to our communities — Our people contribute to the cities, towns and neighborhoods where they live and work, in big ways and in small; from disaster relief to the support of education and a wide variety of other social causes and programs. At Vulcan, this means a great deal more than just financial support. Our people throughout the United States, and in Mexico, are generously volunteering their time, talent and energy to improve the world around them.

Our commitment to the environment — We take a long-term approach that bears in mind the demands of the present and the needs of the future. As we continue to build on our legacy, we do so with a clear view of our responsibility to future generations.

Our commitment to our shareholders — We work hard every day to generate returns that exceed market averages. We are good stewards, with responsible operating and capital project expenditures, to achieve a healthy return on our shareholders’ investment in us. We will continue to strive to be the market leader, winning on margin performance, consistent strength of execution and pricing performance; earning a superior return on the very significant capital invested in our business.

We believe our ability to succeed stems directly from these commitments. Over the years, nearly six decades, we have built a strong, resilient and vital business on this foundation of doing things the right way. We expect this to continue for the decades to come.

2016 ACQUISITIONS

During 2016, we acquired the assets of the following businesses for total consideration of $33.3 million:

	§		an asphalt plant in New Mexico

	§		an aggregates facility in Texas

	§		a distribution business in Georgia to complement our aggregates logistics and distribution activities

For a detailed discussion of our acquisitions and divestitures, see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.”



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MARKET DEVELOPMENTS AND OUTLOOK

The strong fundamentals of our aggregates-focused business and the outstanding improvement in our core profitability have led to strong earnings growth during the last three years of recovery. In 2017, we expect continued growth across the vast majority of our markets and across each of the end use segments we serve. Our expectation for full year Adjusted EBITDA of $1.125 to $1.225 billion is driven by a continuing recovery in shipments, with higher levels of publicly funded construction activity just beginning to join the ongoing recovery in private demand, as well as a favorable pricing environment.

The following assumptions support our outlook for strong year-over-year growth in Adjusted EBITDA in 2017:

	§		Aggregates shipments growth of 5% to 8% from 2016, with growth weighted more toward the second half of the year

	§		Freight-adjusted aggregates price increase of 5% to 7%, with unit margins continuing to grow faster than pricing

	§		Asphalt Mix, Concrete and Calcium segment gross profit growth of approximately 15%

	§		SAG expenses of approximately $320 million, 2% higher than the prior year and excluding business development-related expenses

Other expectations include:

	§		Core capital spending of approximately $300 million to support the increased level of shipments and further improve production costs and operating efficiencies

	§		Interest expense of approximately $140 million

	§		Depreciation, depletion, accretion and amortization expense of approximately $300 million

	§		Effective tax rate of 28%

We remain focused on continuous, compounding improvement in profitability and cash flows. Our 2017 outlook reflects earnings growth and unit margin performance consistent with recent trends as well as our longer range goals. The flow-through of freight-adjusted revenues to gross profit in our Aggregates segment should remain in line with the long-term goal of greater than 60%. Since the beginning of this recovery, our efforts have resulted in Aggregates segment gross profit increasing $515 million on a 41 million ton increase in shipments. During this same period, unit gross profit in our core Aggregates segment has improved 89% on a trailing twelve month (TTM) basis.

*Excludes more recent acquisitions.

TTM 2Q’13 represents the cyclical low in aggregates volumes.



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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

Gross profit 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



dollars in millions	2016	2015	2014
Gross profit	$ 1,000.8	$ 857.5	$ 587.6
Total revenues	$ 3,592.7	$ 3,422.2	$ 2,994.2
Gross profit margin	27.9%	25.1%	19.6%

GROSS PROFIT MARGIN EXCLUDING FREIGHT AND DELIVERY REVENUES



dollars in millions	2016	2015	2014
Gross profit	$ 1,000.8	$ 857.5	$ 587.6
Total revenues	$ 3,592.7	$ 3,422.2	$ 2,994.2
Freight and delivery revenues 1	536.0	538.1	473.1
Total revenues excluding freight and delivery revenues	$ 3,056.7	$ 2,884.1	$ 2,521.1
Gross profit margin excluding freight and delivery revenues	32.7%	29.7%	23.3%


1	Includes freight to remote distribution sites.

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 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.” 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 profit margin as 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 revenues, which are pass-through activities. 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. Reconciliations of these metrics to their nearest GAAP measures are presented below:

AGGREGATES SEGMENT GROSS PROFIT MARGIN IN ACCORDANCE WITH GAAP



dollars in millions	2016	2015	2014
Aggregates segment
Gross profit	$ 873.1	$ 755.7	$ 544.1
Segment sales	$ 2,961.8	$ 2,777.8	$ 2,346.4
Gross profit margin	29.5%	27.2%	23.2%
Incremental gross profit margin	63.8%	49.1%

AGGREGATES SEGMENT GROSS PROFIT AS A PERCENTAGE OF FREIGHT-ADJUSTED REVENUES



dollars in millions	2016	2015	2014
Aggregates segment
Gross profit	$ 873.1	$ 755.7	$ 544.1
Segment sales	$ 2,961.8	$ 2,777.8	$ 2,346.4
Less
Freight, delivery and transportation revenues 1	651.9	644.7	532.2
Other revenues	15.7	20.6	20.2
Freight-adjusted revenues	$ 2,294.2	$ 2,112.5	$ 1,794.0
Gross profit as a percentage of
freight-adjusted revenues	38.1%	35.8%	30.3%
Incremental gross profit as a percentage of
freight-adjusted revenues	64.6%	66.5%


1	At the segment level, freight, delivery and transportation revenues include intersegment freight & delivery revenues, which are eliminated at the consolidated level.



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GAAP does not define "cash gross profit" and it should not be considered as an alternative to earnings measures defined by GAAP. We present this 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 use this metric to assess the operating performance of our business. We do not use this metric as a measure to allocate resources. Reconciliation of this metric to its nearest GAAP measure is presented below:

CASH GROSS PROFIT

Cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization to gross profit. Cash gross profit per ton is computed by dividing cash gross profit by tons shipped.



in millions, except per ton data	2016	2015	2014
Aggregates segment
Gross profit	$ 873.1	$ 755.7	$ 544.1
Depreciation, depletion, accretion and amortization	236.5	228.5	227.0
Aggregates segment cash gross profit	$ 1,109.6	$ 984.2	$ 771.1
Unit shipments - tons	181.4	178.3	162.4
Aggregates segment cash gross profit per ton	$ 6.12	$ 5.52	$ 4.75
Asphalt Mix segment
Gross profit	$ 97.7	$ 78.2	$ 38.1
Depreciation, depletion, accretion and amortization	16.8	16.4	10.7
Asphalt Mix segment cash gross profit	$ 114.5	$ 94.6	$ 48.8
Concrete segment
Gross profit	$ 26.5	$ 20.2	$ 2.2
Depreciation, depletion, accretion and amortization	12.1	11.4	19.9
Concrete segment cash gross profit	$ 38.6	$ 31.6	$ 22.1
Calcium segment
Gross profit	$ 3.5	$ 3.5	$ 3.2
Depreciation, depletion, accretion and amortization	0.8	0.7	1.6
Calcium segment cash gross profit	$ 4.3	$ 4.2	$ 4.8



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GAAP does not define "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 this 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 use this metric to assess the operating performance of our business and for a basis of strategic planning and forecasting. 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.

EBITDA AND ADJUSTED EBITDA



in millions	2016	2015	2014
Net earnings	$ 419.5	$ 221.2	$ 204.9
Income tax expense	124.9	94.9	91.7
Interest expense, net of interest income	133.3	220.3	242.4
Loss on discontinued operations, net of tax	2.9	11.7	2.2
EBIT	680.6	548.1	541.2
Depreciation, depletion, accretion and amortization	284.9	274.8	279.5
EBITDA	$ 965.5	$ 822.9	$ 820.7
Gain on sale of real estate and businesses 1	$ (16.2)	$ (6.3)	$ (238.5)
Business interruption claims recovery, net of incentives	(11.0)	0.0	0.0
Charges associated with divested operations	16.9	7.1	11.9
Fair market value adjustments for acquired inventory	0.0	1.0	1.6
Asset impairment	10.5	5.2	3.1
Restructuring charges	0.3	5.0	1.3
Adjusted EBITDA	$ 966.0	$ 834.9	$ 600.1
Depreciation, depletion, accretion and amortization	284.9	274.8	279.5
Adjusted EBIT	$ 681.1	$ 560.1	$ 320.6


1	The 2016 amount includes a $4.3 million gain (reflected within Other operating income, net) for plant relocation reimbursement.

Adjusted EBITDA for 2015 and 2014 has been revised to conform with the 2016 presentation which no longer includes an adjustment for amortization of deferred revenue and charges associated with business development. Adjusting for amortization of deferred revenue is no longer meaningful as all periods presented include amortization of deferred revenue at amounts that are substantially equivalent. Additionally, 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 the future outcome of legal proceedings, charges associated with divested operations, asset impairment and other unusual gains and losses due to the uncertainty in predicting these items.




			2017 Projected
in millions			Mid-point
Net earnings			$ 530
Income tax expense			205
Interest expense, net of interest income			140
Loss on discontinued operations, net of tax			0
Depreciation, depletion, accretion and amortization			300
Projected EBITDA			$ 1,175



Part II	36

RESULTS OF OPERATIONS

Total revenues include sales of product 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 consists of our former Chemicals business.

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

CONSOLIDATED OPERATING RESULT HIGHLIGHTS



For the years ended December 31	2016	2015	2014
in millions, except per share data
Total revenues	$ 3,592.7	$ 3,422.2	$ 2,994.2
Cost of revenues	2,591.9	2,564.7	2,406.6
Gross profit	$ 1,000.8	$ 857.5	$ 587.6
Selling, administrative and general expenses	$ 315.0	$ 286.8	$ 272.3
Gain on sale of property, plant & equipment
and businesses	$ 15.4	$ 9.9	$ 244.2
Operating earnings	$ 679.6	$ 549.8	$ 538.1
Interest expense	$ 134.1	$ 220.6	$ 243.4
Earnings from continuing operations
before income taxes	$ 547.3	$ 327.9	$ 298.8
Earnings from continuing operations	$ 422.4	$ 232.9	$ 207.1
Loss on discontinued operations, net of income taxes	(2.9)	(11.7)	(2.2)
Net earnings	$ 419.5	$ 221.2	$ 204.9
Basic earnings (loss) per share
Continuing operations	$ 3.17	$ 1.75	$ 1.58
Discontinued operations	(0.02)	(0.09)	(0.02)
Basic net earnings per share	$ 3.15	$ 1.66	$ 1.56
Diluted earnings (loss) per share
Continuing operations	$ 3.11	$ 1.72	$ 1.56
Discontinued operations	(0.02)	(0.08)	(0.02)
Diluted net earnings per share	$ 3.09	$ 1.64	$ 1.54
EBITDA	$ 965.5	$ 822.9	$ 820.7
Adjusted EBITDA	$ 966.0	$ 834.9	$ 600.1

Net earnings for 2016 were $419.5 million ($3.09 per diluted share) compared to $221.2 million ($1.64 per diluted share) in 2015 and $204.9 million ($1.54 per diluted share) in 2014. Each year's results were impacted by discrete items as follows:

Net earnings for 2016 include:

	§		$36.1 million of tax benefits (utilization of foreign tax credits — $6.5 million, partial release of the Alabama NOL carryforward valuation allowance — $4.8 million, and excess tax benefits related to share-based compensation — $24.8 million

	§		a pretax gain of $16.2 million related to the sale of real estate

	§		a pretax gain of $11.0 million for business interruption claims (net of incentives)

	§		pretax charges of $16.9 million associated with divested operations

	§		pretax losses of $10.5 million from asset impairment



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Net earnings for 2015 include:

	§		a pretax gain of $6.3 million related to the sale of real estate and businesses

	§		pretax charges of $7.1 million associated with divested operations

	§		a $5.2 million pretax asset impairment loss

	§		a $5.0 million pretax charge for restructuring

	§		a pretax loss on debt purchase of $67.1 million presented as a component of interest expense (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”)

	§		a $6.5 million tax charge related to a foreign tax credit carryforward impairment

	§		a $4.7 million tax benefit related to a partial release of the Alabama NOL carryforward valuation allowance

Net earnings for 2014 include:

	§		a pretax gain of $238.5 million related to the sale of real estate and businesses including our cement and concrete businesses in the Florida area

	§		pretax charges of $15.0 million associated with divested operations

	§		a pretax loss on debt purchase of $72.9 million presented as a component of interest expense

ADJUSTED CONCRETE AND CALCIUM SEGMENT FINANCIAL DATA

The following table compares our Concrete and Calcium segments financial data excluding the results of the divested operations from both the January 2015 exchange of our California concrete businesses and the March 2014 sale of our Florida area concrete and cement businesses.



For the years ended December 31	2016	2015	2014
in millions
Concrete Segment
Segment sales
As reported	$ 330.1	$ 299.3	$ 375.8
Adjusted	$ 330.1	$ 294.1	$ 272.6
Total revenues
As reported	$ 330.1	$ 299.3	$ 375.8
Adjusted	$ 330.1	$ 294.1	$ 272.6
Gross profit
As reported	$ 26.5	$ 20.2	$ 2.2
Adjusted	$ 26.5	$ 20.9	$ 12.0
Depreciation, depletion, accretion and amortization
As reported	$ 12.1	$ 11.4	$ 19.9
Adjusted	$ 12.1	$ 11.3	$ 15.7
Shipments - cubic yards
As reported	3.0	2.8	3.7
Adjusted	3.0	2.8	2.6
Calcium Segment
Segment sales
As reported	$ 8.9	$ 8.6	$ 25.0
Adjusted	$ 8.9	$ 8.6	$ 9.0
Total revenues
As reported	$ 8.9	$ 8.6	$ 15.8
Adjusted	$ 8.9	$ 8.6	$ 9.1
Gross profit
As reported	$ 3.5	$ 3.5	$ 3.2
Adjusted	$ 3.5	$ 3.5	$ 3.5
Depreciation, depletion, accretion and amortization
As reported	$ 0.8	$ 0.7	$ 1.6
Adjusted	$ 0.8	$ 0.7	$ 0.6



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EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

Year-over-year changes in earnings from continuing operations before income taxes are summarized below:



in millions
	2014	$ 298.8	2015	$ 327.9
Higher aggregates gross profit		211.6		117.5
Higher asphalt mix gross profit		40.1		19.5
Higher concrete gross profit		17.9		6.4
Higher calcium gross profit		0.3		0.0
Higher selling, administrative and general expenses		(14.6)		(28.1)
Higher (lower) gain on sale of property, plant & equipment and businesses		(234.3)		5.5
Higher business interruption claims recovery		0.0		11.7
Higher impairment loss		(2.1)		(5.3)
Lower (higher) restructuring charges		(3.7)		4.7
Lower interest expense		22.8		86.5
All other		(8.9)		1.0
	2015	$ 327.9	2016	$ 547.3

OPERATING RESULTS BY SEGMENT

We present our results of operations by segment at the gross profit level. We have four operating (and reportable) segments organized around our principal product lines: (1) Aggregates, (2) Asphalt Mix, (3) Concrete and (4) Calcium. Management reviews earnings for the product line segments principally at the gross profit level.

AGGREGATES

Our year-over-year aggregates shipments:

	§		increased 2% in 2016

	§		increased 10% in 2015

	§		increased 11% in 2014

For the year, shipments rose 2% over the prior year, with this gain coming despite double-digit shipment declines in California, Illinois and Texas. Trailing twelve month construction start activity, both public and private, has steadily improved since July 2016. This improvement has helped reverse year-over-year declines from May to October, which negatively impacted our shipments in the second half of the year. The backlog of construction projects in development continues to grow as well. In addition, state and local governments continue to pass measures to increase public infrastructure investment.

Source: Dodge Data & Analytics



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Our year-over-year freight-adjusted selling price1 for aggregates:

	§		increased 7% in 2016

	§		increased 7% in 2015

	§		increased 2% in 2014

We routinely arrange the delivery of our aggregates to the customer. Additionally, we incur transportation costs to move aggregates from the production site to remote distribution sites. These costs are passed on to our customers in the aggregates price. We remove these pass-through freight and transportation revenues (and any other aggregates-derived revenues, such as landfill tipping fees) from the freight-adjusted selling price for aggregates. See the Reconciliation of Non-GAAP Financial Measures within this Item 7 for a reconciliation of freight-adjusted revenues.

Pricing increased 7%, with virtually all of our markets realizing higher pricing versus the prior year. 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.


AGGREGATES SEGMENT SALES AND FREIGHT-ADJUSTED REVENUES	AGGREGATES GROSS PROFIT AND CASH GROSS PROFIT
in millions	in millions


AGGREGATES UNIT SHIPMENTS	AGGREGATES SELLING PRICE AND CASH GROSS PROFIT PER TON
Tons, in millions	Freight-adjusted average sales price per ton 2

	2	Freight-adjusted sales price is calculated as freight-adjusted revenues divided by aggregates unit shipments

Aggregates segment gross profit increased $117.5 million (16%). Unit gross profit increased 14%, to $4.81 per ton, while unit cash gross profit increased 11% to $6.12 per ton. The flow-through rate from freight-adjusted aggregates revenues to segment gross profit was 65%, exceeding our long-term flow-through goal of 60%. These improvements in our core profitability were delivered despite modest shipment growth and a year-over-year decline in inventory levels.



Part II	40

ASPHALT MIX

Our year-over-year asphalt mix shipments:

	§		declined 3% in 2016

	§		increased 30% in 2015

	§		increased 8% in 2014

Asphalt Mix segment gross profit increased 25% to $97.7 million. Volumes and price decreased 3% and 2%, respectively, versus the prior year while gross profit margin expanded 4.3 percentage points (430 basis points) due mostly to lower unit costs for liquid asphalt. The significant increase in asphalt mix shipments from 2014 to 2015 was largely attributable to the January 2015 swap of our concrete operations in California for asphalt mix operations, primarily in Arizona.


ASPHALT MIX SEGMENT SALES	ASPHALT MIX GROSS PROFIT AND CASH GROSS PROFIT
in millions	in millions

CONCRETE

Our year-over-year ready-mixed concrete shipments:

	§		increased 7% in 2016

	§		decreased 25% in 20151

	§		decreased 22% in 2014

Concrete segment gross profit increased 32% and gross profit margin expanded 1.3 percentage points (130 basis points) versus the prior year. Ready-mixed concrete shipments increased 7% and the average sales price increased 3%. Material margins expanded, offsetting higher costs for internally supplied aggregates and other raw materials. The significant decrease in ready-mixed concrete shipments from 2014 to 2015 was largely attributable to the aforementioned January 2015 swap of our concrete operations in California.


CONCRETE SEGMENT SALES 1	CONCRETE GROSS PROFIT AND CASH GROSS PROFIT 1
in millions	in millions


1	The financial data above excludes both the California and Florida area concrete businesses exchanged/sold in January 2015 and March 2014, respectively. See the Adjusted Concrete and Calcium Segment Financial Data table on page 38.



Part II	41

CALCIUM

Our Calcium segment’s performance was in line with the prior year — gross profit of $3.5 million, shipments of 0.3 million tons and price of $27.08 per ton were all essentially flat when compared with the prior year. Our cement business was sold in the first quarter of 2014 along with the Florida concrete assets. Adjusted for the sale of our cement business in the Florida area, Calcium segment gross profit was $3.5 million in 2014.


CALCIUM SEGMENT SALES 1	CALCIUM GROSS PROFIT AND CASH GROSS PROFIT 1
in millions	in millions


1	The financial data above excludes the cement businesses sold in March 2014. See the Adjusted Concrete and Calcium Segment Financial Data table on page 38.

In total, the 2016 gross profit contributions from our three non-aggregates (Asphalt Mix, Concrete and Calcium) segments was $127.7 million, a 25% increase over 2015, and a 293% increase over 2014.

SELLING, ADMINISTRATIVE AND GENERAL EXPENSES

in millions

The increase in SAG costs in 2016 was driven primarily by incentives tied to our financial performance and stock price, certain investments in sales and customer service capabilities, as well as elevated legal and other outside service expenses. We intend to further leverage SAG expenses to revenues as volumes recover. As a percentage of total revenues, SAG expenses increased from 8.4% in 2015 to 8.8% in 2016. We do not expect the recent growth in SAG expenses to repeat in 2017.

As a percentage of total revenues, SAG expense was:

	§		8.8% in 2016 — increased 0.4 percentage points (40 basis points)

	§		8.4% in 2015 — decreased 0.7 percentage points (70 basis points)

	§		9.1% in 2014 — decreased 0.3 percentage points (30 basis points)

Our comparative total company employment levels at year end:

	§		increased 4% in 2016

	§		increased 4% in 2015

	§		declined 3% in 2014



Part II	42

GAIN ON SALE OF PROPERTY, PLANT & EQUIPMENT AND BUSINESSES

in millions

The 2016 gain on sale of property, plant & equipment and businesses of $15.4 million includes $11.9 million of pretax gain from surplus land sales in Virginia and California. The 2015 gain includes a $5.9 million pretax gain from the previously mentioned asset exchange (we exited the ready-mixed concrete business in California and added thirteen asphalt plant locations, primarily in Arizona). The 2014 gain includes a $227.9 million pretax gain from the sale of our cement and concrete businesses in Florida to Cementos Argos and a $6.0 million pretax gain from the sale of two reclaimed operating sites. See Note 19 "Acquisitions and Divestitures" in Item 8 "Financial Statements and Supplementary Data."

BUSINESS INTERRUPTION CLAIMS RECOVERY

During 2016, we settled 18 of 22 business interruption claims related to the 2010 Gulf Coast oil spill resulting in a pretax gain of $11.7 million. There were no similar recoveries in 2015 or 2014.

IMPAIRMENT OF LONG-LIVED ASSETS

Loss on impairment of long-lived assets were:

	§		$10.5 million in 2016 — we terminated a nonstrategic aggregates site lease we no longer intended to develop resulting in a $9.6 million loss and wrote off $0.9 million of nonrecoverable project costs related to two Aggregates segment capital projects that we no longer intend to complete

	§		$5.2 million in 2015 — we did not renew an Aggregates segment lease on a California land parcel resulting in a $5.2 million loss related to the associated reclamation obligation

	§		$3.1 million in 2014 — we divested our cement and concrete businesses in the Florida area resulting in a $3.1 million loss related primarily to assets retained from the divestiture

See Note 1 "Summary of Significant Accounting Policies" in Item 8 "Financial Statements and Supplementary Data" under the caption Impairment of Long-lived Assets Excluding Goodwill.



Part II	43

OTHER OPERATING EXPENSE, NET

Other operating expense, net is composed of various operating items excluded from cost of revenues and not specifically presented in the accompanying Consolidated Statement of Comprehensive Income. The total other operating expense, net and significant items included in the total were:

	§		$22.8 million in 2016 — includes $16.9 million of discrete charges associated with divested operations. These discrete items included charges associated with office space no longer needed and vacated ($5.2 million), the write-off of a prepaid royalty asset resulting from a change in long-term mining plans ($3.6 million), a property litigation settlement ($1.9 million), a pension withdrawal settlement revision ($1.5 million) and environmental liability accruals associated with previously divested properties ($4.5 million). These charges were partially offset by a $4.3 million gain referable to a plant relocation

	§		$25.6 million in 2015 — includes $7.1 million of discrete charges associated with divested operations. These discrete items included charges associated with severance ($1.4 million) and environmental liability accruals associated with previously divested properties ($5.7 million). Additionally, includes $5.0 million of restructuring charges related to changes to our executive management team and a new divisional organization structure

	§		$18.3 million in 2014 — includes $11.9 million of discrete charges associated with divested operations. These discrete items included charges associated with office space no longer needed and vacated ($4.4 million) and environmental liability accruals associated with previously divested properties ($0.4 million). Additionally, includes restructuring charges of $1.3 million related to changes to our executive management team and a new divisional organization

INTEREST EXPENSE

in millions

Interest expense in 2016 decreased $86.5 million as 2015 included pretax charges for debt purchases of $67.1 million. Likewise, interest expense in 2014 included pretax charges for debt purchases of $72.9 million. See Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data” for additional discussion.



Part II	44

INCOME TAXES

Our income tax expense from continuing operations for the years ended December 31 is shown below:



dollars in millions	2016	2015	2014
Earnings from continuing operations
before income taxes	$ 547.3	$ 327.9	$ 298.8
Income tax expense	$ 124.9	$ 94.9	$ 91.7
Effective tax rate	22.8%	29.0%	30.7%

The $30.0 million increase in our 2016 income tax expense is primarily related to the year-over-year improvement in our earnings from continuing operations partially offset by a $24.8 million excess tax benefit from share-based compensation resulting from our early adoption of ASU 2016-09 (see Note 1 “Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption Share-based Compensation). The 2016 reduction in the effective tax rate is due to higher benefits from the statutory depletion deduction related to higher aggregates sales and the early adoption of ASU 2016-09.

The $3.3 million increase in our 2015 income tax expense is primarily related to the year-over-year improvement in our earnings from continuing operations. The 2015 reduction in the effective tax rate is due to higher benefits from the statutory depletion deduction and the U.S. production deduction, both related to higher aggregates sales. A reconciliation of the federal statutory rate of 35% to our effective tax rates for 2016, 2015 and 2014 is presented in Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data.”

DISCONTINUED OPERATIONS

Pretax loss from discontinued operations were:

	§		$(4.9) million in 2016

	§		$(19.3) million in 2015

	§		$(3.7) million in 2014

The $4.9 million, $19.3 million and $3.7 million pretax losses from discontinued operations for 2016, 2015 and 2014, respectively, resulted primarily from general and product liability costs, including legal defense costs and environmental remediation costs associated with our former Chemicals business. For additional information about discontinued operations, see Note 2 "Discontinued Operations" in Item 8 "Financial Statements and Supplementary Data."



Part II	45

LIQUIDITY AND FINANCIAL RESOURCES

Our primary sources of liquidity are cash provided by our operating activities and a substantial, committed bank line of credit. Additional sources of capital include access to the capital markets, the sale of reclaimed and surplus real estate, and dispositions of nonstrategic operating assets. We believe these financial resources are sufficient to fund our business requirements for 2017, including:

	§		cash contractual obligations

	§		capital expenditures

	§		debt service obligations

	§		dividend payments

	§		potential share repurchases

	§		potential acquisitions

Our capital deployment priorities remain unchanged from the prior year. We intend to take a balanced approach to capital deployment, one incorporating strategic reinvestment, sustained financial strength and flexibility, and the return of capital to shareholders. In 2016 and 2015, we returned $106.3 and $53.2 million, respectively, in cash to shareholders through our dividend and $161.5 million and $21.5 million, respectively, through share repurchases. We expect to increase the return of capital through dividends, share repurchases, or other mechanisms, as 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:

	§		maintain substantial bank line of credit borrowing capacity

	§		proactively manage our long-term debt maturity schedule such that repayment/refinancing risk in any single year is low

	§		maintain an appropriate balance of fixed-rate and floating-rate debt

	§		minimize financial and other covenants that limit our operating and financial flexibility

CASH

Included in our December 31, 2016 cash and cash equivalents balance of $259.0 million is $68.0 million of cash held at our foreign subsidiaries. All of this $68.0 million of cash relates to earnings that are indefinitely reinvested offshore. Use of this cash is currently limited to our foreign operations.



Part II	46

CASH FROM OPERATING ACTIVITIES

in millions

Net cash provided by operating activities is derived primarily from net earnings before noncash deductions for depreciation, depletion, accretion and amortization.



in millions	2016	2015	2014
Net earnings	$ 419.5	$ 221.2	$ 204.9
Depreciation, depletion, accretion
and amortization (DDA&A)	284.9	274.8	279.5
Net earnings before noncash deductions for DDA&A	$ 704.4	$ 496.0	$ 484.4
Net gain on sale of property, plant &
equipment and businesses	(15.4)	(9.9)	(244.2)
Cost of debt purchase	0.0	67.1	72.9
Other operating cash flows, net 1	(44.4)	(33.7)	(52.1)
Net cash provided by operating
activities	$ 644.6	$ 519.5	$ 261.0


1	Primarily reflects changes to working capital balances.

2016 versus 2015 — Net cash provided by operating activities was $644.6 million during 2016, a $125.1 million increase compared to 2015. This increase was primarily attributable to the $198.3 million increase in net earnings, $67.1 million of which was due to the 2015 charges associated with debt purchases (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”). Cash paid for this debt purchase is presented as a component of financing activities. Additionally, upon our 2016 early adoption of ASU 2016-09 (see Note 1 “Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption Share-based Compensation), gross excess tax benefits for 2016 of $28.0 million are classified as operating cash flows. Conversely, gross excess tax benefits of $18.4 million and $3.5 million for 2015 and 2014, respectively, are classified as financing cash flows.

2015 versus 2014 — Net cash provided by operating activities was $519.5 million during 2015, a $258.5 million increase compared to 2014. Although net earnings only increased $16.3 million, 2014 net earnings included a pretax gain of $227.9 million (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”) from the March 2014 sale of our cement and concrete businesses in the Florida area. Cash received associated with gain on sale of property, plant & equipment and businesses is presented as a component of investing activities. In 2015, we purchased $485.1 million principal amount of outstanding debt and incurred charges of $67.1 million. In 2014, we purchased $506.4 million principal amount of outstanding debt and incurred charges of $72.9 million (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”). Cash paid for the debt purchases is presented as a component of financing activities.



Part II	47

CASH FROM INVESTING ACTIVITIES

in millions

2016 versus 2015 — Net cash used for investing activities was $365.1 million during 2016, a $55.4 million increase compared to 2015. We invested $350.1 million in our existing operations in 2016, a $60.9 million increase compared to 2015. Of this $350.1 million, $99.2 million was invested in shipping capacity replacement, new site developments and other growth opportunities. During 2016, we expanded our aggregates distribution capabilities in Georgia and completed two strategic bolt-on acquisitions in New Mexico and Texas for $32.5 million of cash consideration. Conversely, acquisitions during 2015 totaled $27.2 million in cash consideration (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”).

2015 versus 2014 — Net cash used for investing activities was $309.7 million during 2015, a $548.0 million decrease in cash compared to the $238.3 million of net cash provided during 2014. This decrease was the result of lower proceeds from the sale of property, plant & equipment and businesses, less cash used in acquisitions and higher capital investments in our existing operations. During 2014, we sold: a previously mined and subsequently reclaimed tract of land for $10.7 million, land previously containing a sales yard for $5.8 million, and our cement and concrete businesses in the Florida area for $721.4 million. We had no comparable significant sales in 2015. During 2014, we completed several acquisitions for cash consideration of $284.2 million. Conversely, acquisitions during 2015 totaled $27.2 million in cash consideration (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”). Furthermore, during 2015, we increased investments in our existing operations by $64.4 million as reflected in the increased purchases of property, plant & equipment.

CASH FROM FINANCING ACTIVITIES

in millions

2016 VERSUS 2015 — Net cash used for financing activities in 2016 was $304.6 million, an increase of $237.6 million from 2015. This large increase was primarily attributable to a $193.1 million increase in return of capital to our investors via increased dividends ($0.80 per share compared to $0.40 per share) and share repurchases (1,427 thousand shares compared to 228 thousand shares). Additionally, there were no proceeds from the exercise of employee stock options in 2016 (compared to $73.0 million in 2015) as only stock-only stock appreciation rights (SOSARs) remained outstanding at the beginning of the year. Finally, the aforementioned early adoption of ASU 2016-09 resulted in 2016 gross excess tax benefits of $28.0 million classified as operating cash flows rather than financing cash flows.



Part II	48

2015 VERSUS 2014 — Net cash used for financing activities in 2015 was $67.0 million, a decrease of $484.8 million from 2014. This large decrease is primarily attributable to 2014’s $506.4 million principal amount debt purchase, which required $579.7 million of cash. The 2014 debt purchase was funded by the aforementioned sale of our cement and concrete businesses in the Florida area. In 2015, we refinanced $635.1 million principal amount of debt and entered into a new $750.0 million line of credit. The total cash requirement for these actions was $702.3 million ($635.1 million principal, $59.3 million of premiums above par and transaction fees of $7.9 million). We funded the refinancing by issuing $400.0 million of new 10-year notes, borrowing $235.0 million under our new and expanded line of credit and using $67.3 million of cash. Furthermore, in 2014 we generated $30.6 million of cash by issuing new shares to our 401(k) plan (such issuances were discontinued in the fourth quarter of 2014). Finally, in 2015 we returned capital to our investors by repurchasing 228 thousand shares of common stock for cash consideration of $21.5 million.

DEBT

Certain debt measures as of December 31 are outlined below:



dollars in millions	2016	2015
Debt
Current maturities of long-term debt	$ 0.1	$ 0.1
Short-term debt (line of credit)	0.0	0.0
Long-term debt 1	1,982.8	1,980.3
Total debt	$ 1,982.9	$ 1,980.4
Capital
Total debt	$ 1,982.9	$ 1,980.4
Equity	4,572.5	4,454.2
Total capital	$ 6,555.4	$ 6,434.6
Total Debt as a Percentage of Total Capital	30.2%	30.8%
Weighted-average Effective Interest Rates
Line of credit 2	1.25%	1.75%
Term debt	7.52%	7.52%
Fixed versus Floating Interest Rate Debt
Fixed-rate debt	88.3%	88.3%
Floating-rate debt	11.7%	11.7%


1	Includes borrowing under our line of credit for which we have the intent and ability to extend repayment beyond twelve months, as follows: December 31, 2016 — $235.0 million and December 31, 2015 — $235.0 million.
2	Reflects the margin above LIBOR for LIBOR-based borrowings; we also paid upfront fees that are amortized to interest expense and pay fees for unused borrowing capacity and standby letters of credit.

LINE OF CREDIT

In 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 (incurring $1.9 million of transaction fees together with the new term loan described below).

The credit agreement contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility (none of which materially impact our ability to execute our strategic, operating and financial plans). 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 December 31, 2016, we were in compliance with the line of credit covenants.



Part II	49

Borrowings and other cost ranges and details are described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.” As of December 31, 2016, the credit margin for the 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 portion was 0.15%.

As of December 31, 2016, our available borrowing capacity under the line of credit was $475.5 million. Utilization of the borrowing capacity was as follows:

	§		$235.0 million was borrowed

	§		$39.5 million was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our term debt is unsecured. $1,769.0 million 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 December 31, 2016, we were in compliance with all of the term debt covenants.

In December 2016, we entered into an unsecured $250.0 million delayed draw term loan (incurring, together with the line of credit extension mentioned previously, $1.9 million of transaction costs). 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.

The term loan may be funded in up to three draws through June 21, 2017, after which any undrawn amount expires. Borrowings bear interest in the same manner as the line of credit. Until June 21, 2017, we also pay a commitment fee on the undrawn amount in the same manner as the line of credit. The term loan principal will be repaid quarterly beginning March 2018 (quarter 5 after closing) as follows: quarters 5 - 8 @ 0.625%; quarters 9 - 12 @ 1.25%; quarters 13 - 19 @ 1.875% and quarter 20 @ 79.375%. The term loan may be prepaid at any time without penalty.

In March, April and August of 2015, we completed the refinancing of $485.1 million principal amount of debt as described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.” And, in December 2015 we refinanced at maturity the $150.0 million of 10.125% notes via borrowing on our line of credit. These refinancing actions resulted in total debt of approximately $2.0 billion as of December 31, 2015 (consistent with year-end 2014) and have the following benefits, among others: (1) eliminated $621.1 million of debt maturities in 2015 – 2018, (2) extended the weighted-average life of our debt portfolio, and (3) lowered our weighted-average interest rate.

The 2015 refinancing actions resulted in charges totaling $67.1 million. Such charges are detailed in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data” and are presented in the accompanying Consolidated Statement of Comprehensive Income as a component of interest expense for the year ended December 31, 2015.

DEBT PAYMENTS AND MATURITIES

There were no significant scheduled debt payments during 2016. Scheduled debt payments during 2015 included $150.0 million in December to retire the 10.125% notes (which were refinanced via long-term borrowings on our line of credit). Additionally, we refinanced $485.1 million of debt in 2015 as described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.”

As of December 31, 2016, current maturities for the next four quarters and maturities (excluding borrowings on the line of credit) for the next five years are due as follows:



	Current		Debt
in millions	Maturities	in millions	Maturities
First quarter 2017	$ 0.0	2017	$ 0.1
Second quarter 2017	0.0	2018	522.5
Third quarter 2017	0.0	2019	0.1
Fourth quarter 2017	0.1	2020	0.1
		2021	606.0

We expect to retire current maturities using existing cash.



Part II	50

DEBT RATINGS

Our debt ratings and outlooks as of December 31, 2016 are as follows:



	Rating/Outlook	Date	Description
Senior Unsecured Term Debt 1
Fitch	BBB-/stable	3/31/2016	rating changed from BB+
Moody's	Ba1/positive	5/4/2016	rating changed from Ba2
Standard & Poor's	BBB/stable	3/8/2016	rating/outlook changed from BB+/positive


1	Not all of our long-term debt is rated.

EQUITY

Our common stock issuances and purchases are as follows:



in thousands	2016	2015	2014
Common stock shares at January 1,
issued and outstanding	133,172	131,907	130,200
Common Stock Issuances
Acquisitions	0	0	715
401(k) retirement plans	0	0	485
Share-based compensation plans	594	1,493	507
Common Stock Purchases
Purchased and retired	(1,427)	(228)	0
Common stock shares at December 31,
issued and outstanding	132,339	133,172	131,907

During 2014, we issued 715.0 thousand shares of our common stock in connection with business acquisitions as explained in Note 19 "Acquisitions and Divestitures" in Item 8 "Financial Statements and Supplementary Data."

Under a program that was discontinued in the fourth quarter of 2014, we occasionally sold shares of our common stock to the trustee of our 401(k) retirement plans to satisfy the plan participants' elections to invest in our common stock. During 2014, we issued 485.3 thousand shares for cash proceeds of $30.6 million under this arrangement.

On February 10, 2006, our Board of Directors authorized us to purchase up to 10,000,000 shares of our common stock. As of December 31, 2016, there were 1,756,757 shares remaining under this authorization. On February 10, 2017, our Board of Directors authorized us to purchase an additional 8,243,243 shares to refresh the number of shares we are authorized to purchase to 10,000,000. Depending upon market, business, legal and other conditions, we may purchase shares from time to time through the open market (including plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934) and/or privately negotiated transactions. The authorization has no time limit, does 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) are detailed below:



in thousands, except average cost	2016	2015	2014
Shares Purchased and Retired
Number	1,427	228	0
Total cost 1	$ 161,463	$ 21,475	$ 0
Average cost 1	$ 113.18	$ 94.19	$ 0.00


1	Excludes commissions of $0.02 per share.

There were no shares held in treasury as of December 31, 2016, 2015 and 2014.



Part II	51

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:

	§		results of operations and financial position

	§		capital expenditures

	§		liquidity and capital resources

STANDBY LETTERS OF CREDIT

For a discussion of our standby letters of credit see Note 6 "Debt" in Item 8 "Financial Statements and Supplementary Data."

CASH CONTRACTUAL OBLIGATIONS

We expect core capital spending (excluding growth) of $300.0 million during 2017. Excluding future cash requirements for capital expenditures and immaterial or contingent contracts, our obligations to make future contractual payments as of December 31, 2016 are summarized in the table below:



	Note	Payments Due by Year
in millions	Reference	2017	2018-2019	2020-2021	Thereafter	Total
Cash Contractual Obligations
Bank line of credit 1
Principal payments	Note 6	$ 0.0	$ 0.0	$ 235.0	$ 0.0	$ 235.0
Interest payments and fees 2		6.5	16.4	18.6	0.0	41.5
Term debt
Principal payments	Note 6	0.1	522.6	606.1	640.3	1,769.1
Interest payments	Note 6	125.7	196.9	138.9	337.8	799.3
Operating leases	Note 7	31.0	54.5	44.3	119.7	249.5
Mineral royalties	Note 12	22.2	36.2	23.5	134.3	216.2
Unconditional purchase obligations
Capital	Note 12	131.8	0.2	0.0	0.0	132.0
Noncapital 3	Note 12	24.4	19.4	7.2	4.0	55.0
Benefit plans 4	Note 10	9.4	40.9	60.5	112.0	222.8
Total cash contractual obligations 5, 6		$ 351.1	$ 887.1	$ 1,134.1	$ 1,348.1	$ 3,720.4


1	Bank line of credit represents borrowings under our unsecured $750.0 million line of credit that expires December 2021.
2	Includes fees for unused borrowing capacity, and fees for standby letters of credit. The figures for all years assume that the amount of unused borrowing capacity and the amount of standby letters of credit do not change from December 31, 2016, and borrowing costs reflect a rising LIBOR.
3	Noncapital unconditional purchase obligations relate primarily to transportation and electricity contracts.
4	Payments in "Thereafter" column for benefit plans are for the years 2022-2026.
5	The above table excludes discounted asset retirement obligations in the amount of $223.9 million at December 31, 2016, the majority of which have an estimated settlement date beyond 2021 (see Note 17 "Asset Retirement Obligations" in Item 8 "Financial Statements and Supplementary Data").
6	The above table excludes liabilities for unrecognized tax benefits in the amount of $10.8 million at December 31, 2016, as we cannot make a reasonably reliable estimate of the amount and period of related future payment of these uncertain tax positions (for more details, see Note 9 "Income Taxes" in Item 8 "Financial Statements and Supplementary Data").



Part II	52

CRITICAL ACCOUNTING POLICIES

We follow certain significant accounting policies when we prepare our consolidated financial statements. A summary of these policies is included in Note 1 "Summary of Significant Accounting Policies" in Item 8 "Financial Statements and Supplementary Data."

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 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. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.

We believe the following six critical accounting policies require the most significant judgments and estimates used in the preparation of our consolidated financial statements:

	1.		Goodwill impairment

	2.		Impairment of long-lived assets excluding goodwill

	3.		Pension and other postretirement benefits

	4.		Environmental compliance costs

	5.		Claims and litigation including self-insurance

	6.		Income taxes

GOODWILL IMPAIRMENT

Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than its carrying amount. Goodwill is tested for impairment on an annual basis or more frequently whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment evaluation is a critical accounting policy because goodwill is material to our total assets (as of December 31, 2016, goodwill represents 37% of total assets) and the evaluation involves the use of significant estimates, assumptions and judgment.

HOW WE TEST GOODWILL FOR IMPAIRMENT

Goodwill is tested for impairment at the reporting unit level, one level below our operating segments. We have identified 18 reporting units, of which 9 carry goodwill. We have the option of either assessing qualitative factors to determine whether it is more likely than not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to a two-step quantitative test. We elected to perform the quantitative impairment test for all years presented.

STEP 1

We compare the fair value of a reporting unit to its carrying value, including goodwill:

	§		if the fair value exceeds its carrying value, the goodwill of the reporting unit is not considered impaired

	§		if the carrying value of a reporting unit exceeds its fair value, we go to step two to measure the amount of impairment loss, if any

STEP 2

We compare the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by hypothetically allocating the fair value of the reporting unit to its identifiable assets and liabilities in a manner consistent with a business combination, with any excess fair value representing implied goodwill:

	§		if the carrying value of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess



Part II	53

HOW WE DETERMINE CARRYING VALUE AND FAIR VALUE

First, we determine the carrying value of each reporting unit by assigning assets and liabilities, including goodwill, to those units as of the measurement date. Then, we estimate the fair values of the reporting units using both an income approach (which involves discounting estimated future cash flows) and a market approach (which involves the application of revenue and EBITDA multiples of comparable companies). We consider market factors when determining the assumptions and estimates used in our valuation models. Finally, to assess the reasonableness of the reporting unit fair values, we compare the total of the reporting unit fair values to our market capitalization.

OUR FAIR VALUE ASSUMPTIONS

We base our fair value estimates on market participant assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty and actual results may differ. Changes in key assumptions or management judgment with respect to a reporting unit or its prospects may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or underperformance relative to historical or projected operating results. These conditions could result in a significantly different estimate of the fair value of our reporting units, which could result in an impairment charge in the future.

The significant assumptions in our discounted cash flow models include our estimate of future profitability, capital requirements and the discount rate. The profitability estimates used in the models were derived from internal operating budgets and forecasts for long-term demand and pricing in our industry. Estimated capital requirements reflect replacement capital estimated on a per ton basis and acquisition capital necessary to support growth estimated in the models. The discount rate was derived using a capital asset pricing model.

RESULTS OF OUR IMPAIRMENT TESTS

The results of our annual impairment tests for:

	§		November 1, 2016 indicated that the fair values of all reporting units with goodwill substantially exceeded (in excess of 100%) their carrying values

	§		November 1, 2015 indicated that the fair values of all reporting units with goodwill substantially exceeded (in excess of 100%) their carrying values

	§		November 1, 2014 indicated that the fair values of all reporting units with goodwill substantially exceeded (in excess of 20%) their carrying values

For additional information about goodwill, see Note 18 "Goodwill and Intangible Assets" in Item 8 "Financial Statements and Supplementary Data."

IMPAIRMENT OF LONG-LIVED ASSETS EXCLUDING GOODWILL

We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. The impairment evaluation is a critical accounting policy because long-lived assets are material to our total assets (as of December 31, 2016, net property, plant & equipment represents 39% of total assets, while net other intangible assets represents 9% of total assets) and the evaluation involves the use of significant estimates, assumptions and judgment. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value.

Fair value is estimated primarily by using a discounted cash flow methodology that requires considerable judgment and assumptions. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results. We periodically review the appropriateness of the estimated useful lives of our long-lived assets.



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We test long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. As a result, our long-lived asset impairment test is at a significantly lower level than the level at which we test goodwill for impairment. In markets where we do not produce downstream products (e.g., asphalt mix and ready-mixed concrete), the lowest level of largely independent identifiable cash flows is at the individual aggregates operation or a group of aggregates operations collectively serving a local market. Conversely, in vertically integrated markets, the cash flows of our downstream and upstream businesses are not largely independently identifiable as the selling price of the upstream products (aggregates) impacts the profitability of the downstream business.

During 2016, we recorded a $10.5 million loss on impairment of long-lived assets resulting from the termination of a nonstrategic aggregates lease and the write off of nonrecoverable project costs related to two Aggregates segment capital projects that we no longer intend to complete. During 2015, we recorded a $5.2 million impairment loss resulting from exiting a lease. During 2014, we recorded a $3.1 million impairment loss related primarily to assets retained in the divestiture of our cement and concrete businesses in the Florida area, see Note 19 "Acquisitions and Divestitures" in Item 8 "Financial Statements and Supplementary Data."

We maintain certain long-lived assets that are not currently being used in our operations. These assets totaled $374.4 million at December 31, 2016, representing a less than 1.0% increase from December 31, 2015. Of the total $374.4 million, approximately 40% relates to real estate held for future development and expansion of our operations. In addition, approximately 25% is comprised of real estate (principally former mining sites) pending development as commercial or residential real estate, reservoirs or landfills. The remaining 35% is composed of aggregates, asphalt mix and ready-mixed concrete operating assets idled temporarily as a result of a decline in demand for our products. We anticipate moving idled assets back into operation as demand recovers. We evaluate the useful lives and the recoverability of these assets whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

For additional information about long-lived assets and intangible assets, see Note 4 "Property, Plant & Equipment" and Note 18 "Goodwill and Intangible Assets" in Item 8 "Financial Statements and Supplementary Data."

PENSION AND OTHER POSTRETIREMENT BENEFITS

Accounting for pension and postretirement benefits requires that we make significant assumptions about the valuation of benefit obligations and the performance of plan assets. Each year we review the following primary assumptions:

	§		DISCOUNT RATES — The discount rate used in calculating the present value of projected benefit payments and the discount rates used to measure service cost and interest cost

	§		EXPECTED RETURN ON PLAN ASSETS — The expected future return on plan assets reduces the recorded net benefit costs

	§		RATE OF COMPENSATION INCREASE — Annual pay increases after 2015 will not increase our pension plan obligations as a result of a 2013 plan amendment

	§		RATE OF INCREASE IN THE PER CAPITA COST OF COVERED HEALTHCARE BENEFITS — Future increases in the per capita cost after 2015 will not increase our postretirement medical benefits obligation as a result of a 2012 plan amendment to cap medical coverage cost at the 2015 level

HOW WE SET OUR ASSUMPTIONS

In selecting the discount rate, we use the yield on high-quality bonds with a duration equal to the duration of plan liabilities. At December 31, 2016, the discount rates for our various plans ranged from 3.43% to 4.41% (December 31, 2015 ranged from 3.53% to 4.68%).

In estimating the expected return on plan assets, we consider past performance and long-term future expectations for the types of investments held by the plan as well as the expected long-term allocation of plan assets to these investments. At December 31, 2016, the expected return on plan assets was reduced to 7.00% (December 31, 2015 was 7.50%).



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Changes to the assumptions listed above would have an impact on the projected benefit obligations and the annual net benefit cost. The following table reflects the favorable and unfavorable outcomes associated with a change in certain assumptions:



	(Favorable) Unfavorable
	0.5 Percentage Point Increase		0.5 Percentage Point Decrease
	Inc (Dec) in	Inc (Dec) in	Inc (Dec) in	Inc (Dec) in
in millions	Benefit Obligation	Annual Benefit Cost	Benefit Obligation	Annual Benefit Cost
Actuarial Assumptions
Discount rates
Pension	$ (55.7)	$ (1.0)	$ 61.5	$ 1.0
Other postretirement benefits	(1.2)	(0.0)	1.3	0.0
Expected return on plan assets	not applicable	(3.7)	not applicable	3.7

As of the December 31, 2016 measurement date, the fair value of our pension plan assets increased from $745.7 million to $749.5 million due to investment returns. No contributions were made to the qualified pension plans in 2016.

During 2017, we expect to recognize net pension expense of approximately $0.4 million and net postretirement credit of approximately $(3.7) million compared to credits of $(3.6) million and $(3.7) million, respectively, in 2016. The increases are primarily due to a reduction in discount rates coupled with the aforementioned reduction in the expected long-term return on pension assets.

In 2016, we changed our method to estimate the service and interest cost components of net periodic benefit cost for our defined benefit pension and other postretirement benefit plans. Previously, we estimated the service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. As of 2016, we elected to use a full yield curve approach to estimate the service and interest cost, applying the specific spot rates along the yield curve to the relevant projected cash flows. We made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding yield curve spot rates.

We accounted for this change as a change in estimate and, accordingly, accounted for it prospectively as of 2016. The weighted-average discount rates used to measure service and interest costs for 2016 were 4.68% and 3.79%, respectively, for our pension plans and 3.77% and 2.81%, respectively, for our other postretirement plans.

We do not anticipate contributions to the funded pension plans will be required during 2017; however, we do anticipate making a discretionary contribution of $9.5 million. We currently do not anticipate that the funded status of any of our plans will fall below statutory thresholds requiring accelerated funding or constraints on benefit levels or plan administration.

For additional information about pension and other postretirement benefits, see Note 10 "Benefit Plans" in Item 8 "Financial Statements and Supplementary Data."



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ENVIRONMENTAL COMPLIANCE COSTS

Our environmental compliance costs include the cost of ongoing monitoring programs, the cost of remediation efforts and other similar costs. Our accounting policy for environmental compliance costs is a critical accounting policy because it involves the use of significant estimates and assumptions and requires considerable management judgment.

HOW WE ACCOUNT FOR ENVIRONMENTAL COSTS

To account for environmental costs, we:

	§		expense or capitalize environmental costs consistent with our capitalization policy

	§		expense costs for an existing condition caused by past operations that do not contribute to future revenues

	§		accrue costs for environmental assessment and remediation efforts when we determine that a liability is probable and we can reasonably estimate the cost

At the early stages of a remediation effort, environmental remediation liabilities are not easily quantified due to the uncertainties of various factors. The range of an estimated remediation liability is defined and redefined as events in the remediation effort occur, but generally liabilities are recognized no later than completion of the remedial feasibility study. When we can estimate a range of probable loss, we accrue the most likely amount. If no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. As of December 31, 2016, the difference between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $3.3 million — this amount does not represent our maximum exposure to loss for all environmental remediation obligations as it excludes those sites for which a range of loss cannot be reasonably estimated at this time. Our environmental remediation obligations are recorded on an undiscounted basis.

Accrual amounts may be based on technical cost estimations or the professional judgment of experienced environmental managers. Our Safety, Health and Environmental Affairs Management Committee routinely reviews cost estimates and key assumptions in response to new information, such as the kinds and quantities of hazardous substances, available technologies and changes to the parties participating in the remediation efforts. However, a number of factors, including adverse agency rulings and unanticipated conditions as remediation efforts progress, may cause actual results to differ materially from accrued costs.

For additional information about environmental compliance costs, see Note 8 "Accrued Environmental Remediation Costs" in Item 8 "Financial Statements and Supplementary Data."

CLAIMS AND LITIGATION INCLUDING SELF-INSURANCE

We are involved with claims and litigation, including items covered under our self-insurance program. We are self-insured for losses related to workers' compensation up to $2.0 million per occurrence and automotive and general/product liability up to $3.0 million per occurrence. We have excess coverage on a per occurrence basis beyond these retention levels.

Under our self-insurance program, we aggregate certain claims and litigation costs that are reasonably predictable based on our historical loss experience and accrue losses, including future legal defense costs, based on actuarial studies. Certain claims and litigation costs, due to their unique nature, are not included in our actuarial studies. For matters not included in our actuarial studies, legal defense costs are accrued when incurred.

Our accounting policy for claims and litigation including self-insurance is a critical accounting policy because it involves the use of significant estimates and assumptions and requires considerable management judgment.

HOW WE ASSESS THE PROBABILITY OF LOSS

We use both internal and outside legal counsel to assess the probability of loss, and establish an accrual when the claims and litigation represent a probable loss and the cost can be reasonably estimated. Significant judgment is used in determining the timing and amount of the accruals for probable losses, and the actual liability could differ materially from the accrued amounts.

For additional information about claims and litigation including self-insurance, see Note 1 "Summary of Significant Accounting Policies" in Item 8 "Financial Statements and Supplementary Data" under the caption Claims and Litigation Including Self-insurance.



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INCOME TAXES

VALUATION OF OUR DEFERRED TAX ASSETS

We file federal, state and foreign income tax returns and account for the current and deferred tax effects of such returns using the asset and liability method. 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.

Significant judgments and estimates are required in determining our deferred tax assets and liabilities. These estimates are updated throughout the year to consider income tax return filings, our geographic mix of earnings, legislative changes and other relevant items.

Each quarter we analyze the likelihood that our deferred tax assets will be realized. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. A summary of our deferred tax assets is included in Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data.”

At December 31, 2016, we have state net operating loss carryforward deferred tax assets of $54.5 million, against which we have a valuation allowance of $44.2 million. Of the deferred tax assets, $53.2 million relates to Alabama.

From 2008 through the second quarter of 2015, we carried a full valuation allowance against the Alabama deferred tax asset for the following reasons:

	§		we had a substantial cumulative loss in Alabama

	§		due to our legal entity structure, we had no expectation of creating sufficient taxable income in Alabama

During the second quarter of 2015, we restructured our legal entities. Among other benefits, we anticipated that the restructuring would generate significant taxable income in Alabama, and therefore, allow for the utilization of some or all of the Alabama deferred tax asset.

Our Alabama cumulative loss is calculated as pretax earnings from continuing operations, discontinued operations and other comprehensive income plus permanent differences over the last three years. While evaluating all available positive and negative evidence, realizing the significance of the restructuring in our Alabama income tax filing, we determined that it was appropriate to adjust our Alabama cumulative loss calculation to consider the restructuring, remove pretax earnings from discontinued operations and other comprehensive income and remove any other significant nonrecurring items. We refer to this calculation as our Alabama adjusted earnings.

At the end of the second quarter of 2015, our Alabama adjusted earnings were negative. However, the Alabama adjusted earnings loss was dramatically smaller than our Alabama cumulative loss (of the three adjustments made, the restructuring had the greatest impact). In addition, we considered all other forms of positive and negative evidence, including the four sources of taxable income. The first three sources of taxable income (carryback potential, reversing temporary differences and tax planning strategies) provided very little positive evidence. Because our Alabama adjusted earnings were a loss, we did not project future Alabama taxable income (the fourth source). As a result, during the second quarter of 2015 we continued to carry a full valuation allowance against our Alabama deferred tax asset.

At the end of the third quarter of 2015, our Alabama adjusted earnings turned positive. This development provided sufficient positive evidence such that we determined it was appropriate to use projections of future Alabama taxable income in our assessment for the first time. However, because we had not yet returned to sustained profitability (i.e., an Alabama cumulative gain) we used our Alabama trailing twelve months adjusted earnings as the basis for an objectively verifiable projection of future Alabama taxable income. This projection, in addition to considering all other positive and negative evidence, led us to conclude in the third quarter that it was more likely than not that $4.7 million of the deferred tax asset was realizable. Therefore, we recognized a deferred tax benefit of $4.7 million in the third quarter of 2015 by reducing the valuation allowance. Our analysis in each of the four subsequent quarters further confirmed our third quarter of 2015 conclusion but resulted in no further reductions of the valuation allowance.



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In the fourth quarter of 2016, we achieved three consecutive years of positive Alabama adjusted earnings. This development together with the projection of future Alabama taxable income (using our most recent trailing twelve months adjusted earnings) warranted an additional partial release of $4.8 million in the fourth quarter of 2016. As of year-end 2016, we have recognized $9.5 million of the Alabama deferred tax asset.

We believe that once we have an Alabama cumulative gain, we will have sufficient positive evidence to conclude that we have returned to sustained profitability and we will no longer limit our estimate of future taxable income to our Alabama trailing twelve months adjusted earnings. At that time, we may realize a significant portion, if not all, of the Alabama deferred tax asset. We project the earliest this could happen would be the fourth quarter of 2017.

LIABILITY FOR UNRECOGNIZED TAX BENEFITS

We recognize a tax benefit associated with a tax position when we judge 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 position. 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.

The years open to tax examinations vary by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is appropriate.

We consider a tax position to be resolved at the earlier of the issue being “effectively settled,” settlement of an examination, or the expiration of the statute of limitations. Upon resolution of a tax position, any liability for unrecognized tax benefits will be released.

Our liability for unrecognized tax benefits is generally presented as noncurrent. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current. We classify interest and penalties associated with our liability for unrecognized tax benefits as income tax expense.

NEW ACCOUNTING STANDARDS

For a discussion of accounting standards recently adopted and pending adoption and the effect such accounting changes will have on our results of operations, financial position or liquidity, see Note 1 "Summary of Significant Accounting Policies" in Item 8 "Financial Statements and Supplementary Data" under the caption New Accounting Standards.

FORWARD-LOOKING STATEMENTS

The foregoing discussion and analysis, as well as certain information contained elsewhere in this Annual Report, contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor created thereby. See the discussion in Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 in Part I, above.



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