Page 81 - 2019 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OTHER FINANCIAL INFORMATION

Critical Accounting Policies and Estimates
The Company’s audited consolidated financial statements include certain critical estimates regarding the effect of matters
that are inherently uncertain. These estimates require management’s subjective and complex judgments. Amounts reported
in the Company’s consolidated financial statements could differ materially if management used different assumptions in
making these estimates, resulting in actual results differing from those estimates. Methodologies used and assumptions
selected by management in making these estimates, as well as the related disclosures, have been reviewed by and discussed
with the Company’s Audit Committee. Management’s determination of the critical nature of accounting estimates and
judgments may change from time to time depending on facts and circumstances that management cannot currently predict.

Impairment Review of Goodwill
Goodwill is required to be tested annually for impairment. An interim review is performed between annual tests if facts and
circumstances indicate a potential impairment. The impairment review of goodwill is a critical accounting estimate because
goodwill represents 24% of the Company’s total assets at December 31, 2019; the review requires management to apply
judgment and make key assumptions; and an impairment charge could be material to the Company’s financial condition and
results of operations. The Company performs its impairment evaluation as of October 1, which represents the annual
evaluation date.
The Company’s reporting units, which represent the level at which goodwill is tested for impairment, are based on the
operating segments of the Building Materials business. There is no goodwill related to the Magnesia Specialties business.
Certain of the aforementioned reporting units within the Building Materials business meet the aggregation criteria and are
consolidated into reportable segments for financial reporting.
Goodwill is assigned to the respective reporting unit(s) based on the location of acquisitions at the time of consummation. If
subsequent organizational changes result in operations being transferred to a different reporting unit, a proportionate
amount of goodwill is transferred from the former to the new reporting unit. Goodwill is tested for impairment by comparing
the reporting unit’s fair value to its carrying value, which represents a Step-1 analysis. However, prior to Step 1, the Company
may perform an optional qualitative assessment. As part of the qualitative assessment, the Company considers, among other
things, the following events and circumstances: macroeconomic conditions, industry and market conditions, cost factors,
overall financial performance and other business or reporting unit-specific events. If the Company concludes it is more-likely-
than-not (i.e., a likelihood of more than 50%) that a reporting unit’s fair value is higher than its carrying value, the Company
does not perform any further goodwill impairment testing for that reporting unit. Otherwise, it proceeds to Step 1 of its
goodwill impairment analysis. The Company may bypass the qualitative assessment for any reporting unit in any period and
proceed directly with the quantitative calculation in Step 1. When the Company validates its conclusion by measuring fair
value, it may resume performing a qualitative assessment for a reporting unit in any subsequent period. If the reporting unit’s
fair value exceeds its carrying value, no further calculation is necessary. A reporting unit with a carrying value in excess of its
fair value constitutes a Step-1 failure and results in an impairment charge.
For the 2019 annual impairment evaluation, the Company performed a Step-1 analysis for all reporting units. The fair values
were calculated using a discounted cash flow model. Key assumptions included management’s estimates of changes in sales
price, shipment volumes and production costs as well as assumptions of future profitability, capital requirements, discount
rates ranging from 8.5% to 9.25% and a terminal growth rate of 2.5%. With the exception of the Cement and Southwest
Ready Mix Division, the fair value of all reporting units exceeded the carrying value by more than 150%. The Cement and
Southwest Ready Mix Division reporting unit’s fair value exceeded its carrying value by 35%, or $701.5 million. For sensitivity
purposes, a 100-basis-point increase in the discount rate, holding all other assumptions constant, would result in the Cement
and Southwest Ready Mix Division reporting unit passing the Step-1 analysis by $343.5 million, or 17%. The Cement and
Southwest Ready Mix Division reporting unit had $934.7 million of goodwill at December 31, 2019.

Future profitability and capital requirements are, by their nature, estimates. Price, cost and volume assumptions were based
on various factors, including historical averages and current forecasts, external sources, and market conditions, while also
considering any production capacity constraints. Capital requirements included maintenance-level needs and known
efficiency- and capacity-increasing investments.
A discount rate is calculated for each reporting unit that requires a Step-1 analysis and represents its weighted average cost
of capital. The calculation of the discount rate includes the following components, which are primarily based on published

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