Page 81 - 2019 Annual Report
P. 81

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



           Celebrating 25 Years as a Public Company                                         Annual Report  ♦  Page 79
   76   77   78   79   80   81   82   83   84   85   86