Page 82 - 2019 Annual Report
P. 82

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
           sources: equity risk premium, historical beta, risk-free interest rate, small-stock premium, company-specific premium and
           borrowing rate.
           The terminal growth rate was based on average GDP increases.
           Management believes that all assumptions used were reasonable based on historical operating results and expected future
           trends. However, if future operating results are unfavorable as  compared with  forecasts, the results of future goodwill
           impairment evaluations could be negatively affected. Further, mineral reserves, which represent underlying assets producing
           the reporting units’ cash flows for the aggregates product line, are depleting assets by their nature. Any potential impairment
           charges from future evaluations represent a risk to the Company.


           Pension Expense-Selection of Assumptions
           The Company sponsors noncontributory defined  benefit pension  plans that  cover substantially all employees and a
           Supplemental Excess Retirement Plan (SERP) for certain retirees (see Note K to the audited consolidated financial statements).
           Annual pension expense (inclusive of SERP expense) consists of several components:
                  •  Service Cost, which represents the present value of benefits attributed to services rendered in the current year,
                     measured by expected future salary levels;
                  •  Interest Cost, which represents one year’s additional interest on the outstanding liability;
                  •  Expected Return on Assets, which represents the expected investment return on pension plan assets; and
                  •  Amortization  of Prior Service Cost  and Actuarial Gains and Losses,  which  represents  components that are
                     recognized over time rather than immediately. Prior service cost represents credit given to employees for years
                     of service prior to plan inception, of which there is an insignificant amount at December 31, 2019. Actuarial gains
                     and losses arise from changes in assumptions regarding future events or when actual returns on pension assets
                     differ from expected returns. At December 31, 2019, the unrecognized actuarial loss was $229.4 million. Pension
                     accounting rules currently allow companies to amortize the portion of the unrecognized actuarial loss that
                     represents more than 10% of the greater of the projected benefit obligation or pension plan assets, using the
                     average remaining service life for the amortization period. Therefore, the $229.4 million unrecognized actuarial
                     loss consists  of $131.6  million currently  subject to amortization in  2020  and $97.8  million not subject to
                     amortization in 2020. $13.5 million of amortization of the actuarial loss is estimated to be a component of 2020
                     annual pension expense.

           These components  are  calculated annually to determine the pension expense reflected in the Company’s results
           of operations.

           Management believes the selection of assumptions related to the annual pension expense is a critical accounting estimate
           due to the high degree of volatility in the expense dependent on selected assumptions. The key assumptions are as follows:
                  •  The discount rate is used to present value the pension obligation and represents the current rate at which the
                     pension obligations could be effectively settled.
                  •  The expected long-term rate of return on pension plan assets is used to estimate future asset returns and should
                     reflect the  average rate of  long-term earnings on assets invested  to  provide for the benefits included in the
                     projected benefit obligation.
                  •  The mortality table represents published statistics on the expected lives of people.
                  •  The rate of increase in future compensation levels is used to project the pay-related pension benefit formula and
                     should estimate actual future compensation levels.
           Management’s selection of the discount rate is based on an analysis that estimates the current rate of return for high-quality,
           fixed-income investments with maturities matching the payment of pension benefits that could be purchased to settle the
           obligations. The Company selected a hypothetical portfolio of Moody’s Aa bonds, with maturities that match the benefit
           obligations, to determine the discount rate. At December 31, 2019, the Company selected a discount rate assumption of
           3.69%, a 69-basis-point decrease compared with the prior-year assumption. Of the four key assumptions, the discount rate is
           generally the most volatile and sensitive estimate. Accordingly, a change in this assumption has the most significant impact
           on the annual pension expense.







           Annual Report  ♦  Page 80                                            Celebrating 25 Years as a Public Company
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