Page 82 - 2019 Annual Report

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.

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