Page 85 - 2019 Annual Report

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
to the deduction of estimated cost reserves and various period expenses for financial reporting purposes that are deductible
in a later period for income tax purposes. The reversal of these differences depends on facts and circumstances, including the
timing of deduction for income tax purposes for reserves previously established and the establishment of additional reserves
for financial reporting purposes. The deferred tax assets attributable to unvested stock-based compensation awards relate to
differences in the timing of deductibility for financial reporting purposes versus income tax purposes. For financial reporting
purposes, the fair value of the awards is deducted ratably over the requisite service period. For income tax purposes, no
deduction is allowed until the award is vested or no longer subject to substantial risk of forfeiture. The Company records all
excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event in the period in which the award
vests or settles, increasing volatility in the income tax rate from period to period.

Business Combinations – Allocation of Purchase Price
The Company’s Board of Directors and management regularly review strategic long-term plans, including potential
investments in value-added acquisitions of related or similar businesses, which would increase the Company’s market share
and/or are related to the Company’s existing markets. When an acquisition is completed, the Company’s consolidated
statements of earnings include the operating results of the acquired business starting from the date of acquisition, which is
the date control is obtained. The purchase price is determined based on the fair value of assets and equity interests given to
the seller and any future obligations to the seller as of the date of acquisition. Additionally, conversion of the seller’s equity
awards into equity awards of the Company can affect the purchase price. The Company allocates the purchase price to the
fair values of the tangible and intangible assets acquired and liabilities assumed as valued at the date of acquisition. Goodwill
is recorded for the excess of the purchase price over the net of the fair value of the identifiable assets acquired and liabilities
assumed as of the acquisition date. The purchase price allocation is a critical accounting policy because the estimation of fair
values of acquired assets and assumed liabilities is judgmental and requires various assumptions. Further, the amounts and
useful lives assigned to depreciable and amortizable assets versus amounts assigned to goodwill and indefinite-lived
intangible assets, which are not amortized, can significantly affect the results of operations in the period of and for periods
subsequent to a business combination.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and,
therefore, represents an exit price. A fair-value measurement assumes the highest and best use of the asset by market
participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the
measurement date. The Company assigns the highest level of fair value available to assets acquired and liabilities assumed
based on the following options:
• Level 1 – Quoted prices in active markets for identical assets and liabilities
• Level 2 – Observable inputs, other than quoted prices, for similar assets or liabilities in active markets
• Level 3 – Unobservable inputs, used to value the asset or liability which includes the use of valuation models
Level 1 fair values are used to value investments in publicly-traded entities and assumed obligations for publicly-traded long-
term debt.
Level 2 fair values are typically used to value acquired receivables, inventories, machinery and equipment, land, buildings,
deferred income tax assets and liabilities, and accruals for payables, asset retirement obligations, environmental remediation
and compliance obligations, and contingencies. Additionally, Level 2 fair values are typically used to value assumed contracts
at other-than-market rates.

Level 3 fair values are used to value acquired mineral reserves and mineral interests produced and sold as final products, and
separately-identifiable intangible assets. The fair values of mineral reserves and mineral interests are determined using an
excess earnings approach, which requires management to estimate future cash flows, net of capital investments in the
specific operation and contributory asset charges. The estimate of future cash flows is based on available historical
information and future expectations and assumptions determined by management, but is inherently uncertain. Key
assumptions in estimating future cash flows include changes in sales price, shipment volumes and production costs as well as
capital needs. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and
mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate
of return that a hypothetical market participant would require if purchasing the acquired business, with an adjustment for
the risk of these assets not generating the projected cash flows.
The Company values separately-identifiable acquired intangible assets which may include, but are not limited to, permits,
customer relationships, water rights and noncompetition agreements. The fair values of these assets are typically determined
by an excess earnings method, a replacement cost method or, in the case of water rights, a market approach.

Celebrating 25 Years as a Public Company Annual Report ♦ Page 83