Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE SUMMARY

FINANCIAL SUMMARY FOR 2018 (compared to 2017)

	§		Total revenues increased $492.6 million, or 13%, to $4,382.9 million

	§		Gross profit increased $107.4 million, or 11%, to $1,100.9 million

	§		Aggregates segment sales increased $417.6 million, or 13%, to $3,513.6 million

	§		Aggregates segment freight-adjusted revenues increased $274.6 million, or 11%, to $2,667.3 million

	§		Shipments increased 10%, or 18.2 million tons, to 201.4 million tons

	§		Same-store shipments increased 6%, or 10.7 million tons, to 193.8 million tons

	§		Freight-adjusted sales price increased 1%, or $0.19 per ton

	§		Same-store freight-adjusted sales price increased 2%, or $0.21 per ton

	§		Segment gross profit increased $137.3 million, or 16%, to $991.9 million

	§		Asphalt, Concrete and Calcium segment gross profit decreased $29.9 million, or 22%, to $109.1 million, collectively

	§		Selling, administrative and general (SAG) expenses increased 3% to $333.4 million and decreased 0.75 percentage points (75 basis points) as a percentage of total revenues

	§		Operating earnings increased $108.7 million, or 17%, to $747.7 million

	§		Earnings from continuing operations before income taxes were $623.3 million compared to $361.3 million

	§		Effective tax rate was 16.9% compared with negative 64.2%

	§		Earnings from continuing operations were $517.8 million, or $3.87 per diluted share, compared to $593.4 million, or $4.40 per diluted share

	§		Discrete items in 2018 include:

	§		$0.6 million of tax expense related to the Tax Cuts and Jobs Act (TCJA)

	§		pretax interest charges of $7.4 million related to the January and March early debt retirements

	§		pretax gains of $2.9 million for the sale of businesses

	§		pretax charges of $18.5 million for divested operations

	§		pretax gains of $2.3 million for business interruption claims

	§		pretax charges of $5.2 million associated with non-routine business development

	§		pretax charges of $6.2 million for restructuring

	§		Discrete items in 2017 include:

	§		$297.0 million of net tax benefits (including $268.2 million related to TCJA and a $28.8 million partial release of a net operating loss (NOL) carryforward valuation allowance)

	§		pretax interest charges of $153.1 million related to debt purchases

	§		pretax gains of $10.5 million for the sale of real estate and businesses

	§		pretax charges of $4.3 million for property donation

	§		pretax charges of $18.1 million for divested operations

	§		pretax charges of $6.7 million for one-time employee bonuses

	§		pretax charges of $3.1 million associated with non-routine business development, net of an asset purchase agreement termination fee

	§		pretax charges of $1.9 million for restructuring

	§		Net earnings were $515.8 million, a decrease of $85.4 million, or 14%

	§		Adjusted EBITDA was $1,131.7 million, an increase of $149.8 million, or 15%

	§		Returned capital to shareholders via dividends ($148.1 million versus $132.3 million) and share repurchases ($134.0 million versus $60.3 million)

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In 2018, we executed on our goals through a commitment to our shareholders, customers, employees and the communities we serve. We delivered growth and enhanced profitability in the face of several severe weather events that disrupted operations in some states for weeks at a time. With a clear and compelling strategy, a lean and locally-led operational structure, and unparalleled positions in attractive long-term growth markets, we are especially well-situated to benefit as infrastructure demand in key Vulcan states continues to grow, fueled by marked increases in state and local funding and we are well-equipped to overcome market challenges.

Even though the year provided plenty of headwinds for the construction industry, including weather disruptions and a 25% increase in the cost of diesel fuel during the year, we delivered strong top and bottom line growth. For the year, we increased total revenues, gross profit and earnings from continuing operations before income taxes, and adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA). Our 2018 net earnings were down compared to 2017 because of the one-time impact of TCJA on our 2017 income tax provision (-64.2% effective tax rate).

Our capital allocation and investment-grade rating priorities remain unchanged. For the full year, capital expenditures were $469.1 million. This amount included $221.7 million of core operating and maintenance capital investments to improve or replace existing property, plant & equipment. In addition, we invested $247.4 million in internal growth projects to secure new aggregates reserves, develop new production sites, enhance our distribution capabilities and support the targeted growth of our asphalt and concrete operations.

At year end, total debt was $2,912.4 million, or 2.6 times 2018 Adjusted EBITDA. Throughout 2017 and during the first quarter of 2018, we completed a number of debt refinancing activities (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”) in order to extend the maturity of our debt portfolio consistent with the long-lived nature of our asset base. As a result of these actions, the weighted-average term of our debt portfolio has more than doubled to approximately 15 years.

As the leading aggregates producer in the U.S., serving many of the most attractive markets, we are well positioned for continued top line growth, particularly as federal, state and local governments increase spending on public infrastructure construction, while demand from private sector projects remains stable. In addition, our keen focus on operational excellence, cost control and disciplined investment should enable us to continue to enhance profitability and drive sustainable, long-term shareholder value.

Additionally, we advanced our world-class safety performance, improving on our record-setting results from the previous year.

2018 ACQUISITIONS

We continue to pursue opportunities for value-creating acquisitions, swaps and greenfield investments. We remain active in the pursuit of bolt-on acquisitions and other value-creating growth investments. We closed four business acquisitions during 2018 for total consideration of $219.9 million (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”). These acquisitions complement our existing positions in our Alabama, California and Texas markets.

We will continue to make disciplined investments in organic and acquisition-led growth, while continuing to emphasize capital returns and cost control. We are completely focused on actions that improve returns to our shareholders. We seek continuous, compounding improvement, generating big results through small actions. Our capital allocation priorities remain unchanged:

	§		deploying operating capital to sustain our franchise

	§		maintaining the financial strength and flexibility needed through the cycle

	§		strategic growth through mergers and acquisitions and internal development

	§		returning excess cash to shareholders through a healthy mix of sustainable dividend growth and stock repurchases

For a detailed discussion of our acquisitions and divestitures, see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.”

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MARKET DEVELOPMENTS AND OUTLOOK

Our aggregates-focused business is well positioned in 2019 for further gains in our industry-leading unit profitability in aggregates and double-digit earnings growth. Vulcan-served markets are benefitting disproportionally from both strong growth in public construction demand and continued growth in private demand.

Public funding for transportation infrastructure has changed significantly over the last three years. State transportation funding legislation and local ballot measures are bringing about important increases in public spending for much needed projects and are finally beginning to generate new highway construction and the repair and maintenance work necessary to address the country’s failing infrastructure — all projects that depend upon aggregates as the fundamental building block.

Nine of our key states that generate almost 80% of our revenue have passed legislation over the last three years that raises their transportation infrastructure funding by almost 60% over 2015 levels. These nine key states — California, Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Texas and Virginia — have all addressed their transportation infrastructure needs and boosted their economies.

Altogether, state laws and local initiatives to increase transportation infrastructure funding have added more than $20 billion annually in just these nine Vulcan states. To put that in perspective, that’s nearly half as much as the federal transportation law, the FAST Act, provides on an annual basis to all 50 states. We expect more Vulcan-served states to follow suit in 2019 and following years. In last November’s elections, 352 state and local transportation funding initiatives appeared on ballots in 31 states, and 79% of them were approved by voters.

We are excited about accelerating public sector growth. At the same time, demand from private sector projects has continued to be stable in our markets, providing a solid base for overall growth. In fact, private construction activity continues to improve in several of our important markets, particularly housing and nonresidential construction in the South and West.

Overall, we see significant room for growth, with demand for aggregates still below historical averages, and well below past peaks in demand, even as population and economic activity continue to increase in our key markets. We believe that we are in the middle stages of the market upturn that began five and a half years ago and see significant upside in revenues and profitability.

Management Expectations for 2019 — We expect solid growth in private demand and strong growth in public demand. Above-average demand growth in Vulcan markets compared to the rest of the U.S. further supports our positive outlook for aggregates shipment growth. The underlying direction of aggregates unit profitability remains clear, strongly supported by our strategic and tactical focus on compounding pricing improvements. We expect double-digit earnings growth in 2019.

Management expectations for 2019 include:

	§		Aggregates shipments growth of 3% to 5%

	§		Aggregates freight-adjusted price increase of 5% to 7%

	§		Collective Asphalt, Concrete and Calcium segment gross profit growth of 15% to 20%

	§		SAG expenses of approximately $355 million

	§		Net earnings of $610 million to $670 million

	§		Adjusted EBITDA of $1.25 billion to $1.33 billion

	§		Interest expense of approximately $130 million

	§		Depreciation, depletion, accretion and amortization expense of approximately $360 million

	§		An effective tax rate of approximately 20%

	§		Earnings from continuing operations of $4.55 to $5.05 per diluted share

Additionally, we expect to spend approximately $250 million on maintenance capital and $200 million for internal growth projects that are largely underway.

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COMPETITIVE ADVANTAGES

AGGREGATES FOOTPRINT

Over time, we have strategically and systematically built one of the most valuable aggregates franchises in the U.S., with a footprint that is impossible to replicate. Zoning and permitting regulations have made it increasingly difficult to expand existing quarries or to develop new quarries. Such regulations, while curtailing expansion, also increase the value of our reserves that were zoned and permitted decades ago.

Demand for aggregates correlates positively with changes in population growth, household formation and employment. We have a coast-to-coast footprint that serves 19 of the top 25 highest-growth metropolitan areas and states where 80% of U.S. population growth from 2020 to 2030 is projected to occur. As state and federal spending increases, Vulcan is poised to benefit greatly from growing private and public demand for aggregates, thereby delivering significant long-term value for our shareholders.

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OPERATIONAL EXCELLENCE

We have continued to deliver strong financial performance over time and through business cycles. Through our aggregates-led strategy with a focus on continuous operational improvement; disciplined investment in organic and acquisition-led growth; and an ongoing emphasis on capital returns and controlling costs, we have created one of the most profitable public companies in our industry as measured by aggregates gross profit per ton.

Current economic indicators and market fundamentals point toward continued market growth. We are currently operating at well below full capacity making us extremely well positioned to further benefit from economies of scale as this growth continues.

Additionally, we recognize that the aggregates mining in which we engage is an interim use of the approximately 240,000 acres of land in our portfolio. Our land and water assets will be converted to other valuable uses at the end of mining. Effective management throughout the life cycle of our land — from pre-mining utilization as agriculture and timber development, to post-mining development as water reservoirs or residential and commercial development — not only generates significant additional value for our shareholders but greatly benefits the communities in which we operate.

SAFETY, HEALTH AND ENVIRONMENTAL PERFORMANCE

A strategy for sustainable, long-term value creation must include doing right by your employees, your neighbors and the environment in which you operate. Over our more than six decades as a public company, we have built a strong, resilient and vital business on this foundation of doing things the right way.

We are a leader in our industry in safety, health and environmental performance, with a safety record substantially better than the industry average. We apply the shared experiences, expertise and resources at each of our locally led sites, with an emphasis on taking care of one another. The result is a record of safety excellence consistently outperforming the industry.

Source: Mine Safety and Health Administration (MSHA) records and Internal Vulcan Data.

*	The aggregates industry MSHA injury rate for 2018 was not available as of the filing of this report.

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We focus on our environmental stewardship programs with the same intensity that we bring to our health and safety initiatives resulting in 98% citation-free inspections out of all 2018 federal and state environmental inspections.

We lead community relations programs that serve our neighbors while ensuring that we grow and thrive in the communities where we operate. During 2018, we operated 44 certified wildlife habitat sites, the second largest number of sites in the nation and third largest globally, as certified by the Wildlife Habitat Council. We conducted tours for more than 26,000 students and neighbors at our operations, partnered with 238 adopted schools, and provided 141 scholarships to students nationwide.

CUSTOMER SERVICE

More than an aggregates supplier, we are a business dedicated to customer service and finding creative solutions to meet our customers’ needs. Being a valued partner and trusted supplier means that we are providing the right product, with the right specifications, that is the right quality, delivered the right way — on time and safely. Our One-Vulcan, Locally Led approach, in which our employees work together to leverage the size and strengths of Vulcan as a whole, while running their operations with a strong entrepreneurial spirit and sense of ownership, allows us to deliver market-leading services to our customers.

Transportation costs are passed along to our customers, and because aggregates have a very high weight-to-value ratio, those costs can add up quickly when transporting aggregates long distances. Having the most extensive distribution network of any aggregates producer sets us apart. Combining our trucking, rail, barge and shipping logistics capabilities allows us to provide better customer solutions and create a seamless customer experience at a competitive price.

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RESULTS OF OPERATIONS

Total revenues are primarily derived from our product sales of aggregates, asphalt mix and ready-mixed concrete, and include freight & delivery costs that we pass along to our customers to deliver these products. We also generate revenues from our asphalt construction paving business and services related to our aggregates business. We discuss separately our discontinued operations, which consists of our former Chemicals business.

The following table highlights significant components of our consolidated operating results including EBITDA and Adjusted EBITDA.

CONSOLIDATED OPERATING RESULTS HIGHLIGHTS

For the years ended December 31			2018			2017			2016
in millions, except per share data
Total revenues			$ 4,382.9			$ 3,890.3			$ 3,592.7
Cost of revenues			3,282.0			2,896.8			2,603.8
Gross profit			$ 1,100.9			$ 993.5			$ 988.9
Selling, administrative and general expenses			$ 333.4			$ 325.0			$ 316.8
Operating earnings			$ 747.7			$ 639.0			$ 665.9
Interest expense			$ 138.0			$ 295.5			$ 134.1
Earnings from continuing operations
before income taxes			$ 623.3			$ 361.3			$ 547.3
Earnings from continuing operations			$ 517.8			$ 593.4			$ 422.4
Earnings (loss) on discontinued operations, net of income taxes			(2.0)			7.8			(2.9)
Net earnings			$ 515.8			$ 601.2			$ 419.5
Basic earnings (loss) per share
Continuing operations			$ 3.91			$ 4.48			$ 3.17
Discontinued operations			(0.01)			0.06			(0.02)
Basic net earnings per share			$ 3.90			$ 4.54			$ 3.15
Diluted earnings (loss) per share
Continuing operations			$ 3.87			$ 4.40			$ 3.11
Discontinued operations			(0.02)			0.06			(0.02)
Diluted net earnings per share			$ 3.85			$ 4.46			$ 3.09
EBITDA			$ 1,107.0			$ 958.4			$ 965.5
Adjusted EBITDA			$ 1,131.7			$ 981.9			$ 966.0

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Net earnings for 2018 were $515.8 million ($3.85 per diluted share) compared to $601.2 million ($4.46 per diluted share) in 2017 and $419.5 million ($3.09 per diluted share) in 2016. Each year's results were impacted by discrete items, as follows:

Net earnings for 2018 include:

	§		$0.6 million of tax expense related to TCJA

	§		pretax gains of $2.9 million related to the sale of businesses

	§		pretax charges of $18.5 million associated with divested operations

	§		pretax gains of $2.3 million for business interruption claims

	§		pretax charges of $5.2 million associated with non-routine business development

	§		pretax charges of $6.2 million for restructuring

	§		pretax interest charges of $7.4 million related to early debt retirements (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”)

Net earnings for 2017 include:

	§		$297.0 million of net tax benefits (TCJA — $268.2 million, and partial release of the Alabama NOL carryforward valuation allowance — $28.8 million)

	§		pretax gains of $10.5 million related to the sale of real estate and businesses

	§		pretax charges of $4.3 million for property donation

	§		pretax charges of $18.1 million associated with divested operations

	§		pretax charges of $6.7 million for one-time employee bonuses

	§		pretax charges of $3.1 million associated with non-routine business development, net of an asset purchase agreement termination fee

	§		pretax charges of $1.9 million for restructuring

	§		a pretax loss on debt purchases of $153.1 million presented as a component of interest expense (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”)

Net earnings for 2016 include:

	§		$11.3 million of tax benefits (utilization of foreign tax credits — $6.5 million, and partial release of the Alabama NOL carryforward valuation allowance — $4.8 million)

	§		pretax gains of $16.2 million related to the sale of real estate

	§		pretax gains of $11.0 million for business interruption claims (net of incentives)

	§		pretax charges of $16.9 million associated with divested operations

	§		pretax losses of $10.5 million from asset impairment

EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

Year-over-year changes in earnings from continuing operations before income taxes are summarized below:

in millions
	2016	$ 547.3			2017	$ 361.3
Higher (lower) aggregates gross profit		(9.3)				137.3
Lower asphalt gross profit		(5.3)				(34.8)
Higher concrete gross profit		20.2				4.7
Higher (lower) calcium gross profit		(1.0)				0.2
Higher selling, administrative and general expenses		(8.2)				(8.4)
Higher (lower) gain on sale of property, plant & equipment and businesses		2.4				(2.9)
Lower (higher) interest expense		(161.4)				157.5
All other		(23.4)				8.4
	2017	$ 361.3			2018	$ 623.3

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OPERATING RESULTS BY SEGMENT

We present our results of operations by segment at the gross profit level. We have four operating (and reportable) segments organized around our principal product lines: (1) Aggregates, (2) Asphalt, (3) Concrete and (4) Calcium. Management reviews earnings for the product line reporting segments principally at the gross profit level.

1. AGGREGATES

Our year-over-year aggregates shipments:

	§		increased 10% in 2018 1

	§		increased 1% in 2017

	§		increased 2% in 2016

§
1	The fourth quarter 2017 acquisition of Aggregates USA contributed to the 2018 increase.

Aggregates shipments increased 10% (6% same–store) led by double-digit growth in Alabama, Arizona, Florida, Illinois, Tennessee and Texas. Most other key markets realized flat-to-modest shipment growth. Conversely, in Virginia, volumes declined 9% due mostly to wet weather experienced throughout the first half of the year.

Our year-over-year freight-adjusted selling price1 for aggregates:

	§		increased 1% in 2018

	§		increased 3% in 2017

	§		increased 7% in 2016

1

We routinely arrange the delivery of our aggregates to the customer. Additionally, we incur freight costs to move aggregates from the production site to remote distribution sites. These costs are passed on to our customers in the aggregates price. We remove these pass-through freight & delivery revenues (and any other aggregates-derived revenues, such as landfill tipping fees) from the freight-adjusted selling price for aggregates. See the Reconciliation of Non-GAAP Financial Measures within this Item 7 for a reconciliation of freight-adjusted revenues.

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Throughout 2018, aggregates pricing momentum continued to improve as the year-over-year growth rate in freight-adjusted average sales price increased each quarter. For the year, freight-adjusted aggregates pricing increased more than 1%. On a mix-adjusted basis, pricing increased 3.5% versus the prior year. Positive trends in backlogged project work along with demand visibility, customer confidence and logistics constraints support continued upward pricing movements in 2019.

AGGREGATES SEGMENT SALES AND FREIGHT-ADJUSTED REVENUES	AGGREGATES GROSS PROFIT AND CASH GROSS PROFIT
in millions	in millions

AGGREGATES UNIT SHIPMENTS		AGGREGATES SELLING PRICE AND CASH GROSS PROFIT PER TON
tons, in millions		Freight-adjusted average sales price per ton 1
		1	Freight-adjusted sales price is calculated as freight-adjusted revenues divided by aggregates unit shipments

Unit cost of sales (freight-adjusted) decreased 1% (same-store -2%) versus the prior year as fixed cost leverage and other operating efficiencies more than offset a 25% increase in the unit cost for diesel fuel. We remain focused on compounding improvements in unit margins throughout the cycle through fixed cost leverage, price growth and operating efficiencies. Since the recovery began in the second half of 2013, gross profit per ton in our Aggregates segment has compounded at an average annual growth rate of 13%.

Incremental gross profit as a percentage of segment sales excluding freight & delivery was 47%. On a same-store basis, this metric was in-line with our longer-term expectations of 60%. We evaluate this metric on a trailing-twelve month basis as quarterly gross profit flow-through rates can vary widely from quarter to quarter.

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2. ASPHALT

Our year-over-year asphalt mix shipments:

	§		increased 4% in 2018 1

	§		increased 14% in 2017 2

	§		decreased 2% in 2016

1	Same-store declined 2%. The 4% increase in asphalt mix shipments in 2018 was attributable to first and second quarter 2018 acquisitions of asphalt mix operations and construction paving businesses in Alabama and Texas, coupled with the fourth quarter 2017 swap of our concrete operations for asphalt operations in Arizona.
2	The 14% increase in asphalt mix shipments in 2017 was largely attributable to a first quarter 2017 acquisition of asphalt mix operations and a construction paving business in Tennessee.

Asphalt segment gross profit of $56.5 million was $34.8 million or 38% lower than 2017. Higher liquid asphalt costs negatively affected segment earnings by $54.4 million. Pricing gains are beginning to offset higher liquid asphalt costs, but their impact will be gradual during 2019.

ASPHALT SEGMENT SALES	ASPHALT GROSS PROFIT AND CASH GROSS PROFIT
in millions	in millions

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3. CONCRETE

Our year-over-year ready-mixed concrete shipments:

	§		decreased 10% in 2018 1

	§		increased 19% in 2017 2

	§		increased 7% in 2016

1	The 10% decrease in ready-mixed concrete shipments in 2018 was attributable to the March 2018 disposition of ready-mixed concrete facilities in Georgia, and the fourth quarter 2017 swap of our concrete operations for asphalt operations in Arizona.
2	Of the 19% increase in ready-mixed concrete shipments in 2017, 9% was attributable to a March 2017 acquisition of ready-mixed concrete facilities in California.

Concrete segment gross profit was $49.9 million, up 10% from 2017 on a 10% decline in shipments (same-store -1%). Strategic market restructuring (exiting Georgia and Arizona and entering Northern California) contributed to improved Concrete segment material margins and unit gross profit. The material margins per cubic yard improved 6% (same store +3%) and unit gross profit improved 22% (+2% same-store).

CONCRETE SEGMENT SALES	CONCRETE GROSS PROFIT AND CASH GROSS PROFIT
in millions	in millions

4. CALCIUM

Calcium segment gross profit increased 10% from 2017 to $2.7 million.

CALCIUM SEGMENT SALES	CALCIUM GROSS PROFIT AND CASH GROSS PROFIT
in millions	in millions

In total, the 2018 gross profit contributions from our three non-aggregates (Asphalt, Concrete and Calcium) segments was $109.1 million, a 22% decrease over 2017, and a 13% decrease over 2016. As stated previously, higher liquid asphalt costs in our Asphalt segment accounted for all of this decrease.

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SELLING, ADMINISTRATIVE AND GENERAL (SAG) EXPENSES

in millions

As a percentage of total revenues, SAG expense was:

	§		7.6% in 2018 — decreased 0.75 percentage points (75 basis points)

	§		8.4% in 2017 — decreased 0.45 percentage points (45 basis points)

	§		8.8% in 2016 — increased 0.4 percentage points (40 basis points)

Our comparative total company employment levels at year end:

	§		increased 6% in 2018

	§		increased 11% in 2017

	§		increased 4% in 2016

Increases in our employment levels were driven by our acquisitions (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”). As noted above, 2018 SAG expenses were $333.4 million or 7.6% as a percentage of total revenues, down from 8.4% in 2017. We remain focused on further leveraging our overhead cost structure.

GAIN ON SALE OF PROPERTY, PLANT & EQUIPMENT AND BUSINESSES

in millions

The 2018 gain on sale of property, plant & equipment and businesses of $14.9 million includes $2.9 million of pretax gain from the sale of our ready-mixed concrete operations in Georgia, $3.8 million of pretax gain related to the sale of mitigation credits and $1.3 million of pretax gain from the sale of one of the replaced self-unloading ships. The 2017 gain on sale of property, plant & equipment and businesses of $17.8 million includes $8.0 million of pretax gain from a swap of ready-mixed concrete operations for an asphalt operation (all in Arizona) and $2.5 million of pretax gain related to a property donation. The 2016 gain includes $11.9 million of pretax gain from surplus land sales in Virginia and California. See Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.”

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OTHER OPERATING EXPENSE, NET

Other operating expense, which has an approximate run-rate of $12 million a year (exclusive of discrete items), is composed of various operating items not specifically presented in the accompanying Consolidated Statements of Comprehensive Income. The total other operating expense, net and significant items included in the total were:

	§		$34.8 million in 2018— includes discrete items as follows:

	§		$5.2 million of non-routine business development charges

	§		$18.5 million of charges associated with divested operations, including environmental liability accruals associated with previously divested properties ($20.0 million)

	§		$6.2 million of managerial restructuring charges

	§		$2.3 million gain referable to the settlement of business interruption claims related to the 2010 Gulf Coast oil spill

	§		$47.3 million in 2017 — includes discrete items as follows:

	§		$3.1 million of non-routine business development charges, net of a termination fee. These net charges were composed of $11.1 million of non-routine business development charges partially offset by an $8.0 million credit related to an asset purchase agreement termination fee

	§		$18.1 million of charges associated with divested operations including $16.6 million of environmental liability accruals related to the Hewitt Landfill matter (see Note 12 to the consolidated financial statements)

	§		$6.7 million of one-time cash bonuses for non-incentive eligible employees ($1,000 per employee)

	§		$4.3 million of charges related to a property donation

	§		$1.9 million of managerial restructuring charges

	§		$21.6 million in 2016 — includes discrete items as follows:

	§		$16.9 million of charges associated with divested operations, including charges associated with office space no longer needed and vacated ($5.2 million), the write-off of a prepaid royalty asset resulting from a change in long-term mining plans ($3.6 million), a property litigation settlement ($1.9 million), a pension withdrawal settlement revision ($1.5 million), and environmental liability accruals associated with previously divested properties ($4.5 million)

	§		$10.5 million of impairment charges related to the termination of a nonstrategic aggregates site lease we no longer intended to develop ($9.6 million) and the write-off of nonrecoverable project costs related to two Aggregates segment capital projects that we no longer intend to complete ($0.9 million)

	§		$11.7 million gain referable to the settlement of business interruption claims related to the 2010 Gulf Coast oil spill

	§		$4.3 million gain referable to a plant relocation

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INTEREST EXPENSE

in millions

Interest expense was $138.0 million in 2018 compared to $295.5 million in 2017 and $134.1 million in 2016. Interest expense for 2017 included $153.1 million of charges related to the 2017 debt purchases. See Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data” for additional discussion.

INCOME TAXES

Our income tax expense (benefit) from continuing operations for the years ended December 31 is shown below:

dollars in millions			2018			2017			2016
Earnings from continuing operations
before income taxes			$ 623.3			$ 361.3			$ 547.3
Income tax expense (benefit)			$ 105.4			$ (232.1)			$ 124.9
Effective tax rate			16.9%			-64.2%			22.8%

The $337.5 million increase in our 2018 income tax expense was primarily due to $297.0 million of net discrete tax benefits recorded in the fourth quarter of 2017.

These discrete items were composed of two tax benefits:

	§		a $301.6 million remeasurement of our deferred tax assets and liabilities at the new Tax Cuts and Jobs Act (TCJA) 21% federal corporate income tax rate

	§		a $28.8 million partial release of our Alabama NOL carryforward valuation allowance

Partially offset by two tax charges:

	§		$21.1 million of lost tax benefits associated with tax deductions accelerated into 2017 (e.g., lost U.S. production deduction)

	§		a $12.3 million tax expense for the one-time Deemed Repatriation Transition Tax

See Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data.”

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DISCONTINUED OPERATIONS

Pretax earnings (loss) from discontinued operations were:

	§		$(2.7) million in 2018

	§		$13.0 million in 2017

	§		$(4.9) million in 2016

Pretax earnings (loss) from discontinued operations for 2018, 2017 and 2016, resulted primarily from general and product liability costs, including legal defense costs and environmental remediation costs associated with our former Chemicals business. The 2017 results also include insurance recoveries from previously incurred general liability costs. For additional information about discontinued operations, see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption Discontinued Operations.

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

SAME-STORE

We have provided certain information on a same-store basis. When discussing our financial results in comparison to prior periods, we may exclude the operating results of recently acquired/divested businesses that do not have comparable results in the periods being discussed. These recently acquired/divested businesses are disclosed in Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.” This approach allows us to evaluate the performance of our operations on a comparable basis. We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our operations are performing period over period without the effects of acquisition and divestiture activity. Our same-store information may not be comparable to similar measures used by other companies.

AGGREGATES SEGMENT FREIGHT-ADJUSTED REVENUES

Aggregates segment freight-adjusted revenues is not a Generally Accepted Accounting Principle (GAAP) measure. We present this metric as it is consistent with the basis by which we review our operating results. We believe that this presentation is consistent with our competitors and meaningful to our investors as it excludes revenues associated with freight & delivery, which are pass-through activities. It also excludes immaterial other revenues related to services, such as landfill tipping fees, that are derived from our aggregates business. Additionally, we use this metric as the basis for calculating the average sales price of our aggregates products. Reconciliation of this metric to its nearest GAAP measure is presented below:

dollars in millions			2018			2017			2016
Aggregates segment
Segment sales			$ 3,513.6			$ 3,096.1			$ 2,961.8
Less
Freight & delivery revenues 1			796.9			670.7			651.9
Other revenues			49.4			32.7			15.7
Freight-adjusted revenues			$ 2,667.3			$ 2,392.7			$ 2,294.2
Unit shipments - tons			201.4			183.2			181.4
Freight-adjusted sales price			$ 13.25			$ 13.06			$ 12.65

1	At the segment level, freight & delivery revenues include intersegment freight & delivery (which are eliminated at the consolidated level) and freight to remote distribution sites.

Part II	44

AGGREGATES SEGMENT GROSS PROFIT

Aggregates segment gross profit margin as a percentage of segment sales excluding freight & delivery (revenues and costs) is not a GAAP measure. We present this metric as it is consistent with the basis by which we review our operating results. We believe that this presentation is consistent with our competitors and meaningful to our investors as it excludes revenues associated with freight & delivery, which are pass-through activities (we do not generate a profit associated with the transportation component of the selling price of the product). Incremental gross profit as a percentage of segment sales excluding freight & delivery represents the year-over-year change in gross profit divided by the year-over-year change in segment sales excluding freight & delivery. Reconciliations of these metrics to their nearest GAAP measures are presented below:

MARGIN IN ACCORDANCE WITH GAAP

dollars in millions			2018			2017			2016
Aggregates segment
Gross profit			$ 991.9			$ 854.5			$ 863.8
Segment sales			$ 3,513.6			$ 3,096.1			$ 2,961.8
Gross profit margin			28.2%			27.6%			29.2%
Incremental gross profit margin			32.9%			n/a

AS A PERCENTAGE OF SEGMENT SALES EXCLUDING FREIGHT & DELIVERY

dollars in millions			2018			2017			2016
Aggregates segment
Gross profit			$ 991.9			$ 854.5			$ 863.8
Segment sales			$ 3,513.6			$ 3,096.1			$ 2,961.8
Freight & delivery revenues 1			796.9			670.7			651.9
Segment sales excluding freight & delivery			$ 2,716.7			$ 2,425.4			$ 2,309.9
Gross profit as a percentage of segment sales
excluding freight & delivery			36.5%			35.2%			37.4%
Incremental gross profit as a percentage of segment
sales excluding freight & delivery			47.1%			n/a

1	At the segment level, freight & delivery revenues include intersegment freight & delivery (which are eliminated at the consolidated level) and freight to remote distribution sites.

Part II	45

CASH GROSS PROFIT

GAAP does not define “cash gross profit” and it should not be considered as an alternative to earnings measures defined by GAAP. We and the investment community use this metric to assess the operating performance of our business. Additionally, we present this metric as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. Aggregates segment cash gross profit per ton is computed by dividing Aggregates segment cash gross profit by tons shipped. Reconciliation of this metric to its nearest GAAP measure is presented below:

in millions, except per ton data			2018			2017			2016
Aggregates segment
Gross profit			$ 991.9			$ 854.5			$ 863.8
Depreciation, depletion, accretion and amortization			281.6			245.2			236.5
Aggregates segment cash gross profit			$ 1,273.5			$ 1,099.7			$ 1,100.3
Unit shipments - tons			201.4			183.2			181.4
Aggregates segment cash gross profit per ton			$ 6.32			$ 6.00			$ 6.07
Asphalt segment
Gross profit			$ 56.5			$ 91.3			$ 96.6
Depreciation, depletion, accretion and amortization			31.3			25.4			16.8
Asphalt segment cash gross profit			$ 87.8			$ 116.7			$ 113.4
Concrete segment
Gross profit			$ 49.9			$ 45.2			$ 25.0
Depreciation, depletion, accretion and amortization			12.5			13.8			12.1
Concrete segment cash gross profit			$ 62.4			$ 59.0			$ 37.1
Calcium segment
Gross profit			$ 2.7			$ 2.5			$ 3.5
Depreciation, depletion, accretion and amortization			0.3			0.7			0.7
Calcium segment cash gross profit			$ 3.0			$ 3.2			$ 4.2

Part II	46

EBITDA AND ADJUSTED EBITDA

GAAP does not define “Earnings Before Interest, Taxes, Depreciation and Amortization” (EBITDA) and it should not be considered as an alternative to earnings measures defined by GAAP. We use this metric to assess the operating performance of our business and as a basis for strategic planning and forecasting as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. We adjust EBITDA for certain items to provide a more consistent comparison of earnings performance from period to period. Reconciliation of this metric to its nearest GAAP measure is presented below:

in millions			2018			2017			2016
Net earnings			$ 515.8			$ 601.2			$ 419.5
Income tax expense (benefit)			105.4			(232.1)			124.9
Interest expense, net of interest income			137.6			291.1			133.3
(Earnings) loss on discontinued operations, net of tax			2.0			(7.8)			2.9
EBIT			760.8			652.4			680.6
Depreciation, depletion, accretion and amortization			346.2			306.0			284.9
EBITDA			$ 1,107.0			$ 958.4			$ 965.5
Gain on sale of real estate and businesses 1			$ (2.9)			$ (10.5)			$ (16.2)
Property donation			0.0			4.3			0.0
Business interruption claims recovery, net of incentives			(2.3)			0.0			(11.0)
Charges associated with divested operations			18.5			18.1			16.9
Business development, net of termination fee 2			5.2			3.1			0.0
One-time employee bonuses			0.0			6.7			0.0
Asset impairment			0.0			0.0			10.5
Restructuring charges			6.2			1.9			0.3
Adjusted EBITDA			$ 1,131.7			$ 981.9			$ 966.0
Depreciation, depletion, accretion and amortization			346.2			306.0			284.9
Adjusted EBIT			$ 785.5			$ 675.9			$ 681.1

1	The 2016 amount includes a $4.3 million gain (reflected within Other operating income, net) for plant relocation reimbursement.
2	Represents non-routine charges associated with acquisitions including the cost impact of purchase accounting inventory valuations.

2019 PROJECTED EBITDA

The following reconciliation to the mid-point of the range of 2019 Projected EBITDA excludes adjustments (as noted in Adjusted EBITDA above) as they are difficult to forecast (timing or amount). Due to the difficulty of forecasting such adjustments, we are unable to estimate their significance. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP. Reconciliation of this metric to its nearest GAAP measure is presented below:

			2019 Projected
in millions			Mid-point
Net earnings			$ 640
Income tax expense			160
Interest expense, net of interest income			130
Discontinued operations, net of tax			0
Depreciation, depletion, accretion and amortization			360
Projected EBITDA			$ 1,290

Part II	47

LIQUIDITY AND FINANCIAL RESOURCES

Our primary sources of liquidity are cash provided by our operating activities and a substantial, committed bank line of credit. Additional sources of capital include access to the capital markets, the sale of surplus real estate, and dispositions of nonstrategic operating assets. We believe these financial resources are sufficient to fund our business requirements for 2019, including:

	§		cash contractual obligations

	§		capital expenditures

	§		debt service obligations

	§		dividend payments

	§		potential share repurchases

	§		potential acquisitions

Our balanced approach to capital deployment remains unchanged. We intend to balance reinvestment in our business, growth through acquisitions and return of capital to shareholders, while sustaining financial strength and flexibility. In 2018 and 2017, we returned $148.1 million and $132.3 million, respectively, in cash to shareholders through our dividends and $134.0 million and $60.3 million, respectively, through share repurchases.

We actively manage our capital structure and resources in order to minimize the cost of capital while properly managing financial risk. We seek to meet these objectives by adhering to the following principles:

	§		maintain substantial bank line of credit borrowing capacity

	§		proactively manage our debt maturity schedule such that repayment/refinancing risk in any single year is low

	§		maintain an appropriate balance of fixed-rate and floating-rate debt

	§		minimize financial and other covenants that limit our operating and financial flexibility

Part II	48

CASH

Included in our December 31, 2018 cash and cash equivalents and restricted cash balances of $44.4 million is $19.1 million of cash held at our foreign subsidiaries. Use of this cash is no longer limited to our foreign operations as a result of our decision to remove our indefinite reinvestment assertion as it relates to the earnings of our foreign subsidiaries (see Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data”).

CASH FROM OPERATING ACTIVITIES

in millions

Net cash provided by operating activities is derived primarily from net earnings before noncash deductions for depreciation, depletion, accretion and amortization.

in millions			2018			2017			2016
Net earnings			$ 515.8			$ 601.2			$ 419.5
Depreciation, depletion, accretion
and amortization (DDA&A)			346.2			306.0			284.9
Contributions to pension plans			(109.6)			(20.0)			(9.6)
Deferred tax expense (benefit) 1			64.6			(235.7)			33.6
Cost of debt purchase			6.9			140.8			0.0
Other operating cash flows, net 2			8.9			(147.6)			(83.8)
Net cash provided by operating activities			$ 832.8			$ 644.7			$ 644.6

1	The change from 2016 to 2017 reflects a $301.6 million reduction of our net deferred income tax liability as a result of the Tax Cuts and Jobs Act (TCJA).
2	Primarily reflects changes to working capital balances.

2018 versus 2017 — Net cash provided by operating activities was $832.8 million during 2018, a $188.1 million increase compared to 2017. During the first quarter of 2018, we made a $100.0 million discretionary contribution to our qualified pension plans that was deductible for tax purposes in 2017 and early retired debt incurring premium and transaction costs of $6.9 million which was added back to operating cash flows and reflected as a financing cash outflow. During 2017, we made a discretionary pension plan contribution of $10.6 million and early retired debt incurring premium and transaction costs of $140.8 million which was added back to operating cash flows and is reflected as a financing cash outflow.

2017 versus 2016 — Net cash provided by operating activities was $644.7 million during 2017 and $644.6 during 2016. Although net earnings increased by $181.7 million compared to 2016, 2017 earnings included discrete deferred tax benefits of $301.6 million referable to the TCJA (see Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data”) partially offset by cost of debt purchases of $140.8 million (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”). Cash paid for debt purchases is presented as a component of financing activities.

Part II	49

CASH FROM INVESTING ACTIVITIES

in millions

2018 versus 2017 — Net cash used for investing activities was $669.9 million during 2018, a $599.6 million decrease compared to 2017. We invested $469.1 million in our existing operations in 2018, a $9.5 million increase compared to 2017. Of this $469.1 million, $247.4 million was invested in internal growth projects to secure new aggregates reserves, develop new production sites, enhance our distribution capabilities and support the targeted growth of our asphalt and concrete operations. Additionally, during 2018 we acquired businesses for $221.4 million of cash consideration as compared to $822.4 million of cash consideration (excluding the assets immediately divested in the Aggregates USA acquisition for $287.3 million) for businesses in 2017.

2017 versus 2016 — Net cash used for investing activities was $1,269.5 million during 2017, a $912.3 million increase compared to 2016. We invested $459.6 million in our existing operations in 2017, a $109.4 million increase compared to 2016. Of this $459.6 million, $167.7 million was invested in internal growth projects to secure new aggregates reserves, develop new production sites, enhance our distribution capabilities and support the targeted growth of our asphalt and concrete operations. As noted above, acquisitions during 2017 totaled $822.4 million of cash consideration. During 2016, we expanded our aggregates distribution capabilities in Georgia and completed two strategic bolt-on acquisitions in New Mexico and Texas for $32.5 million of cash consideration (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”).

CASH FROM FINANCING ACTIVITIES

in millions

2018 VERSUS 2017 — Net cash used for financing activities in 2018 was $265.1 million, compared to $503.4 million provided by financing activities in 2017. The 2017 results included $721.4 million of net proceeds from debt refinancing activities compared to 2018 net proceeds of $48.8 million. Additionally, we increased by $89.5 million the return of capital to our shareholders via higher dividends of $15.8 million ($1.12 per share compared to $1.00 per share) and higher share repurchases of $73.7 million (1,191,928 shares @ $112.41 per share compared to 510,283 shares @ $118.18 per share).

2017 VERSUS 2016 — Net cash provided by financing activities in 2017 was $503.4 million, an increase of $808.0 million compared with the cash used during 2016. This increase was primarily attributable to the 2017 debt issuances (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”) which provided net proceeds of $2,184.7 million partially offset by the repayment of $235.0 million borrowed against our line of credit and the early retirement of notes due in 2018 and 2021 for a total cost of $1,228.2 million ($1,087.4 million principal and $140.8 million cost of debt purchase). Additionally, we increased dividends to our shareholders by $26.0 million ($1.00 per share compared to $0.80 per share). Share repurchases decreased by $101.2 million (510,283 shares @ $118.18 per share compared to 1,426,659 shares @ $113.18 per share).

Part II	50

DEBT

Certain debt measures as of December 31 are outlined below:

dollars in millions						2018			2017
Debt
Current maturities of long-term debt						$ 0.0			$ 41.4
Short-term debt						133.0			0.0
Long-term debt 1						2,779.4			2,813.5
Total debt						$ 2,912.4			$ 2,854.9
Capital
Total debt						$ 2,912.4			$ 2,854.9
Equity						5,202.9			4,968.9
Total capital						$ 8,115.3			$ 7,823.8
Total Debt as a Percentage of Total Capital						35.9%			36.5%
Weighted-average Effective Interest Rates
Line of credit 2						1.25%			1.25%
Term debt						4.56%			4.26%
Fixed versus Floating Interest Rate Debt
Fixed-rate debt						70.4%			61.8%
Floating-rate debt						29.6%			38.2%

1	Includes borrowing under our line of credit for which we have the intent and ability to extend repayment beyond twelve months, as follows: December 31, 2018 — none, and December 31, 2017 — $250.0 million. The December 31, 2017 long-term debt also includes a $350.0 million unsecured term loan due 2018 which was subsequently refinanced in February 2018.
2	Reflects the margin above LIBOR for LIBOR-based borrowings; we also paid upfront fees that are amortized to interest expense and pay fees for unused borrowing capacity and standby letters of credit.

LINE OF CREDIT

Covenants, borrowings, cost ranges and other details are described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.” As of December 31, 2018, we were in compliance with the line of credit covenants and the credit margin for LIBOR borrowings was 1.25%, the credit margin for base rate borrowings was 0.25%, and the commitment fee for the unused portion was 0.15%.

As of December 31, 2018, our available borrowing capacity under the line of credit was $572.0 million. Utilization of the borrowing capacity was as follows:

	§		$133.0 million was borrowed

	§		$45.0 million was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our $2,846.4 million (face value) of term debt is unsecured. $2,846.2 million of such debt is governed by three essentially identical indentures that contain customary investment-grade type covenants. The primary covenant in all three indentures limits the amount of secured debt we may incur without ratably securing such debt. As of December 31, 2018, we were in compliance with all term debt covenants.

Throughout 2017 and during the first quarter of 2018, we completed a number of debt refinancing activities (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”) in order to extend the maturity of our debt portfolio consistent with the long-lived nature of our asset base. As a result of these actions, the weighted-average term of our debt portfolio has more than doubled to approximately 15 years.

Part II	51

As a result of the first quarter 2018 early debt retirements, we recognized premiums of $5.6 million, transaction costs of $1.3 million and noncash expense (acceleration of unamortized deferred transaction costs) of $0.5 million. The combined charge of $7.4 million was a component of interest expense for the year ended December 31, 2018.

As a result of the 2017 early debt retirements, we recognized premiums of $139.2 million, transaction costs of $1.6 million and noncash expense (acceleration of unamortized deferred transaction costs) of $7.2 million. The combined charge of $148.0 million was a component of interest expense for the year ended December 31, 2017.

DEBT PAYMENTS AND MATURITIES

Scheduled debt payments during 2018 included $350.0 million (which we refinanced in February via issuing $350.0 million of 30-year 4.70% senior notes due 2048) as described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.” Additionally, we early retired $396.1 million of debt during the first quarter of 2018. There were no significant scheduled debt payments during 2017 and 2016.

As of December 31, 2018, maturities for the next four quarters and maturities for the next five years are due as follows (excluding borrowings on the line of credit):

	2019				Debt
in millions	Debt Maturities			in millions	Maturities
First quarter	$ 0.0			2019	$ 0.0
Second quarter	0.0			2020	250.0
Third quarter	0.0			2021	506.1
Fourth quarter	0.0			2022	0.0
				2023	0.0

DEBT RATINGS

Our debt ratings and outlooks as of December 31, 2018 are as follows:

				Rating/Outlook		Date			Description
Senior Unsecured Term Debt
Fitch				BBB-/stable		9/24/2018			rating/outlook affirmed
Moody's				Baa3/stable		3/7/2018			rating/outlook affirmed
Standard & Poor's				BBB/stable		4/6/2018			rating/outlook affirmed

Part II	52

EQUITY

Our common stock issuances and purchases are as follows:

in thousands			2018			2017			2016
Common stock shares at January 1,
issued and outstanding			132,324			132,339			133,172
Common Stock Issuances
Share-based compensation plans			630			495			594
Common Stock Purchases
Purchased and retired			(1,192)			(510)			(1,427)
Common stock shares at December 31,
issued and outstanding			131,762			132,324			132,339

On February 10, 2017, our Board of Directors authorized us to purchase 8,243,243 shares of our common stock to refresh the number of shares we were authorized to purchase to 10,000,000. As of December 31, 2018, there were 8,297,789 shares remaining under the authorization. Depending upon market, business, legal and other conditions, we may purchase shares from time to time through the open market (including plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934) and/or privately negotiated transactions. The authorization has no time limit, does not obligate us to purchase any specific number of shares, and may be suspended or discontinued at any time.

Our common stock purchases (all of which were open market purchases) are detailed below:

in thousands, except average cost			2018			2017			2016
Shares Purchased and Retired
Number			1,192			510			1,427
Total purchase price			$ 133,983			$ 60,303			$ 161,463
Average price per share			$ 112.41			$ 118.18			$ 113.18

There were no shares held in treasury as of December 31, 2018, 2017 and 2016.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements, such as financing or unconsolidated variable interest entities, that either have or are reasonably likely to have a current or future material effect on our:

	§		results of operations and financial position

	§		capital expenditures

	§		liquidity and capital resources

Part II	53

STANDBY LETTERS OF CREDIT

For a discussion of our standby letters of credit see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.”

CASH CONTRACTUAL OBLIGATIONS

We expect core capital spending (excluding growth) of $250.0 million during 2019. Excluding future cash requirements for capital expenditures and immaterial or contingent contracts, our obligations to make future contractual payments as of December 31, 2018 are summarized in the table below:

			Note		Payments Due by Year
in millions			Reference		2019		2020-2021		2022-2023		Thereafter		Total
Cash Contractual Obligations
Bank line of credit 1
Principal payments			Note 6		$ 0.0		$ 133.0		$ 0.0		$ 0.0		$ 133.0
Interest payments and fees 2			Note 6		2.2		3.4		0.0		0.0		5.6
Term debt
Principal payments			Note 6		0.0		756.1		0.0		2,090.3		2,846.4
Interest payments			Note 6		121.6		216.6		192.0		1,482.1		2,012.3
Operating leases			Note 7		48.0		79.3		47.2		195.0		369.5
Mineral royalties			Note 12		23.2		36.6		26.0		154.8		240.6
Unconditional purchase obligations
Capital			Note 12		35.2		0.0		0.0		0.0		35.2
Noncapital 3			Note 12		11.9		9.1		3.7		12.0		36.7
Benefit plans 4			Note 10		9.1		16.5		39.8		44.4		109.8
Total cash contractual obligations 5, 6					$ 251.2		$ 1,250.6		$ 308.7		$ 3,978.6		$ 5,789.1

1	Bank line of credit represents borrowings under our unsecured $750.0 million line of credit that expires December 2021.
2	Includes fees for unused borrowing capacity, and fees for standby letters of credit. The figures for all years assume that the amount of unused borrowing capacity and the amount of standby letters of credit do not change from December 31, 2018, and borrowing costs reflect a rising LIBOR.
3	Noncapital unconditional purchase obligations relate primarily to transportation and electricity contracts.
4	Payments in “Thereafter” column for benefit plans are for the years 2024-2028.
5	The above table excludes discounted asset retirement obligations in the amount of $225.7 million at December 31, 2018, the majority of which have an estimated settlement date beyond 2023 (see Note 17 “Asset Retirement Obligations” in Item 8 “Financial Statements and Supplementary Data”).
6	The above table excludes liabilities for unrecognized tax benefits in the amount of $3.7 million at December 31, 2018, as we cannot make a reasonably reliable estimate of the amount and period of related future payment of these uncertain tax positions (for more details, see Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data”).

Part II	54

CRITICAL ACCOUNTING POLICIES

We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data.”

We prepare these financial statements to conform with accounting principles generally accepted in the United States of America. These principles require us to make estimates and judgments that affect reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and contingent liabilities at the date of the financial statements. We base our estimates on historical experience, current conditions and various other assumptions we believe reasonable under existing circumstances and evaluate these estimates and judgments on an ongoing basis. The results of these estimates form the basis for our judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may materially differ from these estimates.

We believe the following critical accounting policies require the most significant judgments and estimates used in the preparation of our consolidated financial statements:

	1.		Goodwill impairment

	2.		Impairment of long-lived assets excluding goodwill

	3.		Business combinations and purchase price allocation

	4.		Pension and other postretirement benefits

	5.		Environmental compliance costs

	6.		Claims and litigation including self-insurance

	7.		Income taxes

1. GOODWILL IMPAIRMENT

Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than its carrying amount. Goodwill is tested for impairment on an annual basis or more frequently whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment evaluation is a critical accounting policy because goodwill is material to our total assets (as of December 31, 2018, goodwill represents 32% of total assets) and the evaluation involves the use of significant estimates, assumptions and judgment.

HOW WE TEST GOODWILL FOR IMPAIRMENT

Goodwill is tested for impairment at the reporting unit level, one level below our operating segments. We have identified 17 reporting units (of which 9 carry goodwill) based primarily on geographic location. We have the option of either assessing qualitative factors to determine whether it is more likely than not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to a quantitative test. We elected to perform the quantitative impairment test for all years presented.

The quantitative impairment test compares the fair value of a reporting unit to its carrying value, including goodwill. If the fair value exceeds its carrying value, the goodwill of the reporting unit is not considered impaired. However, if the carrying value of a reporting unit exceeds its fair value, we recognize an impairment loss equal to that excess.

HOW WE DETERMINE CARRYING VALUE AND FAIR VALUE

First, we determine the carrying value of each reporting unit by assigning assets and liabilities, including goodwill, to those units as of the measurement date. Then, we estimate the fair values of the reporting units using both an income approach (which involves discounting estimated future cash flows) and a market approach (which involves the application of revenue and EBITDA multiples of comparable companies). We consider market factors when determining the assumptions and estimates used in our valuation models. Finally, to assess the reasonableness of the reporting unit fair values, we compare the total of the reporting unit fair values to our market capitalization.

Part II	55

OUR FAIR VALUE ASSUMPTIONS

We base our fair value estimates on market participant assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty and actual results may differ. Changes in key assumptions or management judgment with respect to a reporting unit or its prospects may result from a change in market conditions, market trends, interest rates or other factors outside of our control, or underperformance relative to historical or projected operating results. These conditions could result in a significantly different estimate of the fair value of our reporting units, which could result in an impairment charge in the future.

The significant assumptions in our discounted cash flow models include our estimate of future profitability, capital requirements and the discount rate. The profitability estimates used in the models were derived from internal operating budgets and forecasts for long-term demand and pricing in our industry. Estimated capital requirements reflect replacement capital estimated on a per ton basis and if applicable, acquisition capital necessary to support growth estimated in the models. The discount rate was derived using a capital asset pricing model.

RESULTS OF OUR IMPAIRMENT TESTS

The results of our annual impairment tests for the last three years indicated that the fair values of all reporting units with goodwill substantially exceeded (in excess of 100%) their carrying values.

For additional information about goodwill, see Note 18 “Goodwill and Intangible Assets” in Item 8 “Financial Statements and Supplementary Data.”

2. IMPAIRMENT OF LONG-LIVED ASSETS EXCLUDING GOODWILL

We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. The impairment evaluation is a critical accounting policy because long-lived assets are material to our total assets (as of December 31, 2018, net property, plant & equipment represents 43% of total assets, while net other intangible assets represents 11% of total assets) and the evaluation involves the use of significant estimates, assumptions and judgment. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value.

Fair value is estimated primarily by using a discounted cash flow methodology that requires considerable judgment and assumptions. Our estimate of net future cash flows is based on historical experience and assumptions of future trends, which may be different from actual results. We periodically review the appropriateness of the estimated useful lives of our long-lived assets.

We test long-lived assets for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. As a result, our long-lived asset impairment test is at a significantly lower level than the level at which we test goodwill for impairment. In markets where we do not produce downstream products (e.g., asphalt mix and ready-mixed concrete), the lowest level of largely independent identifiable cash flows is at the individual aggregates operation or a group of aggregates operations collectively serving a local market. Conversely, in vertically integrated markets, the cash flows of our downstream and upstream businesses are not largely independently identifiable as the selling price of the upstream products (aggregates) impacts the profitability of the downstream business.

During 2018 and 2017, we recorded no losses on impairment of long-lived assets. During 2016, we recorded a $10.5 million impairment loss resulting from the termination of a nonstrategic aggregates lease and the write off of nonrecoverable project costs related to two Aggregates segment capital projects that we no longer intended to complete.

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We maintain certain long-lived assets that are not currently being used in our operations. These assets totaled $415.7 million at December 31, 2018, essentially flat from December 31, 2017. Of the total $415.7 million, approximately 50% relates to real estate held for future development and expansion of our operations. In addition, approximately 25% is comprised of real estate (principally former mining sites) pending development as commercial or residential real estate, reservoirs or landfills. The remaining 25% is composed of aggregates, asphalt and concrete operating assets idled temporarily. We evaluate the useful lives and the recoverability of these assets whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

For additional information about long-lived assets and intangible assets, see Note 4 “Property, Plant & Equipment” and Note 18 “Goodwill and Intangible Assets” in Item 8 “Financial Statements and Supplementary Data.”

3. BUSINESS COMBINATIONS AND PURCHASE PRICE ALLOCATION

Our strategic long-term plans include potential investments in value-added acquisitions of related or similar businesses. When an acquisition is completed, our consolidated statements of comprehensive income includes the operating results of the acquired business starting from the date of acquisition, which is the date that control is obtained.

HOW WE DETERMINE AND ALLOCATE THE PURCHASE PRICE

The purchase price is determined based on the fair value of consideration transferred to and liabilities assumed from the seller as of the date of acquisition. We allocate the purchase price to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed as of 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. 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. Additionally, the amounts assigned to depreciable and amortizable assets compared to amounts assigned to goodwill, which is not amortized, can significantly affect our results of operations.

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. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as described below:

Level 1: Quoted prices in active markets for identical assets or liabilities Level 2: Inputs that are derived principally from or corroborated by observable market data Level 3: Inputs that are unobservable and significant to the overall fair value measurement

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 machinery and equipment, land, buildings, and assumed liabilities for asset retirement obligations, environmental remediation and compliance obligations. 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 as well as leased mineral interests (referred to in our financial statements as contractual rights in place) and other identifiable intangible assets. We determine the fair values of owned mineral reserves and leased mineral interests using a lost profits approach and/or an excess earnings approach. These valuation techniques require management to estimate future cash flows. 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 sales price, shipment volumes, production costs and 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 assume if purchasing the acquired business, with an adjustment for the risk of these assets not generating the projected cash flows.

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Other identifiable intangible assets may include, but are not limited to, noncompetition agreements and favorable/unfavorable lease agreements. The fair values of these assets are typically determined by an excess earnings method, a replacement cost method or a market approach.

MEASUREMENT PERIOD ADJUSTMENTS

We may adjust the amounts recognized in an acquisition during a measurement period after the acquisition date. Any such adjustments are the result of subsequently obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed. Measurement period adjustments are generally recorded as increases or decreases to goodwill, if any, recognized in the transaction. The cumulative impact of measurement period adjustments on depreciation, amortization and other income statement items are recognized in the period the adjustment is determined. The measurement period ends once we have obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of acquisition. Any adjustments to assets acquired or liabilities assumed beyond the measurement period are recorded through earnings.

4. PENSION AND OTHER POSTRETIREMENT BENEFITS

Accounting for pension and other postretirement benefits requires that we use assumptions for the valuation of projected benefit obligations (PBO) and the performance of plan assets. Each year, we review our assumptions for discount rates (used for PBO, service cost, and interest cost calculations) and the expected return on plan assets. Due to plan changes made in 2012 and 2013, annual pay increases and the per capita cost of healthcare benefits do not materially impact plan obligations.

	§		DISCOUNT RATES — We use a high-quality bond full yield curve approach (specific spot rates for each annual expected cash flow) to establish the discount rates at each measurement date. See Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data” for the discount rates used for PBO, service cost, and interest cost calculations.

	§		EXPECTED RETURN ON PLAN ASSETS — Our expected return on plan assets is: (1) a long-term view based on our current asset allocation, and (2) a judgment informed by consultation with our retirement plans’ consultant and our pension plans’ actuary. For the year ended December 31, 2018, the expected return on plan assets remained at 7.0%.

Changes to the assumptions listed above would have an impact on the PBO and the annual net benefit cost. The following table reflects the favorable and unfavorable outcomes associated with a change in certain assumptions:

	(Favorable) Unfavorable
	0.5 Percentage Point Increase						0.5 Percentage Point Decrease
	Inc (Dec) in			Inc (Dec) in			Inc (Dec) in			Inc (Dec) in
in millions	Benefit Obligation			Annual Benefit Cost			Benefit Obligation			Annual Benefit Cost
Actuarial Assumptions
Discount rates
Pension	$ (51.1)			$ (0.9)			$ 56.2			$ 1.3
Other postretirement benefits	(1.1)			(0.0)			1.2			0.0
Expected return on plan assets	not applicable			(4.3)			not applicable			4.3

As of the December 31, 2018 measurement date, the fair value of our pension plan assets decreased from $840.9 million for the prior year-end to $836.8 million. This decrease in fair value was the net result of our $100.0 million contribution to the qualified pension plans offset by benefit payments and negative investment returns. Our postretirement plans are unfunded.

The discount rate is the weighted-average of the spot rates for each cash flow on the yield curve for high-quality bonds as of the measurement date. As of the December 31, 2018 measurement date, the PBO of our pension plans decreased from $1,091.2 million to $958.9 million. The PBO of our postretirement plans decreased from $43.5 million to $40.8 million. The PBO decreases were primarily due to higher discount rates, which ranged from 3.92% to 4.47% in 2018 compared with 3.24% to 3.79% in 2017.

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During 2019, we expect to recognize net pension expense of $0.7 million and net postretirement income of $2.6 million compared to income of $6.8 million and income of $2.7 million, respectively, in 2018. The increase in pension expense is due to investment losses during 2018 coupled with a reduction in our assumption for expected return on plan assets (from 7.00% in 2018 to 5.75% in 2019).

We do not anticipate that contributions to the funded pension plans will be required during 2019 and we do not anticipate making a discretionary contribution. We currently do not anticipate that the funded status of any of our plans will fall below statutory thresholds requiring accelerated funding or constraints on benefit levels or plan administration.

For additional information about pension and other postretirement benefits, see Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data.”

5. ENVIRONMENTAL COMPLIANCE COSTS

Our environmental compliance costs include the cost of ongoing monitoring programs, the cost of remediation efforts and other similar costs. Our accounting policy for environmental compliance costs is a critical accounting policy because it involves the use of significant estimates and assumptions and requires considerable management judgment.

HOW WE ACCOUNT FOR ENVIRONMENTAL COSTS

To account for environmental costs, we:

	§		expense or capitalize environmental costs consistent with our capitalization policy

	§		expense costs for an existing condition caused by past operations that do not contribute to future revenues

	§		accrue costs for environmental assessment and remediation efforts when we determine that a liability is probable and we can reasonably estimate the cost

At the early stages of a remediation effort, environmental remediation liabilities are not easily quantified due to the uncertainties of various factors. The range of an estimated remediation liability is defined and redefined as events in the remediation effort occur, but generally liabilities are recognized no later than completion of the remedial feasibility study. When we can estimate a range of probable loss, we accrue the most likely amount. If no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. As of December 31, 2018, the difference between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $3.1 million — this amount does not represent our maximum exposure to loss for all environmental remediation obligations as it excludes those sites for which a range of loss cannot be reasonably estimated at this time. Our environmental remediation obligations are recorded on an undiscounted basis.

Accrual amounts may be based on technical cost estimations or the professional judgment of experienced environmental managers. Our Safety, Health and Environmental Affairs Management Committee routinely reviews cost estimates and key assumptions in response to new information, such as the kinds and quantities of hazardous substances, available technologies and changes to the parties participating in the remediation efforts. However, a number of factors, including adverse agency rulings and unanticipated conditions as remediation efforts progress, may cause actual results to differ materially from accrued costs.

For additional information about environmental compliance costs, see Note 8 “Accrued Environmental Remediation Costs” in Item 8 “Financial Statements and Supplementary Data.”

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6. CLAIMS AND LITIGATION INCLUDING SELF-INSURANCE

We are involved with claims and litigation, including items covered under our self-insurance program. We are self-insured for losses related to workers' compensation up to $2.0 million per occurrence and automotive and general/product liability up to $3.0 million per occurrence. We have excess coverage on a per occurrence basis beyond these retention levels.

Under our self-insurance program, we aggregate certain claims and litigation costs that are reasonably predictable based on our historical loss experience and accrue losses, including future legal defense costs, based on actuarial studies. Certain claims and litigation costs, due to their unique nature, are not included in our actuarial studies. For matters not included in our actuarial studies, legal defense costs are accrued when incurred.

Our accounting policy for claims and litigation including self-insurance is a critical accounting policy because it involves the use of significant estimates and assumptions and requires considerable management judgment.

HOW WE ASSESS THE PROBABILITY OF LOSS

We use both internal and outside legal counsel to assess the probability of loss, and establish an accrual when the claims and litigation represent a probable loss and the cost can be reasonably estimated. Significant judgment is used in determining the timing and amount of the accruals for probable losses, and the actual liability could differ materially from the accrued amounts.

For additional information about claims and litigation including self-insurance, see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption Claims and Litigation Including Self-insurance.

7. INCOME TAXES

VALUATION OF OUR DEFERRED TAX ASSETS

We file federal, state and foreign income tax returns and account for the current and deferred tax effects of such returns using the asset and liability method. We recognize deferred tax assets and liabilities (which reflect our best assessment of the future taxes we will pay) based on the differences between the book basis and tax basis of assets and liabilities. Deferred tax assets represent items to be used as a tax deduction or credit in future tax returns while deferred tax liabilities represent items that will result in additional tax in future tax returns.

Significant judgments and estimates are required in determining our deferred tax assets and liabilities. These estimates are updated throughout the year to consider income tax return filings, our geographic mix of earnings, legislative changes and other relevant items. We are required to account for the effects of changes in income tax rates on deferred tax balances in the period in which the legislation is enacted.

Each quarter we analyze the likelihood that our deferred tax assets will be realized. Realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character in either the carryback or carryforward period. A valuation allowance is recorded if, based on the weight of all available positive and negative evidence, it is more likely than not (a likelihood of more than 50%) that some portion, or all, of a deferred tax asset will not be realized. A summary of our deferred tax assets is included in Note 9 “Income Taxes” in Item 8 “Financial Statements and Supplementary Data.”

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LIABILITY FOR UNRECOGNIZED TAX BENEFITS

We recognize a tax benefit associated with a tax position when we judge it is more likely than not that the position will be sustained based upon the technical merits of the position. For a tax position that meets the more likely than not recognition threshold, we measure the income tax benefit as the largest amount that we judge to have a greater than 50% likelihood of being realized. A liability is established for the unrecognized portion of any tax position. Our liability for unrecognized tax benefits is adjusted periodically due to changing circumstances, such as the progress of tax audits, case law developments and new or emerging legislation.

Generally, we are not subject to significant changes in income taxes by any taxing jurisdiction for the years before 2015. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is appropriate.

We consider a tax position to be resolved at the earlier of the issue being “effectively settled,” settlement of an examination, or the expiration of the statute of limitations. Upon resolution of a tax position, any liability for unrecognized tax benefits will be released.

Our liability for unrecognized tax benefits is generally presented as noncurrent. However, if we anticipate paying cash within one year to settle an uncertain tax position, the liability is presented as current. We classify interest and penalties associated with our liability for unrecognized tax benefits as income tax expense.

NEW ACCOUNTING STANDARDS

For a discussion of accounting standards recently adopted or pending adoption and the effect such accounting changes will have on our results of operations, financial position or liquidity, see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption New Accounting Standards.

FORWARD-LOOKING STATEMENTS

The foregoing discussion and analysis, as well as certain information contained elsewhere in this Annual Report, contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor created thereby. See the discussion in Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 in Part I, above.

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