Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Vulcan Materials Company:

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Vulcan Materials Company and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of comprehensive income, equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2019 expressed an unqualified opinion on the Company's internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ DELOITTE & TOUCHE LLP

Birmingham, Alabama

February 26, 2019

We have served as the Company’s auditor since 1956.



Part II	63

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	2018	2017	2016
For the years ended December 31
in thousands, except per share data
Total revenues	$ 4,382,869	$ 3,890,296	$ 3,592,667
Cost of revenues	3,281,924	2,896,783	2,603,782
Gross profit	1,100,945	993,513	988,885
Selling, administrative and general expenses	333,371	324,972	316,769
Gain on sale of property, plant & equipment and businesses	14,944	17,827	15,431
Other operating expense, net	(34,805)	(47,324)	(21,645)
Operating earnings	747,713	639,044	665,902
Other nonoperating income, net	13,000	13,357	14,624
Interest income	554	4,437	807
Interest expense	137,977	295,522	134,076
Earnings from continuing operations before income taxes	623,290	361,316	547,257
Income tax expense (benefit)
Current	40,516	354	94,254
Deferred	64,933	(232,429)	30,597
Total income tax expense (benefit)	105,449	(232,075)	124,851
Earnings from continuing operations	517,841	593,391	422,406
Earnings (loss) on discontinued operations, net of tax	(2,036)	7,794	(2,915)
Net earnings	$ 515,805	$ 601,185	$ 419,491
Other comprehensive income (loss), net of tax
Deferred gain on interest rate derivative	2,496	0	0
Amortization of prior interest rate derivative loss	226	1,862	1,194
Adjustment for funded status of benefit plans	(207)	(14,106)	(20,583)
Amortization of actuarial loss and prior service cost for benefit plans	4,365	2,154	82
Other comprehensive income (loss)	6,880	(10,090)	(19,307)
Comprehensive income	$ 522,685	$ 591,095	$ 400,184
Basic earnings (loss) per share
Continuing operations	$ 3.91	$ 4.48	$ 3.17
Discontinued operations	(0.01)	0.06	(0.02)
Net earnings	$ 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)
Net earnings	$ 3.85	$ 4.46	$ 3.09
Weighted-average common shares outstanding
Basic	132,393	132,513	133,205
Assuming dilution	133,926	134,878	135,790
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



Part II	64

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED BALANCE SHEETS



	2018	2017
As of December 31
in thousands
Assets
Cash and cash equivalents	$ 40,037	$ 141,646
Restricted cash	4,367	5,000
Accounts and notes receivable
Customers, less allowance for doubtful accounts
2018 — $2,090; 2017 — $2,649	512,279	434,089
Other	28,499	154,248
Inventories	429,330	384,338
Other current assets	64,633	60,780
Total current assets	1,079,145	1,180,101
Investments and long-term receivables	44,615	35,115
Property, plant & equipment, net	4,237,307	3,918,931
Goodwill	3,165,396	3,122,321
Other intangible assets, net	1,095,378	1,063,630
Other noncurrent assets	210,289	184,793
Total assets	$ 9,832,130	$ 9,504,891
Liabilities
Current maturities of long-term debt	23	41,383
Short-term debt	133,000	0
Trade payables and accruals	216,473	197,335
Accrued salaries, wages and management incentives	91,960	87,208
Accrued interest	19,631	11,664
Other current liabilities	141,463	105,282
Total current liabilities	602,550	442,872
Long-term debt	2,779,357	2,813,482
Deferred income taxes, net	567,283	464,081
Deferred management incentive and other compensation	16,604	19,856
Pension benefits	119,587	245,449
Other postretirement benefits	35,274	37,856
Asset retirement obligations	225,726	218,117
Deferred revenue	186,397	191,476
Other noncurrent liabilities	96,449	102,809
Total liabilities	$ 4,629,227	$ 4,535,998
Other commitments and contingencies (Note 12)
Equity
Common stock, $1 par value, Authorized 480,000 shares,
Outstanding 131,762 and 132,324 shares, respectively	131,762	132,324
Capital in excess of par value	2,798,486	2,805,587
Retained earnings	2,444,870	2,180,448
Accumulated other comprehensive loss	(172,215)	(149,466)
Total equity	5,202,903	4,968,893
Total liabilities and equity	$ 9,832,130	$ 9,504,891
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



Part II	65

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



	2018	2017	2016
For the years ended December 31
in thousands
Operating Activities
Net earnings	$ 515,805	$ 601,185	$ 419,491
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation, depletion, accretion and amortization	346,246	305,965	284,940
Net gain on sale of property, plant & equipment and businesses	(14,944)	(17,827)	(15,431)
Contributions to pension plans	(109,631)	(20,023)	(9,576)
Share-based compensation expense	25,215	26,635	20,670
Deferred tax expense (benefit)	64,639	(235,697)	33,591
Cost of debt purchase	6,922	140,772	0
(Increase) decrease in assets excluding the initial effects of business
acquisitions and dispositions
Accounts and notes receivable	63,230	(81,561)	(72,763)
Inventories	(34,976)	(14,121)	1,625
Prepaid expenses	(2,167)	(28,445)	2,558
Other assets	(58,489)	(23,759)	(18,236)
Increase (decrease) in liabilities excluding the initial effects of business
acquisitions and dispositions
Accrued interest and income taxes	12,148	1,303	(7,187)
Trade payables and other accruals	40,181	9,823	30,353
Other noncurrent liabilities	(26,901)	(32,592)	(29,138)
Other, net	5,499	13,020	3,691
Net cash provided by operating activities	$ 832,777	$ 644,678	$ 644,588
Investing Activities
Purchases of property, plant & equipment	(469,088)	(459,566)	(350,148)
Proceeds from sale of property, plant & equipment	22,210	15,756	23,318
Proceeds from sale of businesses	11,256	287,292	0
Payment for businesses acquired, net of acquired cash	(221,419)	(1,109,725)	(32,537)
Other, net	(12,850)	(3,248)	2,173
Net cash used for investing activities	$ (669,891)	$ (1,269,491)	$ (357,194)
Financing Activities
Proceeds from short-term debt	739,900	5,000	3,000
Payment of short-term debt	(606,900)	(5,000)	(3,000)
Payment of current maturities and long-term debt	(892,055)	(1,463,308)	(130)
Proceeds from issuance of long-term debt	850,000	2,200,000	0
Debt issuance and exchange costs	(45,513)	(15,291)	(1,860)
Settlements of interest rate derivatives	3,378	0	0
Purchases of common stock	(133,983)	(60,303)	(161,463)
Dividends paid	(148,109)	(132,335)	(106,333)
Share-based compensation, shares withheld for taxes	(31,846)	(25,323)	(34,799)
Net cash provided by (used for) financing activities	$ (265,128)	$ 503,440	$ (304,585)
Net decrease in cash and cash equivalents and restricted cash	(102,242)	(121,373)	(17,191)
Cash and cash equivalents and restricted cash at beginning of year	146,646	268,019	285,210
Cash and cash equivalents and restricted cash at end of year	$ 44,404	$ 146,646	$ 268,019
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



Part II	66

VULCAN MATERIALS COMPANY AND SUBSIDIARY COMPANIES

CONSOLIDATED STATEMENTS OF EQUITY



					Accumulated
			Capital in		Other
	Common Stock		Excess of	Retained	Comprehensive
in thousands	Shares	Amount	Par Value	Earnings	Income (Loss)	Total
Balances at December 31, 2015	133,172	$ 133,172	$ 2,822,578	$ 1,618,507	$ (120,069)	$ 4,454,188
Net earnings	0	0	0	419,491	0	419,491
Share-based compensation plans,
net of shares withheld for taxes	594	594	(35,363)	0	0	(34,769)
Purchase and retirement of
common stock	(1,427)	(1,427)	0	(160,036)	0	(161,463)
Share-based compensation expense	0	0	20,670	0	0	20,670
Cash dividends on common stock	0	0	0	(106,333)	0	(106,333)
Other comprehensive loss	0	0	0	0	(19,307)	(19,307)
Other	0	0	110	(111)	0	(1)
Balances at December 31, 2016	132,339	$ 132,339	$ 2,807,995	$ 1,771,518	$ (139,376)	$ 4,572,476
Net earnings	0	0	0	601,185	0	601,185
Share-based compensation plans,
net of shares withheld for taxes	495	495	(29,168)	0	0	(28,673)
Purchase and retirement of
common stock	(510)	(510)	0	(59,793)	0	(60,303)
Share-based compensation expense	0	0	26,635	0	0	26,635
Cash dividends on common stock	0	0	0	(132,335)	0	(132,335)
Other comprehensive loss	0	0	0	0	(10,090)	(10,090)
Other	0	0	125	(127)	0	(2)
Balances at December 31, 2017	132,324	$ 132,324	$ 2,805,587	$ 2,180,448	$ (149,466)	$ 4,968,893
Released stranded tax effects
ASU 2018-02 (Note 9)	0	0	0	29,629	(29,629)	0
Balances at January 1, 2018, due to
reclassification	132,324	$ 132,324	$ 2,805,587	$ 2,210,077	$ (179,095)	$ 4,968,893
Net earnings	0	0	0	515,805	0	515,805
Share-based compensation plans,
net of shares withheld for taxes	630	630	(32,428)	0	0	(31,798)
Purchase and retirement of
common stock	(1,192)	(1,192)	0	(132,791)	0	(133,983)
Share-based compensation expense	0	0	25,215	0	0	25,215
Cash dividends on common stock	0	0	0	(148,109)	0	(148,109)
Other comprehensive income	0	0	0	0	6,880	6,880
Other	0	0	112	(112)	0	0
Balances at December 31, 2018	131,762	$ 131,762	$ 2,798,486	$ 2,444,870	$ (172,215)	$ 5,202,903
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.



Part II	67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Vulcan Materials Company (the “Company,” “Vulcan,” “we,” “our”), a New Jersey corporation, is the nation's largest supplier of construction aggregates (primarily crushed stone, sand and gravel) and a major producer of asphalt mix and ready-mixed concrete.

We operate primarily in the United States and our principal product — aggregates — is used in virtually all types of public and private construction projects and in the production of asphalt mix and ready-mixed concrete. We serve markets in twenty states, Washington D.C., and the local markets surrounding our operations in Mexico and the Bahamas. Our primary focus is serving metropolitan markets in the United States that are expected to experience the most significant growth in population, households and employment. These three demographic factors are significant drivers of demand for aggregates. While aggregates is our focus and primary business, we produce and sell asphalt mix and/or ready-mixed concrete in our Alabama, mid-Atlantic, Southwestern, Tennessee and Western markets.

Due to the 2005 sale of our Chemicals business as described below, the results of the Chemicals business are presented as discontinued operations in the accompanying Consolidated Statements of Comprehensive Income.

DISCONTINUED OPERATIONS

In 2005, we sold substantially all the assets of our Chemicals business to Basic Chemicals, a subsidiary of Occidental Chemical Corporation. The financial results of the Chemicals business are classified as discontinued operations in the accompanying Consolidated Statements of Comprehensive Income for all periods presented. Results from discontinued operations are as follows:



in thousands	2018	2017	2016
Discontinued Operations
Pretax earnings (loss)	$ (2,748)	$ 12,959	$ (4,877)
Income tax (expense) benefit	712	(5,165)	1,962
Earnings (loss) on discontinued operations,
net of tax	$ (2,036)	$ 7,794	$ (2,915)

Discontinued operations include charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals business. The 2017 results also reflect insurance recoveries for past legal expenses associated with the Texas Brine matter (see Note 12). There were no revenues from discontinued operations for the years presented.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Vulcan Materials Company and all our majority or wholly-owned subsidiary companies. Partially-owned affiliates are either consolidated or accounted for at cost or as equity investments depending on the level of ownership interest or our ability to exercise control over the affiliates’ operations. All intercompany transactions and accounts have been eliminated in consolidation.



Part II	68

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

The preparation of these financial statements in conformity with accounting principles generally accepted (GAAP) in the United States of America requires 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 evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. 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. Actual results may differ materially from these estimates. The most significant estimates included in the preparation of these financial statements are related to goodwill and long-lived asset impairments, business combinations and purchase price allocation, pension and other postretirement benefits, environmental compliance, claims and litigation including self-insurance, and income taxes.

BUSINESS COMBINATIONS

We account for business combinations under the acquisition method of accounting. The purchase price of an acquisition is allocated to the underlying identifiable assets acquired and liabilities assumed based on their respective fair values. 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.

Determining the fair values of assets acquired and liabilities assumed requires judgment and often involves the use of significant estimates and assumptions. 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.

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.

FOREIGN CURRENCY TRANSACTIONS

The U.S. dollar is the functional currency for all of our operations. For our non-U.S. subsidiaries, local currency inventories and long-term assets such as property, plant & equipment and intangibles are remeasured into U.S. dollars at approximate rates prevailing when acquired; all other assets and liabilities are remeasured at year-end exchange rates. Inventories charged to cost of sales and depreciation are remeasured at historical rates; all other income and expense items are remeasured at average exchange rates prevailing during the year. Gains and losses which result from remeasurement are included in earnings and are not material for the years presented.

CASH EQUIVALENTS

We classify as cash equivalents all highly liquid securities with a maturity of three months or less at the time of purchase. The carrying amount of these securities approximates fair value due to their short-term maturities.

RESTRICTED CASH

Restricted cash consists of cash proceeds from the sale of property held in escrow for the acquisition of replacement property under like-kind exchange agreements and cash reserved by other contractual agreements (such as asset purchase agreements) for a specified purpose and therefore not available for use in our operations. The escrow accounts are administered by an intermediary. Cash restricted pursuant to like-kind exchange agreements remains restricted for a maximum of 180 days from the date of the property sale pending the acquisition of replacement property. Restricted cash is included with cash and cash equivalents in the accompanying Consolidated Statements of Cash Flows.



Part II	69

ACCOUNTS AND NOTES RECEIVABLE

Accounts and notes receivable from customers result from our extending credit to trade customers for the purchase of our products. The terms generally provide for payment within 15 days of the month following invoice. On occasion, when necessary to conform to regional industry practices, we sell product under extended payment terms, which may result in either secured or unsecured short-term notes; or, on occasion, notes with durations of less than one year are taken in settlement of existing accounts receivable. Other accounts and notes receivable result from short-term transactions (less than one year) other than the sale of our products, such as interest receivable; insurance claims; freight claims; tax refund claims; bid deposits or rents receivable. As of December 31, 2018, income tax receivables of $922,000 are included in other accounts and notes receivable in the accompanying Consolidated Balance Sheet. There were similar receivables of $106,980,000 ($106,000,000 related to 2017 federal estimated payments which were refunded early 2018) as of December 31, 2017.

Receivables are aged and appropriate allowances for doubtful accounts and bad debt expense are recorded. Bad debt expense (net of recoveries) for the years ended December 31 was as follows: 2018 — $251,000, 2017 — $812,000 and 2016 — $(1,190,000). Write-offs of accounts receivables for the years ended December 31 were as follows: 2018 — $1,291,000, 2017 — $1,384,000 and 2016 — $1,544,000. The bad debt recovery in 2016 relates to the collection of previously reserved receivables primarily attributable to the 2014 sale of our Florida area concrete and cement businesses.

INVENTORIES

Inventories and supplies are stated at the lower of cost or net realizable value. We use the last-in, first-out (LIFO) method of valuation for most of our inventories because it results in a better matching of costs with revenues. Such costs include fuel, parts and supplies, raw materials, direct labor and production overhead. An actual valuation of inventory under the LIFO method can be made only at the end of each year based on the inventory levels and costs at that time. Accordingly, interim LIFO calculations are based on our estimates of expected year-end inventory levels and costs and are subject to the final year-end LIFO inventory valuation. Substantially all operating supplies inventory is carried at average cost. For additional information about our inventories see Note 3.

PROPERTY, PLANT & EQUIPMENT

Property, plant & equipment are carried at cost less accumulated depreciation, depletion and amortization. The cost of properties held under capital leases, if any, is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease.

Capitalized software costs of $4,155,000 and $4,446,000 are reflected in net property, plant & equipment as of December 31, 2018 and 2017, respectively. We capitalized software costs for the years ended December 31 as follows: 2018 — $2,213,000, 2017 — $1,988,000 and 2016 — $152,000.

For additional information about our property, plant & equipment see Note 4.

REPAIR AND MAINTENANCE

Repair and maintenance costs generally are charged to operating expense as incurred. Renewals and betterments that add materially to the utility or useful lives of property, plant & equipment are capitalized and subsequently depreciated. Actual costs for planned major maintenance activities, related primarily to periodic overhauls on our oceangoing vessels, are capitalized and amortized to the next overhaul.



Part II	70

DEPRECIATION, DEPLETION, ACCRETION AND AMORTIZATION

Depreciation is generally computed by the straight-line method at rates based on the estimated service lives of the various classes of assets, which include machinery and equipment (3 to 35 years), buildings (7 to 20 years) and land improvements (8 to 20 years). Capitalized software costs are included in machinery and equipment and are depreciated on a straight-line basis beginning when the software project is substantially complete.

Cost depletion on depletable land is computed by the unit-of-sales method based on estimated recoverable units.

Accretion reflects the period-to-period increase in the carrying amount of the liability for asset retirement obligations. It is computed using the same credit-adjusted, risk-free rate used to initially measure the liability at fair value.

Leaseholds are amortized over varying periods not in excess of applicable lease terms or estimated useful lives.

Amortization of intangible assets subject to amortization is computed based on the estimated life of the intangible assets. A significant portion of our intangible assets is contractual rights in place associated with zoning, permitting and other rights to access and extract aggregates reserves. Contractual rights in place associated with aggregates reserves are amortized using the unit-of-sales method based on estimated recoverable units. Other intangible assets are amortized principally by the straight-line method.

Depreciation, depletion, accretion and amortization expense for the years ended December 31 is outlined below:



in thousands	2018	2017	2016
Depreciation, Depletion, Accretion and Amortization
Depreciation	$ 276,814	$ 250,835	$ 238,237
Depletion	23,260	19,342	17,812
Accretion	10,776	11,415	11,059
Amortization of leaseholds	472	608	267
Amortization of intangibles	34,924	23,765	17,565
Total	$ 346,246	$ 305,965	$ 284,940

DERIVATIVE INSTRUMENTS

During the normal course of operations, we are exposed to market risks including interest rates, foreign currency exchange rates and commodity prices. From time to time, and consistent with our risk management policies, we use derivative instruments to balance the cost and risk of such expenses. We do not use derivative instruments for trading or other speculative purposes.

The accounting for gains and losses that result from changes in the fair value of derivative instruments depends on whether the derivatives have been designated and qualify as hedging instruments and the type of hedging relationship. Changes in the fair value of interest rate swap cash flow hedges are recorded in accumulated other comprehensive income (AOCI) and are reclassified into interest expense in the same period the hedged items affect earnings. Changes in the fair value of interest rate swap fair value hedges are recorded as interest expense consistent with the change in the fair value of the hedged items attributable to the risk being hedged. Additional disclosures about our derivative instruments are presented in Note 5.



Part II	71

FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 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

Our assets at December 31 subject to fair value measurement on a recurring basis are summarized below:



	Level 1 Fair Value
in thousands	2018	2017
Fair Value Recurring
Rabbi Trust
Mutual funds	$ 19,164	$ 20,348
Total	$ 19,164	$ 20,348



	Level 2 Fair Value
in thousands	2018	2017
Fair Value Recurring
Rabbi Trust
Money market mutual fund	$ 1,015	$ 1,203
Total	$ 1,015	$ 1,203

We have two Rabbi Trusts for the purpose of providing a level of security for the employee nonqualified retirement and deferred compensation plans and for the directors' nonqualified deferred compensation plans. The fair values of these investments are estimated using a market approach. The Level 1 investments include mutual funds and equity securities for which quoted prices in active markets are available. Level 2 investments are stated at estimated fair value based on the underlying investments in the fund (short-term, highly liquid assets in commercial paper, short-term bonds and certificates of deposit).

Net gains (losses) of the Rabbi Trusts’ investments were $(2,741,000), $2,441,000 and $2,741,000 for the years ended December 31, 2018, 2017 and 2016, respectively. The portions of the net gains (losses) related to investments still held by the Rabbi Trusts at December 31, 2018, 2017 and 2016 were $(4,386,000), $(3,618,000) and $1,599,000, respectively.

The carrying values of our cash equivalents, restricted cash, accounts and notes receivable, short-term debt, trade payables and accruals, and all other current liabilities approximate their fair values because of the short-term nature of these instruments. Additional disclosures for derivative instruments and interest-bearing debt are presented in Notes 5 and 6, respectively.



Part II	72

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. As of December 31, 2018, goodwill totaled $3,165,396,000, as compared to $3,122,321,000 at December 31, 2017. Goodwill represents 32% of total assets at December 31, 2018 compared to 33% at December 31, 2017.

Goodwill is tested for impairment annually, as of November 1, 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. Goodwill is tested for impairment at the reporting unit level, one level below our operating segments. We have four operating segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. Within these four 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.

The results of the annual impairment tests performed as of November 1, 2018, 2017 and 2016 indicated that the fair values of all reporting units with goodwill substantially exceeded their carrying values. Accordingly, there were no charges for goodwill impairment in the years ended December 31, 2018, 2017 or 2016.

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). Determining the fair value of our reporting units involves the use of significant estimates and assumptions and considerable management judgment. We base our fair value estimates on 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, which 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, 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.

For additional information about goodwill see Note 18.

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 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 determined 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) determines the profitability of the downstream business.



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As of December 31, 2018, net property, plant & equipment represents 43% of total assets, while net other intangible assets represents 11% of total assets. During 2018 and 2017, we recorded no losses on impairment of long-lived assets. During 2016, we recorded a $10,506,000 loss on impairment of long-lived assets 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 intend to complete.

For additional information about long-lived assets and intangible assets see Notes 4 and 18.

STRIPPING COSTS

In the mining industry, the costs of removing overburden and waste materials to access mineral deposits are referred to as stripping costs.

Stripping costs incurred during the production phase are considered costs of extracted minerals under our inventory costing system, inventoried, and recognized in cost of sales in the same period as the revenue from the sale of the inventory. The production stage is deemed to begin when the activities, including removal of overburden and waste material that may contain incidental saleable material, required to access the saleable product are complete. Stripping costs considered as production costs and included in the costs of inventory produced were $78,911,000 in 2018, $65,944,000 in 2017 and $55,987,000 in 2016.

Conversely, stripping costs incurred during the development stage of a mine (pre-production stripping) are excluded from our inventory cost. Pre-production stripping costs are capitalized and reported within other noncurrent assets in our accompanying Consolidated Balance Sheets. Capitalized pre-production stripping costs are expensed over the productive life of the mine using the unit-of-sales method. Pre-production stripping costs included in other noncurrent assets were $95,800,000 as of December 31, 2018 and $81,241,000 as of December 31, 2017. This year-over-year increase resulted primarily from the removal of overburden at a greenfield site in California.

RECLAMATION COSTS

Reclamation costs resulting from normal use of long-lived assets are recognized over the period the asset is in use when there is a legal obligation to incur these costs upon retirement of the assets. Additionally, reclamation costs resulting from normal use under a mineral lease are recognized over the lease term when there is a legal obligation to incur these costs upon expiration of the lease. The obligation, which cannot be reduced by estimated offsetting cash flows, is recorded at fair value as a liability at the obligating event date and is accreted through charges to operating expenses. This fair value is also capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. If the obligation is settled for other than the carrying amount of the liability, a gain or loss is recognized on settlement.

To determine the fair value of the obligation, we estimate the cost (including a reasonable profit margin) for a third party to perform the legally required reclamation tasks. This cost is then increased for both future estimated inflation and an estimated market risk premium related to the estimated years to settlement. Once calculated, this cost is discounted to fair value using present value techniques with a credit-adjusted, risk-free rate commensurate with the estimated years to settlement.

In estimating the settlement date, we evaluate the current facts and conditions to determine the most likely settlement date. If this evaluation identifies alternative estimated settlement dates, we use a weighted-average settlement date considering the probabilities of each alternative.

We review reclamation obligations at least annually for a revision to the cost or a change in the estimated settlement date. Additionally, reclamation obligations are reviewed in the period that a triggering event occurs that would result in either a revision to the cost or a change in the estimated settlement date. Examples of events that would trigger a change in the cost include a new reclamation law or amendment of an existing mineral lease. Examples of events that would trigger a change in the estimated settlement date include the acquisition of additional reserves or the closure of a facility.

The carrying value of these obligations was $225,726,000 as of December 31, 2018 and $218,117,000 as of December 31, 2017. For additional information about reclamation obligations (referred to in our financial statements as asset retirement obligations) see Note 17.



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ENVIRONMENTAL COMPLIANCE

Our environmental compliance costs are undiscounted and include the cost of ongoing monitoring programs, the cost of remediation efforts and other similar costs. We 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 the 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 spread between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $3,105,000 — 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. 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 encountering 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.

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 $2,000,000 per occurrence and automotive and general/product liability up to $3,000,000 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. 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. For matters not included in our actuarial studies, legal defense costs are accrued when incurred. The following table outlines our self-insurance program at December 31:



dollars in thousands	2018	2017
Self-insurance Program
Self-insured liabilities (undiscounted)	$ 68,912	$ 58,216
Insured liabilities (undiscounted)	4,377	7,892
Discount rate	2.93%	1.93%
Amounts Recognized in Consolidated
Balance Sheets
Other accounts and notes receivable	$ 631	$ 6,158
Investments and long-term receivables	3,932	7,246
Other current liabilities	(18,466)	(20,036)
Other noncurrent liabilities	(48,049)	(41,792)
Net liabilities (discounted)	$ (61,952)	$ (48,424)



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Estimated payments (undiscounted and excluding the impact of related receivables) under our self-insurance program for the five years subsequent to December 31, 2018 are as follows:



in thousands
Estimated Payments under Self-insurance Program
2019	$ 20,529
2020	15,232
2021	11,615
2022	6,360
2023	3,665

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.

SHARE-BASED COMPENSATION

All of our share-based compensation awards are classified as equity awards. We measure share-based compensation awards using fair-value-based measurement methods. This results in the recognition of compensation expense for all share-based compensation awards based on their fair value as of the grant date. Compensation cost is recognized over the requisite service period. Forfeitures are recognized as they occur.

A summary of the estimated future compensation cost (unrecognized compensation expense) as of December 31, 2018 related to share-based awards granted to employees under our long-term incentive plans is presented below:



	Unrecognized	Expected
	Compensation	Weighted-average
dollars in thousands	Expense	Recognition (Years)
Share-based Compensation
SOSARs 1	$ 3,376	1.4
Performance shares	14,250	1.6
Restricted shares	6,098	1.7
Total/weighted-average	$ 23,724	1.6


1	Stock-Only Stock Appreciation Rights (SOSARs)

Pretax compensation expense related to our employee share-based compensation awards and related income tax benefits for the years ended December 31 are summarized below:



in thousands	2018	2017	2016
Employee Share-based Compensation Awards
Pretax compensation expense	$ 23,250	$ 24,367	$ 17,823
Income tax benefits	5,940	6,226	6,925

We receive an income tax deduction for share-based compensation equal to the excess of the market value of our common stock on the date of exercise or issuance over the exercise price. Tax benefits resulting from tax deductions in excess of the compensation cost recognized (excess tax benefits) are reflected as discrete income tax benefits in the period of exercise or issuance. Net excess tax benefits were recorded as reductions to our income tax expense and reflected as operating cash flows, as follows (combined federal and state): 2018 — $20,137,000; 2017 — $22,962,000; and 2016 — $24,847,000.

For additional information about share-based compensation, see Note 11 under the caption Share-based Compensation Plans.



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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 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%.

Accounting standards provide for the delayed recognition of differences between actual results and expected or estimated results. This delayed recognition of actual results allows for a smoothed recognition in earnings of changes in benefit obligations and asset performance. The differences between actual results and expected or estimated results are recognized in full in other comprehensive income. Amounts recognized in other comprehensive income are reclassified to earnings in a systematic manner over the average remaining service period of participants for our active plans or the average remaining lifetime of participants for our inactive plans.

For additional information about pension and other postretirement benefits see Note 10.

INCOME TAXES

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.

U.S. income taxes are not provided on foreign earnings when such earnings are indefinitely reinvested offshore. At least annually, we evaluate our investment strategies for each foreign tax jurisdiction in which we operate to determine whether foreign earnings will be indefinitely reinvested offshore.

We recognize a tax benefit associated with a tax position when, in our judgment, 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.



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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.

Our largest permanent item in computing both our taxable income and effective tax rate is the deduction allowed for statutory depletion. The impact of statutory depletion on the effective tax rate is presented in Note 9. The deduction for statutory depletion does not necessarily change proportionately to changes in pretax earnings.

COMPREHENSIVE INCOME

We report comprehensive income in our Consolidated Statements of Comprehensive Income and Consolidated Statements of Equity. Comprehensive income comprises two subsets: net earnings and other comprehensive income (OCI). OCI includes fair value adjustments to cash flow hedges, as well as actuarial gains or losses and prior service costs related to pension and postretirement benefit plans.

For additional information about comprehensive income see Note 14.

EARNINGS PER SHARE (EPS)

Earnings per share are computed by dividing net earnings by the weighted-average common shares outstanding (basic EPS) or weighted-average common shares outstanding assuming dilution (diluted EPS), as set forth below:



in thousands	2018	2017	2016
Weighted-average common shares outstanding	132,393	132,513	133,205
Dilutive effect of
SOSARs	963	1,295	1,339
Other stock compensation plans	570	1,070	1,246
Weighted-average common shares outstanding,
assuming dilution	133,926	134,878	135,790

All dilutive common stock equivalents are reflected in our earnings per share calculations. In periods of loss, shares that otherwise would have been included in our diluted weighted-average common shares outstanding computation would be excluded.

Antidilutive common stock equivalents are not included in our earnings per share calculations. The number of antidilutive common stock equivalents for which the exercise price exceeds the weighted-average market price for the years ended December 31 is as follows:



in thousands	2018	2017	2016
Antidilutive common stock equivalents	162	79	97

RECLASSIFICATIONS

Certain items previously reported in specific financial statement captions have been reclassified to conform with the 2018 presentation. Refer below to Accounting Standards Recently Adopted (Presentation of Benefit Plan Costs) for the impact of reclassifying certain benefit costs from operating income to nonoperating income in our Statements of Comprehensive Income.



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NEW ACCOUNTING STANDARDS

ACCOUNTING STANDARDS RECENTLY ADOPTED

RELEASING STRANDED TAX EFFECTS During the fourth quarter of 2018, we adopted Accounting Standards Update (ASU) 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” effective as of the beginning of the year. This ASU allowed us to reclassify $29,629,000 of stranded tax effects due to remeasuring certain deferred tax assets as a result of applying the TCJA enacted in December 2017 from accumulated other comprehensive income (AOCI) to retained earnings.

PRESENTATION OF BENEFIT PLAN COSTS During the first quarter of 2018, we adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” on a retrospective basis as required. This ASU changed the presentation of the net benefit cost in the income statement and limits benefit costs eligible for inventory capitalization to the service cost component (benefit costs capitalized in inventory are immaterial to our financial statements). We continue to present the service cost component of net benefit cost in cost of revenues and selling, administrative and general expense consistent with employee compensation costs. The other components of net benefit cost (credit) are now included in other nonoperating income. These other components were a net credit for all periods presented resulting in a decrease in operating earnings and an increase in other nonoperating income, as follows: 2018 — $16,539,000; 2017 — $8,102,000 and 2016 — $13,715,000.

CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS During the first quarter of 2018, we adopted ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU amends certain aspects of current guidance on the recognition, measurement and disclosure of financial instruments. Among other changes, this ASU requires most equity investments be measured at fair value. Additionally, the ASU eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value for instruments not recognized at fair value in our financial statements. The adoption of this standard had no material impact on our consolidated financial statements.

REVENUE RECOGNITION During the first quarter of 2018, we adopted ASU 2014-09, “Revenue from Contracts with Customers” (ASC Topic 606). Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Additionally, it provides a more robust framework for addressing revenue issues and expands required revenue recognition disclosures. We adopted this standard using the cumulative effect transition approach; however, because there was no change in the identified performance obligations under Topic 606 compared with the identification of deliverables and separate units of account under previous guidance (Topic 605), the amount and timing of our revenues remain materially unchanged. Our expanded revenue disclosure is presented in Note 2.

ACCOUNTING STANDARDS PENDING ADOPTION

DEFINED BENEFIT PLANS In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-14, “Changes to the Disclosure Requirements for Defined Benefit Plans,” which adds, removes and clarifies the disclosure requirements for employers that sponsor defined benefit pension and other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and is to be applied retrospectively. Early adoption is permitted. While we are still evaluating the impact of ASU 2018-14 and whether we will early adopt, it will not impact our consolidated financial statements as it only affects disclosure. Thus, the adoption of this standard will have a minor impact on the notes to our consolidated financial statements, specifically, our benefit plans note.

CREDIT LOSSES In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which amends guidance on the impairment of financial instruments. The new guidance estimates credit losses based on expected losses, modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim reporting periods within those annual reporting periods. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.



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LEASE ACCOUNTING In February 2016, the FASB issued ASU 2016-02, “Leases,” which amends existing accounting standards for lease accounting and adds additional disclosures about leasing arrangements. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases (with certain exclusions, including mineral leases) with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement and presentation of cash flow in the statement of cash flows. This ASU is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual reporting periods.

We will adopt this standard in the first quarter of 2019 utilizing the comparatives transition option under ASC 840. Under this transition approach, we will not restate our comparative periods in the period of adoption. We currently expect to recognize operating lease liabilities of approximately $430,000,000, with corresponding right-of-use assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases.

We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification, and initial direct costs. Also, we expect to elect the use of the practical expedient pertaining to land easements. We do not expect to elect the use-of-hindsight practical expedient. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for all equipment leases. This means, for those leases that qualify, we will not recognize right-of-use assets or lease liabilities, and this includes not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

NOTE 2: REVENUES

There have been no significant changes to the amount or timing of our revenue recognition as a result of our adoption of ASU 2014-09, “Revenue from Contracts with Customers” (Accounting Standards Codification Topic 606). Revenues are measured as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Sales and other taxes we collect are excluded from revenues. Costs to obtain and fulfill contracts (primarily asphalt construction paving contracts) are immaterial and are expensed as incurred when the expected amortization period is one year or less.

Total revenues are primarily derived from our product sales of aggregates (crushed stone, sand and gravel, sand and other 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 service revenues from our asphalt construction paving business and service revenues related to our aggregates business, such as landfill tipping fees. Our total service revenues were as follows: 2018 — $198,897,000, 2017 — $113,422,000 and 2016 — $42,904,000. The increased service revenues resulted from acquisitions that included asphalt construction paving businesses (2018 – Alabama and Texas, and 2017 – Tennessee, See Note 19).

Our products typically are sold to private industry and not directly to governmental entities. Although approximately 45% to 55% of our aggregates shipments have historically been used in publicly-funded construction, such as highways, airports and government buildings, relatively insignificant sales are made directly to federal, state, county or municipal governments/agencies. Therefore, although reductions in state and federal funding can curtail publicly-funded construction, our aggregates business is not directly subject to renegotiation of profits or termination of contracts with state or federal governments.



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Our segment total revenues by geographic market for the years ended December 31, 2018, 2017 and 2016 are disaggregated as follows:



	For the Year Ended December 31, 2018
in thousands	Aggregates	Asphalt	Concrete	Calcium	Total
Total Revenues by Geographic Market 1
East	$ 1,109,489	$ 156,591	$ 257,250	$ 0	$ 1,523,330
Gulf Coast	1,821,853	131,745	71,739	8,110	2,033,447
West	582,307	444,846	73,010	0	1,100,163
Segment sales	$ 3,513,649	$ 733,182	$ 401,999	$ 8,110	$ 4,656,940
Intersegment sales	(274,071)	0	0	0	(274,071)
Total revenues	$ 3,239,578	$ 733,182	$ 401,999	$ 8,110	$ 4,382,869



	For the Year Ended December 31, 2017
in thousands	Aggregates	Asphalt	Concrete	Calcium	Total
Total Revenues by Geographic Market 1
East	$ 1,045,682	$ 112,673	$ 244,568	$ 0	$ 1,402,923
Gulf Coast	1,512,505	80,311	102,716	7,740	1,703,272
West	537,907	429,090	70,461	0	1,037,458
Segment sales	$ 3,096,094	$ 622,074	$ 417,745	$ 7,740	$ 4,143,653
Intersegment sales	(253,357)	0	0	0	(253,357)
Total revenues	$ 2,842,737	$ 622,074	$ 417,745	$ 7,740	$ 3,890,296



	For the Year Ended December 31, 2016
in thousands	Aggregates	Asphalt	Concrete	Calcium	Total
Total Revenues by Geographic Market 1
East	$ 994,559	$ 0	$ 203,734	$ 0	$ 1,198,293
Gulf Coast	1,497,762	102,035	99,253	8,860	1,707,910
West	469,514	410,275	27,138	0	906,927
Segment sales	$ 2,961,835	$ 512,310	$ 330,125	$ 8,860	$ 3,813,130
Intersegment sales	(220,463)	0	0	0	(220,463)
Total revenues	$ 2,741,372	$ 512,310	$ 330,125	$ 8,860	$ 3,592,667


1	The geographic markets are defined by states/countries as follows:
		East market — Arkansas, Delaware, Illinois, Kentucky, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and Washington D.C. Gulf Coast market — Alabama, Florida, Georgia, Louisiana, Mexico, Mississippi, Oklahoma, South Carolina, Texas and the Bahamas West market — Arizona, California and New Mexico

PRODUCT AND SERVICE REVENUES

Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs at a point in time when our aggregates, asphalt mix and ready-mixed concrete are shipped/delivered and control passes to the customer. Revenue for our products and services is recorded at the fixed invoice amount and is due by the 15th day of the following month — we do not offer discounts for early payment. Freight & delivery generally represents pass-through transportation we incur (including our administrative costs) and pay to third-party carriers to deliver our products to customers and are accounted for as a fulfillment activity. Likewise, the cost related to freight & delivery are included in cost of revenues.



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Freight & delivery revenues are as follows:



in thousands	2018	2017	2016
Freight & Delivery Revenues
Total revenues	$ 4,382,869	$ 3,890,296	$ 3,592,667
Freight & delivery revenues 1	(641,815)	(528,916)	(535,929)
Total revenues excluding freight & delivery	$ 3,741,054	$ 3,361,380	$ 3,056,738


1	Includes freight & delivery to remote distribution sites.

CONSTRUCTION PAVING REVENUES

Revenue from our asphalt construction paving business is recognized over time using the percentage-of-completion method under the cost approach. The percentage of completion is determined by costs incurred to date as a percentage of total costs estimated for the project. Under this approach, recognized contract revenue equals the total estimated contract revenue multiplied by the percentage of completion. Our construction contracts are unit priced and an account receivable is recorded for amounts invoiced based on actual units produced. Contract assets for estimated earnings in excess of billings, contract assets related to retainage provisions and contract liabilities for billings in excess of costs are immaterial. Variable consideration in our construction paving contracts is immaterial and consists of incentives and penalties based on the quality of work performed. Our construction paving contracts may contain warranty provisions covering defects in equipment, materials, design or workmanship that generally run from nine months to one year after project completion. Due to the nature of our construction paving projects, including contract owner inspections of the work during construction and prior to acceptance, we have not experienced material warranty costs for these short-term warranties.

VOLUMETRIC PRODUCTION PAYMENT REVENUES

In 2013 and 2012, we sold a percentage interest in certain future aggregates production for net cash proceeds of $226,926,000. These transactions, structured as volumetric production payments (VPPs):

	§		relate to eight quarries in Georgia and South Carolina

	§		provide the purchaser solely with a nonoperating percentage interest in the subject quarries’ future aggregates production

	§		contain no minimum annual or cumulative guarantees by us for production or sales volume, nor minimum sales price

	§		are both volume and time limited (we expect the transactions will last approximately 25 years, limited by volume rather than time)

We are the exclusive sales agent for, and transmit quarterly to the purchaser the proceeds from the sale of, the purchaser’s share of future aggregates production. Our consolidated total revenues exclude the revenue from the sale of the purchaser’s share of aggregates.

The proceeds we received from the sale of the percentage interest were recorded as deferred revenue on the balance sheet. We recognize revenue on a unit-of-sales basis (as we sell the purchaser’s share of future production) relative to the volume limitations of the transactions. Given the nature of the risks and potential rewards assumed by the buyer, the transactions do not reflect financing activities.

Reconciliation of the VPP deferred revenue balances (current and noncurrent) is as follows:



in thousands	2018	2017	2016
Deferred Revenue
Balance at beginning of year	$ 199,556	$ 206,468	$ 214,060
Revenue recognized from deferred revenue	(6,773)	(6,912)	(7,592)
Balance at end of year	$ 192,783	$ 199,556	$ 206,468

Based on expected sales from the specified quarries, we expect to recognize $7,500,000 of VPP deferred revenue as income in 2019 (reflected in other current liabilities in our December 31, 2018 Consolidated Balance Sheet).



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NOTE 3: INVENTORIES

Inventories at December 31 are as follows:



in thousands	2018	2017
Inventories
Finished products 1	$ 372,604	$ 327,711
Raw materials	27,942	27,152
Products in process	3,064	1,827
Operating supplies and other	25,720	27,648
Total	$ 429,330	$ 384,338


1	Includes inventories encumbered by volumetric production payments (see Note 2), as follows: December 31, 2018 — $3,230 thousand and December 31, 2017 — $2,808 thousand.

In addition to the inventory balances presented above, as of December 31, 2018 and December 31, 2017, we have $9,980,000 and $11,810,000, respectively, of inventory classified as long-term assets (other noncurrent assets) as we do not expect to sell the inventory within one year of their respective balance sheet dates. Inventories valued under the LIFO method total $308,257,000 at December 31, 2018 and $252,808,000 at December 31, 2017. During 2018, 2017 and 2016, inventory reductions resulted in liquidations of LIFO inventory layers carried at lower costs prevailing in prior years as compared to current-year costs. The effect of the LIFO liquidation on 2018 results was to increase cost of revenues by $132,000 and decrease net earnings by $99,000. The effect of the LIFO liquidation on 2017 results was to decrease cost of revenues by $2,714,000 and increase net earnings by $1,662,000. The effect of the LIFO liquidation on 2016 results was to decrease cost of revenues by $3,956,000 and increase net earnings by $2,419,000.

Estimated current cost exceeded LIFO cost at December 31, 2018 and 2017 by $175,844,000 and $168,829,000, respectively. We use the LIFO method of valuation for most of our inventories as it results in a better matching of costs with revenues. In periods of increasing costs, LIFO generally results in higher cost of revenues than under FIFO. In periods of decreasing costs, the results are generally the opposite. We provide supplemental income disclosures to facilitate comparisons with companies not on LIFO. The supplemental income calculation is derived by tax-affecting the change in the LIFO reserve for the periods presented. If all inventories valued at LIFO cost had been valued under first-in, first-out (FIFO) method, the approximate effect on net earnings would have been an increase of $5,223,000 in 2018, an increase of $8,092,000 in 2017 and a decrease of $(8,338,000) in 2016.



Part II	83

NOTE 4: PROPERTY, PLANT & EQUIPMENT

Balances of major classes of assets and allowances for depreciation, depletion and amortization at December 31 are as follows:



in thousands	2018	2017
Property, Plant & Equipment
Land and land improvements 1	$ 2,823,092	$ 2,742,285
Buildings	139,948	135,655
Machinery and equipment	5,106,918	4,740,212
Leasehold improvements	18,217	17,354
Deferred asset retirement costs	183,324	172,631
Construction in progress	186,120	161,175
Total, gross	$ 8,457,619	$ 7,969,312
Less allowances for depreciation, depletion
and amortization	4,220,312	4,050,381
Total, net	$ 4,237,307	$ 3,918,931


1	Includes depletable land, as follows: December 31, 2018 — $1,626,899 thousand and December 31, 2017 — $1,606,303 thousand.

Capitalized interest costs with respect to qualifying construction projects and total interest costs incurred before recognition of the capitalized amount for the years ended December 31 are as follows:



in thousands	2018	2017	2016
Capitalized interest cost	$ 3,674	$ 5,177	$ 7,468
Total interest cost incurred before recognition
of the capitalized amount	141,651	300,699	141,544

NOTE 5: DERIVATIVE INSTRUMENTS

In 2007 and 2018, we entered into interest rate locks of future debt issuances to hedge the risk of higher interest rates. These interest rate locks were designated as cash flow hedges. The gain/loss upon settlement of these interest rate hedges is deferred (recorded in AOCI) and amortized to interest expense over the term of the related debt.

This amortization was reflected in the accompanying Consolidated Statements of Comprehensive Income for the years ended December 31 as follows:



in thousands	Location on Statement	2018	2017	2016
Interest Rate Hedges
Loss reclassified from AOCI
(effective portion)	Interest expense	$ (306)	$ (3,070)	$ (2,008)

The 2017 loss reclassified from AOCI includes the acceleration of deferred losses in the amount of $1,405,000 referable to the debt purchase as described in Note 6.

For the 12-month period ending December 31, 2019, we estimate that $308,000 of the $11,180,000 pretax loss in AOCI will be reclassified to interest expense.



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NOTE 6: DEBT

Debt at December 31 is detailed as follows:



	Effective
in thousands	Interest Rates	2018	2017
Short-term Debt
Bank line of credit expires 2021 1, 2	1.25%	$ 133,000	$ 0
Total short-term debt		$ 133,000	$ 0
Long-term Debt
Bank line of credit expires 2021 1		$ 0	$ 250,000
Term loan due 2018 3		0	350,000
Floating-rate notes due 2020	3.50%	250,000	250,000
Floating-rate notes due 2021	3.71%	500,000	0
7.50% notes due 2021		0	35,111
8.85% notes due 2021	8.88%	6,000	6,000
Term loan due 2021		0	250,000
4.50% notes due 2025	4.65%	400,000	400,000
3.90% notes due 2027	4.00%	400,000	400,000
7.15% notes due 2037	8.05%	129,239	240,188
4.50% notes due 2047	4.59%	700,000	700,000
4.70% notes due 2048	5.42%	460,949	0
Other notes	6.46%	208	230
Total long-term debt - face value		$ 2,846,396	$ 2,881,529
Unamortized discounts and debt issuance costs		(67,016)	(26,664)
Total long-term debt - book value		$ 2,779,380	$ 2,854,865
Less current maturities		23	41,383
Total long-term debt - reported value		$ 2,779,357	$ 2,813,482
Estimated fair value of long-term debt		$ 2,695,802	$ 2,983,419


1	Borrowings on the bank line of credit are classified as short-term debt if we intend to repay within twelve months and as long-term debt if we have the intent and ability to extend payment beyond twelve months.
2	The effective interest rate 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.
3	This short-term loan was refinanced on a long-term basis in February 2018 as discussed below. Thus, it was classified as long-term debt as of December 31, 2017.

Discounts and debt issuance costs are amortized using the effective interest method over the terms of the respective notes resulting in $5,161,000 and $9,808,000, respectively, of net interest expense for these items for 2018 and 2017.

LINE OF CREDIT

Our unsecured $750,000,000 line of credit matures December 2021 and contains affirmative, negative and financial covenants customary for an unsecured investment-grade facility. The primary negative covenant limits our ability to incur secured debt. The financial covenants are: (1) a maximum ratio of debt to EBITDA of 3.5:1 (upon certain acquisitions, the maximum ratio can be 3.75:1 for three quarters), and (2) a minimum ratio of EBITDA to net cash interest expense of 3.0:1. As of December 31, 2018, we were in compliance with the line of credit covenants.



Part II	85

Borrowings on our line of credit are classified as short-term debt if we intend to repay within twelve months and as long-term debt if we have the intent and ability to extend repayment beyond twelve months. Borrowings bear interest, at our option, at either LIBOR plus a credit margin ranging from 1.00% to 1.75%, or SunTrust Bank’s base rate (generally, its prime rate) plus a credit margin ranging from 0.00% to 0.75%. The credit margin for both LIBOR and base rate borrowings is determined by our credit ratings. Standby letters of credit, which are issued under the line of credit and reduce availability, are charged a fee equal to the credit margin for LIBOR borrowings plus 0.175%. We also pay a commitment fee on the daily average unused amount of the line of credit that ranges from 0.10% to 0.25% determined by our credit ratings. As of December 31, 2018, 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 amount was 0.15%.

As of December 31, 2018, our available borrowing capacity was $572,021,000. Utilization of the borrowing capacity was as follows:

	§		$133,000,000 was borrowed

	§		$44,979,000 was used to provide support for outstanding standby letters of credit

TERM DEBT

All of our $2,846,396,000 (face value) of term debt is unsecured. $2,846,188,000 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.

In December 2018, we completed an exchange offer in which all of the $460,949,000 of 4.70% senior unregistered notes due 2048 (issued in February 2018 and March 2018 as described below) were exchanged for new registered notes of like principal amount and like denomination as the unregistered notes, with substantially identical terms. We did not receive any proceeds from the issuance of the new notes.

In March 2018, we early retired via exchange offer $110,949,000 of the $240,188,000 7.15% senior notes due 2037 for: (1) a like amount of notes due 2048 (these notes are a further issuance of, and form a single series with, the $350,000,000 of 4.70% senior notes due 2048 issued in February 2018 as described below, and (2) $38,164,000 of cash. The cash payment primarily reflects the trading price of the retired notes relative to par and will be amortized to interest expense over the term of the notes due 2048. We recognized transaction costs of $1,314,000 with this early retirement.

In February 2018, we issued $350,000,000 of 4.70% senior notes due 2048 (these notes now total $460,949,000 including the notes issued in March as described above) and $500,000,000 of floating-rate senior notes due 2021. Total proceeds of $846,029,000 (net of discounts, transaction costs and an interest rate derivative settlement gain), together with cash on hand, were used to retire/repay without penalty or premium: (1) the $350,000,000 term loan due 2018, (2) the $250,000,000 term loan due 2021, and (3) the $250,000,000 bank line of credit borrowings. We recognized noncash expense of $203,000 with the acceleration of unamortized deferred transaction costs.

In January 2018, we early retired via redemption the remaining $35,111,000 of the 7.50% senior notes due 2021 at a cost of $40,719,000 including a premium of $5,608,000. Additionally, we recognized noncash expense of $263,000 with the acceleration of unamortized deferred transaction costs.

As a result of the first quarter 2018 early debt retirements described above, we recognized premiums of $5,608,000, transaction costs of $1,314,000 and noncash expense (acceleration of unamortized deferred transaction costs) of $466,000. The combined charge of $7,388,000 was a component of interest expense for the year ended December 31, 2018.

In December 2017, we early retired via tender offer $564,889,000 of the $600,000,000 7.50% senior notes due 2021 at a cost of $662,613,000 including a premium of $96,167,000 and transaction costs of $1,558,000. Additionally, we recognized noncash expense of $4,228,000 with the acceleration of unamortized deferred transaction costs.

Also in December 2017, we entered into a 6-month $350,000,000 unsecured term loan with one of the banks that provides our line of credit. Proceeds were used for general corporate purposes. This term loan was prepaid, as described above, in February 2018 with the proceeds of the 4.70% senior notes due 2048.



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In July 2017, we early retired via redemption: (1) the $272,512,000 7.00% senior notes due 2018 and (2) the $250,000,000 10.375% senior notes due 2018 (neither of which now appear in the table above) — at a combined cost of $565,560,000 including a premium of $43,020,000 and transaction costs of $28,000. Additionally, we recognized noncash expense of $3,029,000 with the acceleration of unamortized deferred discounts, transaction costs and interest rate derivative settlement losses. Such redemptions were partially funded with the proceeds of the senior notes issued in June 2017 as described below.

In June 2017, we issued $1,000,000,000 of debt composed of three issuances as follows: (1) $700,000,000 of 4.50% senior notes due 2047, (2) $50,000,000 of 3.90% senior notes due 2027 (these notes are a further issuance of, and form a single series with, the 3.90% notes issued in March 2017), and (3) $250,000,000 of floating-rate senior notes due 2020. Total proceeds of $989,512,000 (net of discounts/premiums and transaction costs) were used to partially finance an acquisition and to early retire the notes due in 2018 as described above.

In June 2017, we drew the full $250,000,000 on the unsecured delayed draw term loan due 2021. These funds were used to repay the $235,000,000 line of credit borrowings and for general corporate purposes. This term loan was repaid, as described above, in February 2018 with proceeds of the floating-rate senior notes due 2021.

In March 2017, we issued $350,000,000 of 3.90% senior notes due 2027. Proceeds of $345,450,000 (net of discounts and transaction costs) were used for general corporate purposes. This series of notes now totals $400,000,000 including the additional $50,000,000 issued in June as described above.

As a result of the 2017 early debt retirements described above, we recognized premiums of $139,187,000, transaction costs of $1,586,000 and noncash expense (acceleration of unamortized deferred transaction costs) of $7,257,000. The combined charge of $148,030,000 was a component of interest expense for the year ended December 31, 2017.

The total scheduled (principal and interest) debt payments, excluding the line of credit, for the five years subsequent to December 31, 2018 are as follows:



in thousands	Total	Principal	Interest
Scheduled Debt Payments (excluding the line of credit)
2019	$ 121,629	$ 23	$ 121,606
2020	366,366	250,025	116,341
2021	606,312	506,026	100,286
2022	96,041	28	96,013
2023	96,041	30	96,011

STANDBY LETTERS OF CREDIT

We provide, in the normal course of business, certain third-party beneficiaries with standby letters of credit to support our obligations to pay or perform according to the requirements of an underlying agreement. Such letters of credit typically have an initial term of one year, typically renew automatically, and can only be modified or canceled with the approval of the beneficiary. All of our standby letters of credit are issued by banks that participate in our $750,000,000 line of credit, and reduce the borrowing capacity thereunder. Our standby letters of credit as of December 31, 2018 are summarized by purpose in the table below:



in thousands
Standby Letters of Credit
Risk management insurance				$ 38,111
Reclamation/restoration requirements				6,868
Total				$ 44,979



Part II	87

NOTE 7: OPERATING LEASES

Rental expense from continuing operations under nonmineral operating leases for the years ended December 31, exclusive of rental payments made under leases of one month or less, is summarized as follows:



in thousands	2018	2017	2016
Operating Leases
Minimum rentals	$ 76,443	$ 59,536	$ 52,713
Contingent rentals (based principally on usage)	54,572	50,822	57,278
Total	$ 131,015	$ 110,358	$ 109,991

Future minimum operating lease payments under all leases with initial or remaining noncancelable lease terms in excess of one year, exclusive of mineral leases (see Note 12), as of December 31, 2018 are payable as follows:



in thousands
Future Minimum Operating Lease Payments
2019	$ 47,979
2020	43,540
2021	35,732
2022	27,463
2023	19,707
Thereafter	195,104
Total	$ 369,525

Lease agreements frequently include renewal options and require that we pay for utilities, taxes, insurance and maintenance expense. Options to purchase are also included in some lease agreements.

NOTE 8: ACCRUED ENVIRONMENTAL REMEDIATION COSTS

Our Consolidated Balance Sheets as of December 31 include accrued environmental remediation costs (measured on an undiscounted basis) as follows:



in thousands	2018	2017
Accrued Environmental Remediation Costs
Continuing operations	$ 39,745	$ 21,784
Retained from former Chemicals business	10,685	10,704
Total	$ 50,430	$ 32,488

The long-term portion of the accruals noted above is included in other noncurrent liabilities in the accompanying Consolidated Balance Sheets and amounted to $13,597,000 at December 31, 2018 and $12,760,000 at December 31, 2017. The short-term portion of these accruals is included in other current liabilities in the accompanying Consolidated Balance Sheets.

The accrued environmental remediation costs in continuing operations relate primarily to the former Florida Rock, Tarmac, and CalMat facilities acquired in 2007, 2000 and 1999, respectively. The current increase primarily relates to the Hewitt Landfill Matter, a former CalMat facility. The balances noted above for Chemicals relate to retained environmental remediation costs from the 2003 sale of the Performance Chemicals business and the 2005 sale of the Chloralkali business. Refer to Note 12 for additional discussion of contingent environmental matters.



Part II	88

NOTE 9: INCOME TAXES

The Tax Cuts and Jobs Act (TCJA) was enacted in December 2017. The TCJA, among other changes, (1) reduces the U.S. federal corporate income tax rate from 35% to 21%, (2) allows for the immediate 100% deductibility of certain capital investments, (3) eliminates the alternative minimum tax (though allows for the future use of previously generated alternative minimum tax credits), (4) repeals the domestic production deduction, (5) requires a one-time “transition tax” on earnings of certain foreign subsidiaries that were previously tax deferred, (6) limits the deductibility of interest expense, (7) further limits the deductibility of certain executive compensation and (8) taxes global intangible low taxed income.

The SEC’s Staff Accounting Bulletin (SAB) 118 provided a one-year measurement period from the TCJA enactment date for companies to complete their income tax accounting.

During 2017, we recorded provisional estimates for the following two elements. During 2018 we recorded measurement-period adjustments to finalize these elements as follows:

	§		DEEMED REPATRIATION TRANSITION TAX — The TCJA subjected companies to a one-time Deemed Repatriation Transition Tax (Transition Tax) on previously untaxed foreign accumulated earnings. We recorded a provisional Transition Tax obligation of $12,301,000 at December 31, 2017. In the fourth quarter of 2018, we completed our accounting for this element, which resulted in an insignificant amount of additional income tax expense.

	§		DEDUCTIBILITY OF EXECUTIVE COMPENSATION — The TCJA eliminated the performance-based compensation exception from the limitation on covered employee remuneration. As a result, we believe that a portion of the performance-based remuneration accounted for in our deferred taxes will no longer be deductible. As such, we included a provisional expense of $1,403,000 at December 31, 2017. In the fourth quarter of 2018, we completed our accounting for this element which resulted in an insignificant amount of additional income tax expense.

Our accounting for the following two elements of the TCJA were recognized solely in 2018 as we were unable to make reasonable estimates of the effects during 2017.

	§		OUTSIDE BASIS DIFFERENCE IN FOREIGN SUBSIDIARIES — We have previously considered the outside basis difference in our foreign subsidiaries to be indefinitely reinvested (the vast majority of which related to the undistributed earnings of our foreign subsidiaries). For U.S. federal income tax purposes, the Transition Tax (mentioned above) greatly reduced the outside basis difference in our foreign subsidiaries. After passage of the TCJA, if we choose to repatriate any previously taxed or undistributed foreign earnings, we have determined that the deferred tax impacts would be: (1) no U.S. federal income tax, (2) no foreign withholding tax, and (3) an insignificant amount of state income tax. As a result, we have chosen to remove our indefinite reinvestment assertion on the earnings of our foreign subsidiaries. We continue to assert indefinite reinvestment on any outside basis differences in excess of our previously taxed and undistributed foreign subsidiary earnings that may be subject to tax in the future.

	§		GLOBAL INTANGIBLE LOW TAXED INCOME — We do not expect to have significant U.S. inclusions in taxable income related to global intangible low taxed income (GILTI). As such, we have made an accounting policy election to treat taxes due on the future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (period cost method) versus factoring such amounts into our measurement of deferred taxes (deferred method).

During the fourth quarter of 2018, we adopted ASU 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” effective as of the beginning of the year. This ASU allowed us to reclassify $29,629,000 of stranded tax effects due to remeasuring certain deferred tax assets as a result of applying the TCJA enacted in December 2017 from accumulated other comprehensive income (AOCI) to retained earnings.



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The components of earnings from continuing operations before income taxes are as follows:



in thousands	2018	2017	2016
Earnings from Continuing Operations
before Income Taxes
Domestic	$ 593,446	$ 346,668	$ 513,721
Foreign	29,844	14,648	33,536
Total	$ 623,290	$ 361,316	$ 547,257

Income tax expense (benefit) from continuing operations consists of the following:



in thousands	2018	2017	2016
Income Tax Expense (Benefit) from
Continuing Operations
Current
Federal	$ 21,111	$ (7,416)	$ 72,506
State and local	15,127	4,661	14,774
Foreign	4,278	3,109	6,974
Total	$ 40,516	$ 354	$ 94,254
Deferred
Federal	$ 59,216	$ (202,184)	$ 37,246
State and local	8,369	(30,052)	(6,647)
Foreign	(2,652)	(193)	(2)
Total	$ 64,933	$ (232,429)	$ 30,597
Total expense (benefit)	$ 105,449	$ (232,075)	$ 124,851

Income tax expense (benefit) differs from the amount computed by applying the federal statutory income tax rate to earnings from continuing operations before income taxes. The sources and tax effects of the differences are as follows:



dollars in thousands	2018		2017		2016
Income tax expense at the federal
statutory tax rate	$ 130,891	21.0%	$ 126,461	35.0%	$ 191,540	35.0%
Expense (Benefit) from
Income Tax Differences
Statutory depletion	(21,733)	-3.5%	(28,995)	-8.0%	(32,230)	-5.9%
State and local income taxes, net of federal
income tax benefit	18,562	3.0%	8,115	2.2%	10,074	1.9%
Share-based compensation	(16,551)	-2.7%	(20,740)	-5.7%	(22,443)	-4.1%
Uncertain tax positions	(6,402)	-1.0%	1,062	0.3%	1,272	0.2%
Revaluation - deferred tax balances	0	0.0%	(301,567)	-83.5%	0	0.0%
AL NOL valuation allowance release	0	0.0%	(28,827)	-8.0%	(4,791)	-0.9%
U.S. production deduction	0	0.0%	2,452	0.7%	(8,790)	-1.6%
Transition tax	595	0.1%	12,301	3.4%	0	0.0%
Foreign tax credit carryforward	0	0.0%	0	0.0%	(6,513)	-1.2%
Other, net	87	0.0%	(2,337)	-0.6%	(3,268)	-0.6%
Total income tax expense (benefit)/
Effective tax rate	$ 105,449	16.9%	$ (232,075)	-64.2%	$ 124,851	22.8%



Part II	90

Deferred taxes on the balance sheet result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred income tax liability at December 31 are as follows:



in thousands	2018	2017
Deferred Tax Assets Related to
Employee benefits	$ 24,407	$ 29,547
Incentive compensation	62,829	59,010
Asset retirement obligations & other reserves	55,822	47,116
State net operating losses	68,436	73,083
Federal credit carryforwards	0	51,284
Other	31,294	37,518
Total gross deferred tax assets	$ 242,788	$ 297,558
Valuation allowance	(29,680)	(29,723)
Total net deferred tax asset	$ 213,108	$ 267,835
Deferred Tax Liabilities Related to
Property, plant & equipment	$ 510,604	$ 490,459
Goodwill/other intangible assets	233,471	216,039
Other	36,316	25,418
Total deferred tax liabilities	$ 780,391	$ 731,916
Net deferred tax liability	$ 567,283	$ 464,081

Each quarter we analyze the likelihood that our deferred tax assets will be realized. 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. At December 31, 2018, we have Alabama state net operating loss (NOL) carryforward deferred tax assets of $65,577,000, against which we have a valuation allowance of $29,183,000. At this time, we do not expect any future adjustment to this valuation allowance. The Alabama NOL carryforward, if not utilized, would expire between 2023 and 2032.

Changes in our liability for unrecognized tax benefits for the years ended December 31 are as follows:



in thousands	2018	2017	2016
Unrecognized tax benefits as of January 1	$ 11,643	$ 10,828	$ 8,447
Increases for tax positions related to
Prior years	0	27	1,368
Current year	698	1,039	1,040
Decreases for tax positions related to
Prior years	(655)	(204)	0
Settlements with taxing authorities	0	0	0
Expiration of applicable statute of limitations	(8,025)	(47)	(27)
Unrecognized tax benefits as of December 31	$ 3,661	$ 11,643	$ 10,828

We classify interest and penalties recognized on the liability for unrecognized tax benefits as income tax expense. Interest and penalties recognized as income tax expense (benefit) were $(1,477,000) in 2018, $420,000 in 2017 and $266,000 in 2016. The balance of accrued interest and penalties included in our liability for unrecognized tax benefits as of December 31 was $312,000 in 2018, $1,789,000 in 2017 and $1,369,000 in 2016. Our liability for unrecognized tax benefits at December 31 in the table above include $3,481,000 in 2018, $10,673,000 in 2017 and $9,884,000 in 2016 that would affect the effective tax rate if recognized. We anticipate no single tax position generating a significant increase in our liability for unrecognized tax benefits within 12 months of this reporting date.

As of December 31, 2018, income tax receivables of $922,000 are included in other accounts and notes receivable in the accompanying Consolidated Balance Sheet. There were similar receivables of $106,980,000 ($106,000,000 related to 2017 federal estimated payments which were refunded early 2018) as of December 31, 2017.



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NOTE 10: BENEFIT PLANS

PENSION PLANS

We sponsor three qualified, noncontributory defined benefit pension plans. These plans cover substantially all employees hired before July 2007, other than those covered by union-administered plans. Normal retirement age is 65, but the plans contain provisions for earlier retirement. Benefits for the Salaried Plan and the Chemicals Hourly Plan are generally based on salaries or wages and years of service; the Construction Materials Hourly Plan provides benefits equal to a flat dollar amount for each year of service. In addition to these qualified plans, we sponsor three unfunded, nonqualified pension plans. The projected benefit obligation presented in the table below includes $71,435,000 and $82,136,000 related to these unfunded, nonqualified pension plans for 2018 and 2017, respectively.

Effective July 2007, we amended our defined benefit pension plans to no longer accept new participants. Future benefit accruals for participants in our salaried defined benefit pension plan ceased on December 31, 2013, while salaried participants’ earnings considered for benefit calculations were frozen on December 31, 2015.

The following table sets forth the combined funded status of the plans and their reconciliation with the related amounts recognized in our consolidated financial statements at December 31:



in thousands	2018	2017
Change in Benefit Obligation
Projected benefit obligation at beginning of year	$ 1,091,223	$ 1,006,674
Service cost	5,716	6,715
Interest cost	35,503	36,230
Plan amendment 1	0	10,869
Actuarial (gain) loss	(118,827)	81,969
Benefits paid	(54,679)	(51,234)
Projected benefit obligation at end of year	$ 958,936	$ 1,091,223
Change in Fair Value of Plan Assets
Fair value of assets at beginning of year	$ 840,901	$ 749,515
Actual return on plan assets	(59,083)	122,597
Employer contribution	109,631	20,023
Benefits paid	(54,679)	(51,234)
Fair value of assets at end of year	$ 836,770	$ 840,901
Funded status	(122,166)	(250,322)
Net amount recognized	$ (122,166)	$ (250,322)
Amounts Recognized in the Consolidated
Balance Sheets
Noncurrent assets	$ 6,488	$ 4,605
Current liabilities	(9,067)	(9,478)
Noncurrent liabilities	(119,587)	(245,449)
Net amount recognized	$ (122,166)	$ (250,322)
Amounts Recognized in Accumulated
Other Comprehensive Income
Net actuarial loss	$ 240,199	$ 250,581
Prior service cost	7,828	9,167
Total amount recognized	$ 248,027	$ 259,748


1	Effective January 2017, we amended the Construction Materials Hourly Plan to increase the multiplier for years of service.



Part II	92

The accumulated benefit obligation (ABO) and the projected benefit obligation (PBO) exceeded plan assets for all of our defined benefit plans at December 31, 2018 and December 31, 2017, except for one where the plan assets exceeded the ABO by $6,525,000 and $5,346,000, respectively. The ABO for all of our defined benefit pension plans totaled $958,899,000 (unfunded, nonqualified plans of $71,435,000) at December 31, 2018 and $1,090,482,000 (unfunded, nonqualified plans of $82,136,000) at December 31, 2017.

The following table sets forth the components of net periodic benefit cost, amounts recognized in other comprehensive income and weighted-average assumptions of the plans at December 31:



dollars in thousands	2018	2017	2016
Components of Net Periodic Pension
Benefit Cost
Service cost	$ 5,716	$ 6,715	$ 5,343
Interest cost	35,503	36,230	36,505
Expected return on plan assets	(59,188)	(48,506)	(51,562)
Amortization of prior service cost (credit)	1,340	1,340	(43)
Amortization of actuarial loss	9,826	7,397	6,163
Net periodic pension benefit cost (credit)	$ (6,803)	$ 3,176	$ (3,594)
Changes in Plan Assets and Benefit
Obligations Recognized in Other
Comprehensive Income
Net actuarial loss (gain)	$ (555)	$ 7,879	$ 33,682
Prior service cost	0	10,868	0
Reclassification of prior service (cost) credit	(1,340)	(1,340)	43
Reclassification of actuarial loss	(9,826)	(7,397)	(6,163)
Amount recognized in other comprehensive
income	$ (11,721)	$ 10,010	$ 27,562
Amount recognized in net periodic pension
benefit cost and other comprehensive
income	$ (18,524)	$ 13,186	$ 23,968
Assumptions
Weighted-average assumptions used to
determine net periodic benefit cost for
years ended December 31
Discount rate — PBO	3.72%	4.29%	4.55%
Discount rate — service cost	3.90%	4.63%	4.68%
Discount rate — interest cost	3.35%	3.63%	3.79%
Expected return on plan assets	7.00%	7.00%	7.50%
Weighted-average assumptions used to
determine benefit obligation at
December 31
Discount rate	4.39%	3.72%	4.29%

The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic pension benefit cost (credit) during 2019 are $4,933,000 and $1,339,000, respectively.



Part II	93

Plan assets are invested according to an investment policy that allocates investments in return seeking assets and liability hedging assets based on the plans’ funded ratio (fair value of assets/PBO). Return seeking assets include public and private equity securities, public and private debt securities, and commodities. Liability hedging assets include money market securities, inflation linked debt securities, public corporate debt securities, and government debt securities.

At each measurement date, we estimate the net asset values and fair values of our pension assets using various valuation techniques. For certain investments, we use the net asset value as a practical expedient to estimating fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as described below:

The fair values and net asset values of our pension plan assets at December 31, 2018 and 2017 are in the tables below. The assets in the common/collective trusts and in the private partnerships consist of both return seeking and liability hedging investments. At December 31, 2018, the total pension asset allocation was approximately 70% return seeking and 30% liability hedging, compared to the December 31, 2017 allocation of approximately 80% return seeking and 20% liability hedging. Based on the funded ratio at December 31, 2018, we are in process of shifting the asset allocation to approximately 55% return seeking and 45% liability hedging.

Fair Value Measurements at December 31, 2018



in thousands	Level 1	Level 2	Level 3	Total
Asset Category
Debt funds	$ 0	$ 168,953	$ 0	$ 168,953
Commodity funds	0	14,697	0	14,697
Equity funds	246	135,656	0	135,902
Investments in the fair value hierarchy	$ 246	$ 319,306	$ 0	$ 319,552
Interest in common/collective trusts (at NAV)				462,566
Private partnerships (at NAV)				54,652
Total pension plan assets				$ 836,770

Fair Value Measurements at December 31, 2017



in thousands	Level 1	Level 2	Level 3	Total
Asset Category
Debt funds	$ 0	$ 178,512	$ 0	$ 178,512
Commodity funds	0	17,041	0	17,041
Equity funds	1,089	143,010	0	144,099
Investments in the fair value hierarchy	$ 1,089	$ 338,563	$ 0	$ 339,652
Interest in common/collective trusts (at NAV)				416,397
Private partnerships (at NAV)				84,852
Total pension plan assets				$ 840,901



Part II	94

The following describes the types of investments included in each asset category listed in the tables above and the valuation techniques we used to determine the fair values or net asset values as of December 31, 2018 and 2017.

The debt funds category consists of U.S. federal, state and local government debt securities, corporate debt securities, foreign government debt securities, and asset-backed securities. The fair values of U.S. government and corporate debt securities are based on current market rates and credit spreads for debt securities with similar maturities. The fair values of debt securities issued by foreign governments are based on prices obtained from broker/dealers and international indices. The fair values of asset-backed securities are priced using prepayment speed and spread inputs that are sourced from the new issue market.

The commodity funds category consists of a single open-end commodity mutual fund. The equity funds category consists of a mutual fund investing in domestic equities. For investment funds publicly traded on a national securities exchange, the fair value is based on quoted market prices. For investment funds not traded on an exchange, the total fair value of the underlying securities is used to determine the net asset value for each unit of the fund held by the pension fund. The estimated fair values of the underlying securities are generally valued based on quoted market prices. For securities without quoted market prices, other observable market inputs are used to determine the fair value.

Common/collective trust fund investments consist of index funds for domestic equities, an actively managed fund for international equities, and a short-term investment fund for highly liquid, short-term debt securities. Investments are valued at the net asset value (NAV) of units of a bank collective trust. The NAV is based on the fair value of the underlying investments held by the fund less its liabilities. This practical expedient is not used when it is determined to be probable that the fund will sell the investment for an amount different than the reported NAV.

The private partnerships category consists of various venture capital funds, mezzanine debt funds and leveraged buyout funds. The NAV of these investments has been estimated based on methods employed by the general partners, including consideration of, among other things, reference to third-party transactions, valuations of comparable companies operating within the same or similar industry, the current economic and competitive environment, creditworthiness of the corporate issuer, as well as market prices for instruments with similar maturities, terms, conditions and quality ratings. The use of different assumptions, applying different judgment to inherently subjective matters and changes in future market conditions could result in significantly different estimates of fair value of these securities.

Total employer contributions to the pension plans are presented below:



in thousands			Pension
Employer Contributions
2016			$ 9,576
2017			20,023
2018			109,631
2019 (estimated)			9,067

For our qualified pension plans, we made discretionary contributions of $100,000,000 and $10,600,000 during 2018 and 2017, respectively, and made no contributions during 2016. We do not anticipate making contributions to our qualified pension plans in 2019. For our nonqualified pension plans, we contributed $9,631,000, $9,423,000 and $9,576,000 during 2018, 2017 and 2016, respectively, and expect to contribute $9,067,000 during 2019.



Part II	95

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



in thousands			Pension
Estimated Future Benefit Payments
2019			$ 56,493
2020			57,191
2021			58,317
2022			59,705
2023			60,871
2024-2028			301,996

We contribute to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements for union-represented employees. A multiemployer plan is subject to collective bargaining for employees of two or more unrelated companies. Multiemployer plans are managed by boards of trustees on which management and labor have equal representation. However, in most cases, management is not directly represented. The risks of participating in multiemployer plans differ from single employer plans as follows:

	§		assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers

	§		if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers

	§		if we cease to have an obligation to contribute to one or more of the multiemployer plans to which we contribute, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability

None of the multiemployer pension plans that we participate in are individually significant. Our contributions to individual multiemployer pension funds did not exceed 5% of the fund’s total contributions in the three years ended December 31, 2018, 2017 and 2016. Total contributions to multiemployer pension plans were $10,081,000 in 2018, $9,253,000 in 2017 and $10,435,000 in 2016.

As of December 31, 2018, a total of 8.5% of our domestic hourly labor force was covered by collective-bargaining agreements. Of such employees covered by collective-bargaining agreements, 7.5% were covered by agreements that expire in 2019. We also employed 332 union employees in Mexico who are covered by a collective-bargaining agreement that will expire in 2019. None of our union employees in Mexico participate in multiemployer pension plans.

In addition to the pension plans noted above, we had one unfunded supplemental retirement plan as of December 31, 2018 and 2017. The accrued costs for the supplemental retirement plan were $1,122,000 at December 31, 2018 and $1,252,000 at December 31, 2017.



Part II	96

POSTRETIREMENT PLANS

In addition to pension benefits, we provide certain healthcare and life insurance benefits for some retired employees. In 2012, we amended our postretirement healthcare plan to cap our portion of the medical coverage cost at the 2015 level. Substantially all our salaried employees and, where applicable, certain of our hourly employees may become eligible for these benefits if they reach a qualifying age and meet certain service requirements. Generally, Company-provided healthcare benefits end when covered individuals become eligible for Medicare benefits, become eligible for other group insurance coverage or reach age 65, whichever occurs first.

The following table sets forth the combined funded status of the plans and their reconciliation with the related amounts recognized in our consolidated financial statements at December 31:



in thousands	2018	2017
Change in Benefit Obligation
Projected benefit obligation at beginning of year	$ 43,480	$ 45,546
Service cost	1,357	1,167
Interest cost	1,240	1,260
Actuarial loss	856	378
Benefits paid	(6,099)	(4,871)
Projected benefit obligation at end of year	$ 40,834	$ 43,480
Change in Fair Value of Plan Assets
Fair value of assets at beginning of year	$ 0	$ 0
Actual return on plan assets	0	0
Fair value of assets at end of year	$ 0	$ 0
Funded status	$ (40,834)	$ (43,480)
Net amount recognized	$ (40,834)	$ (43,480)
Amounts Recognized in the Consolidated
Balance Sheets
Current liabilities	$ (5,560)	$ (5,624)
Noncurrent liabilities	(35,274)	(37,856)
Net amount recognized	$ (40,834)	$ (43,480)
Amounts Recognized in Accumulated
Other Comprehensive Income
Net actuarial gain	$ (18,624)	$ (20,757)
Prior service credit	(11,494)	(15,456)
Total amount recognized	$ (30,118)	$ (36,213)



Part II	97

The following table sets forth the components of net periodic benefit cost, amounts recognized in other comprehensive income, weighted-average assumptions and assumed trend rates of the plans at December 31:



dollars in thousands	2018	2017	2016
Components of Net Periodic Postretirement
Benefit Cost
Service cost	$ 1,358	$ 1,167	$ 1,123
Interest cost	1,240	1,260	1,209
Amortization of prior service credit	(3,962)	(4,236)	(4,236)
Amortization of actuarial gain	(1,298)	(1,587)	(1,751)
Net periodic postretirement benefit cost (credit)	$ (2,662)	$ (3,396)	$ (3,655)
Changes in Plan Assets and Benefit
Obligations Recognized in Other
Comprehensive Income
Net actuarial loss (gain)	$ 835	$ 342	$ (111)
Reclassification of prior service credit	3,962	4,236	4,236
Reclassification of actuarial gain	1,298	1,587	1,751
Amount recognized in other comprehensive
income	$ 6,095	$ 6,165	$ 5,876
Amount recognized in net periodic
postretirement benefit cost and other
comprehensive income	$ 3,433	$ 2,769	$ 2,221
Assumptions
Weighted-average assumptions used to
determine net periodic benefit cost for
years ended December 31
Discount rate — PBO	3.34%	3.59%	3.69%
Discount rate — service cost	3.56%	3.96%	3.77%
Discount rate — interest cost	2.90%	2.89%	2.81%
Weighted-average assumptions used to
determine benefit obligation at
December 31
Discount rate	4.01%	3.33%	3.58%

The estimated net actuarial gain and prior service credit that will be amortized from accumulated other comprehensive income into net periodic postretirement benefit cost (credit) during 2019 are $(1,344,000) and $(3,919,000), respectively.

Total employer contributions to the postretirement plans are presented below:



in thousands			Postretirement
Employer Contributions
2016			$ 5,280
2017			4,871
2018			6,099
2019 (estimated)			5,561

The employer contributions shown above are equal to the cost of benefits during the year. The plans are not funded and are not subject to any regulatory funding requirements.



Part II	98

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



in thousands			Postretirement
Estimated Future Benefit Payments
2019			$ 5,561
2020			5,381
2021			5,077
2022			4,733
2023			4,523
2024–2028			17,168

Contributions by participants to the postretirement benefit plans for the years ended December 31 are as follows:



in thousands			Postretirement
Participants Contributions
2016			$ 2,085
2017			2,025
2018			1,984

PENSION AND OTHER POSTRETIREMENT BENEFITS ASSUMPTIONS

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.

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. At December 31, 2018, the discount rates used were as follows:

	§		PBO for various plans – ranged from 3.92% to 4.47% (December 31, 2017 ranged from 3.24% to 3.79%)

	§		Service cost – weighted average of 3.90% and 3.56%, respectively, for our pension plans and our other postretirement plans (2017 figures were 4.63% and 3.96%, respectively)

	§		Interest cost – weighted average of 3.35% and 2.90%, respectively, for our pension plans and our other postretirement plans (2017 figures were 3.63% and 2.89%, respectively)

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. The expected return on plan assets used to measure plan benefit costs was 7.0% in 2018 and 2017. For 2019, we decreased the expected return on plan assets to 5.75%.

DEFINED CONTRIBUTION PLANS

We sponsor two defined contribution plans. Substantially all salaried and nonunion hourly employees are eligible to be covered by one of these plans. Under these plans, we match employees’ eligible contributions at established rates. Expense recognized in connection with these matching obligations totaled $40,718,000 in 2018, $44,562,000 in 2017 and $45,295,000 in 2016.



Part II	99

NOTE 11: INCENTIVE PLANS

SHARE-BASED COMPENSATION PLANS

Our 2016 Omnibus Long-term Incentive Plan (Plan) authorizes the granting of performance shares, restricted shares, Stock-Only Stock Appreciation Rights (SOSARs) and other types of share-based awards to key salaried employees and nonemployee directors. The maximum number of shares that may be issued under the Plan is 8,000,000.

PERFORMANCE SHARES — Each performance share unit is equal to and paid in one share of our common stock, but carries no voting or dividend rights. The number of units ultimately paid for performance share awards may range from 0% to 200% of the number of units awarded on the date of grant. Payment is based upon our Total Shareholder Return (TSR) performance relative to the TSR performance of the S&P 500®. Awards vest on December 31 of the third (2018 and 2017 awards) or fourth (all other outstanding awards) year after date of grant. Vesting is accelerated upon reaching retirement age, death, disability, or change of control, all as defined in the award agreement. Nonvested units are forfeited upon termination for any other reason. Expense provisions referable to performance share awards amounted to $13,656,000 in 2018, $16,272,000 in 2017 and $12,074,000 in 2016.

The fair value of performance shares is estimated as of the date of grant using a Monte Carlo simulation model. The following table summarizes the activity for nonvested performance share units during the year ended December 31, 2018:



	Target	Weighted-average
	Number	Grant Date
	of Shares	Fair Value
Performance Shares
Nonvested at January 1, 2018	498,979	$ 89.16
Granted	130,715	117.20
Vested	(218,725)	74.85
Canceled/forfeited	(60,291)	103.56
Nonvested at December 31, 2018	350,678	$ 106.06

During 2017 and 2016, the weighted-average grant date fair value of performance shares granted was $117.49 and $87.77, respectively.

The aggregate values for distributed performance share awards are based on the closing price of our common stock as of the distribution date. The aggregate values of distributed performance shares for the years ended December 31 are as follows:



in thousands	2018	2017	2016
Aggregate value of distributed
performance shares	$ 53,721	$ 52,368	$ 60,443



Part II	100

RESTRICTED SHARES — Each restricted share unit is equal to and paid in one share of our common stock, but carries no voting or dividend rights. Awards vest on the third (2018 and 2017 awards) or fourth (all other outstanding awards) anniversary of the grant date. Vesting is accelerated upon reaching retirement age, death, disability, or change of control, all as defined in the award agreement. Nonvested units are forfeited upon termination for any other reason. Expense provisions referable to restricted share awards amounted to $4,831,000 in 2018, $4,371,000 in 2017 and $3,004,000 in 2016.

The fair value of restricted shares is estimated as of the date of grant based on the stock price adjusted for dividends foregone. The following table summarizes the activity for nonvested restricted share units during the year ended December 31, 2018:



		Weighted-average
	Number	Grant Date
	of Shares	Fair Value
Restricted Stock Units
Nonvested at January 1, 2018	109,302	$ 97.43
Granted	52,065	117.20
Vested	(11,622)	100.35
Canceled/forfeited	(4,366)	110.73
Nonvested at December 31, 2018	145,379	$ 103.88

During 2017 and 2016, the weighted-average grant date fair value of restricted shares granted was $117.49 and $87.77, respectively.

The aggregate values for distributed restricted share awards are based on the closing price of our common stock as of the distribution date. The aggregate values of distributed restricted shares for the years ended December 31 are as follows:



in thousands	2018	2017	2016
Aggregate value of distributed
restricted shares	$ 1,345	$ 7,685	$ 0

STOCK-ONLY STOCK APPRECIATION RIGHTS (SOSARs) — SOSARs granted have an exercise price equal to the market value of our underlying common stock on the date of grant. The SOSARs vest ratably over 3 years (2018 and 2017 awards) or 4 years (all other awards) and expire 10 years subsequent to the grant. Vesting is accelerated upon reaching retirement age, death, disability, or change of control, all as defined in the award agreement. Nonvested awards are forfeited upon termination for any other reason.

The fair value of SOSARs is estimated as of the date of grant using the Black-Scholes option pricing model. Compensation cost for SOSARs is based on this grant date fair value and is recognized for awards that ultimately vest. The following table presents the weighted-average fair value and the weighted-average assumptions used in estimating the fair value of grants during the years ended December 31:



	2018	2017	2016
SOSARs
Fair value	$ 43.72	$ 43.01	$ 29.20
Risk-free interest rate	2.90%	2.36%	1.66%
Dividend yield	1.39%	1.27%	1.39%
Volatility	31.49%	31.35%	30.42%
Expected term	9.00 years	9.00 years	9.00 years

The risk-free interest rate is based on the yield at the date of grant of a U.S. Treasury security with a maturity period approximating the SOSARs expected term. The dividend yield assumption is based on our historical dividend payouts adjusted for current expectations of future payouts. The volatility assumption is based on the historical volatility and expectations about future volatility of our common stock over a period equal to the SOSARs expected term. The expected term is based on historical experience and expectations about future exercises and represents the period of time that SOSARs granted are expected to be outstanding.



Part II	101

A summary of our SOSAR activity as of December 31, 2018 and changes during the year are presented below:



			Weighted-average
			Remaining	Aggregate
	Number	Weighted-average	Contractual	Intrinsic Value
	of Shares	Exercise Price	Life (Years)	(in thousands)
SOSARs
Outstanding at January 1, 2018	2,242,487	$ 52.95
Granted	82,800	121.69
Exercised	(583,539)	45.71
Forfeited or expired	(165)	79.41
Outstanding at December 31, 2018	1,741,583	$ 58.64	3.70	$ 72,276
Exercisable at December 31, 2018	1,518,900	$ 51.39	3.08	$ 71,284

The aggregate intrinsic values in the table above represent the total pretax intrinsic value (the difference between our stock price on the last trading day of 2018 and the exercise price, multiplied by the number of in-the-money SOSARs) that would have been received by the option holders had all SOSARs been exercised on December 31, 2018. These values change based on the fair market value of our common stock. The aggregate intrinsic values of SOSARs exercised for the years ended December 31 are as follows:



in thousands	2018	2017	2016
Aggregate intrinsic value of SOSARs exercised	$ 49,248	$ 13,758	$ 27,705

The following table presents cash and stock consideration received and tax benefit realized from SOSAR exercises and compensation cost recorded referable to SOSARs for the years ended December 31:



in thousands	2018	2017	2016
SOSARs
Cash and stock consideration received
from exercises	$ 0	$ 0	$ 0
Tax benefit from exercises	19,083	5,331	10,767
Compensation cost	4,763	3,723	2,744

DEFERRED STOCK UNITS — In addition to the share-based compensation plans for employees discussed above, we issue a limited number of deferred stock units to our nonemployee directors annually. These deferred stock units vest immediately upon issuance (except for the 2015 grant which vested over three years) and accumulate dividends over the vesting period. Expense provisions referable to nonemployee director deferred stock units amounted to $1,965,000 in 2018, $2,260,000 in 2017 and $2,848,000 in 2016.

CASH-BASED COMPENSATION PLANS

We have incentive plans under which cash awards may be made annually. Expense provisions under these plans referable to awards to officers and certain employees amounted to $36,969,000 in 2018, $35,280,000 in 2017 and $46,758,000 in 2016. Additionally, expense provision referable to a 2017 one-time bonus for non-incentive eligible employees amounted to $6,716,000.



Part II	102

NOTE 12: COMMITMENTS AND CONTINGENCIES

We have commitments in the form of unconditional purchase obligations as of December 31, 2018. These include commitments for the purchase of property, plant & equipment of $35,248,000 and commitments for noncapital purchases of $36,722,000. These commitments are due as follows:



	Unconditional
	Purchase
in thousands	Obligations
Property, Plant & Equipment
2019	$ 35,248
Thereafter	0
Total	$ 35,248
Noncapital (primarily transportation and electricity contracts)
2019	$ 11,912
2020–2021	9,120
2022–2023	3,690
Thereafter	12,000
Total	$ 36,722

Expenditures under noncapital purchase commitments totaled $56,674,000 in 2018, $40,526,000 in 2017 and $60,591,000 in 2016.

We have commitments in the form of minimum royalties under mineral leases as of December 31, 2018 in the amount of $240,575,000, due as follows:



	Mineral
in thousands	Leases
Minimum Royalties
2019	$ 23,211
2020–2021	36,630
2022–2023	26,014
Thereafter	154,720
Total	$ 240,575

Expenditures for royalties under mineral leases totaled $76,761,000 in 2018, $67,933,000 in 2017 and $62,978,000 in 2016. Refer to Note 7 for future minimum nonmineral operating lease payments.

Certain of our aggregates reserves are burdened by volumetric production payments (nonoperating interest) as described in Note 2. As the holder of the working interest, we have responsibility to bear the cost of mining and producing the reserves attributable to this nonoperating interest.

As summarized by purpose in Note 6, our standby letters of credit totaled $44,979,000 as of December 31, 2018.

As described in Note 9, our liability for unrecognized tax benefits is $3,661,000 as of December 31, 2018.

As described in Note 17, our asset retirement obligations totaled $225,726,000 as of December 31, 2018.



Part II	103

LITIGATION AND ENVIRONMENTAL MATTERS

We are subject to occasional governmental proceedings and orders pertaining to occupational safety and health or to protection of the environment, such as proceedings or orders relating to noise abatement, air emissions or water discharges. As part of our continuing program of stewardship in safety, health and environmental matters, we have been able to resolve such proceedings and to comply with such orders without any material adverse effects on our business.

We have received notices from the United States Environmental Protection Agency (EPA) or similar state or local agencies that we are considered a potentially responsible party (PRP) at a limited number of sites under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or Superfund) or similar state and local environmental laws. Generally we share the cost of remediation at these sites with other PRPs or alleged PRPs in accordance with negotiated or prescribed allocations. There is inherent uncertainty in determining the potential cost of remediating a given site and in determining any individual party's share in that cost. As a result, estimates can change substantially as additional information becomes available regarding the nature or extent of site contamination, remediation methods, other PRPs and their probable level of involvement, and actions by or against governmental agencies or private parties.

We have reviewed the nature and extent of our involvement at each Superfund site, as well as potential obligations arising under other federal, state and local environmental laws. While ultimate resolution and financial liability is uncertain at a number of the sites, in our opinion based on information currently available, the ultimate resolution of claims and assessments related to these sites will not have a material effect on our consolidated results of operations, financial position or cash flows, although amounts recorded in a given period could be material to our results of operations or cash flows for that period. Amounts accrued for environmental matters are presented in Note 8.

We are a defendant in various lawsuits in the ordinary course of business. It is not possible to determine with precision the outcome, or the amount of liability, if any, under these lawsuits, especially where the cases involve possible jury trials with as yet undetermined jury panels.

In addition to these lawsuits in which we are involved in the ordinary course of business, certain other material legal proceedings are specifically described below.

■ Lower Passaic River Study Area (DISCONTINUED OPERATIONS) — The Lower Passaic River Study Area is part of the Diamond Shamrock Superfund Site in New Jersey. Vulcan and approximately 70 other companies are parties (collectively the Cooperating Parties Group, CPG) to a May 2007 Administrative Order on Consent (AOC) with the EPA to perform a Remedial Investigation/Feasibility Study (draft RI/FS) of the lower 17 miles of the Passaic River (River). The draft RI/FS was submitted recommending a targeted hot spot remedy; however, the EPA issued a record of decision (ROD) in March 2016 that calls for a bank-to-bank dredging remedy for the lower 8 miles of the River. The EPA estimates that the cost of implementing this proposal is $1.38 billion. In September 2016, the EPA entered into an Administrative Settlement Agreement and Order on Consent with Occidental Chemical Corporation (Occidental) in which Occidental agreed to undertake the remedial design for this bank-to-bank dredging remedy, and to reimburse the United States for certain response costs.

In August 2017, the EPA informed certain members of the CPG, including Vulcan, that it planned to use the services of a third-party allocator with the expectation of offering cash-out settlements to some parties in connection with the bank-to-bank remedy. This voluntary allocation process is intended to establish an impartial third-party expert recommendation that may be considered by the government and the participants as the basis of possible settlements. We have begun participating in this voluntary allocation process, which is likely to take several years.

In July 2018, Vulcan, along with more than one hundred other defendants, was sued by Occidental in United States District Court for the District of New Jersey, Newark Vicinage. Occidental is seeking cost recovery and contribution under CERCLA. It is unknown at this time whether the filing of the Occidental lawsuit will impact the EPA allocation process.

In October 2018, the EPA ordered the CPG to prepare a streamlined feasibility study specifically for the upper nine miles of the River. This directive is focused on dioxin.

Efforts to remediate the River have been underway for many years and have involved hundreds of entities that have had operations on or near the River at some point during the past several decades. We formerly owned a chemicals operation near the mouth of the River, which was sold in 1974. The major risk drivers in the River have been identified as dioxins, PCBs, DDx and mercury. We did not manufacture any of these risk drivers and have no evidence that any of these were discharged into the River by Vulcan.



Part II	104

The AOC does not obligate us to fund or perform the remedial action contemplated by either the draft RI/FS or the ROD. Furthermore, the parties who will participate in funding the remediation and their respective allocations have not been determined. We do not agree that a bank-to-bank remedy is warranted, and we are not obligated to fund any of the remedial action at this time; nevertheless, we previously estimated the cost to be incurred by us as a potential participant in a bank-to-bank dredging remedy and recorded an immaterial loss for this matter in 2015.

■ TEXAS BRINE MATTER (DISCONTINUED OPERATIONS) — During the operation of its former Chemicals Division, Vulcan secured the right to mine salt out of an underground salt dome formation in Assumption Parish, Louisiana from 1976 - 2005. Throughout that period and for all times thereafter, the Texas Brine Company (Texas Brine) was the operator contracted by Vulcan (and later Occidental) to mine and deliver the salt. We sold our Chemicals Division in 2005 and transferred our rights and interest related to the salt and mining operations to the purchaser, a subsidiary of Occidental, and we have had no association with the leased premises or Texas Brine since that time. In August 2012, a sinkhole developed in the vicinity of the Texas Brine mining operations, and numerous lawsuits were filed in state court in Assumption Parish, Louisiana. Other lawsuits, including class action litigation, were also filed in federal court before the Eastern District of Louisiana in New Orleans.

There are numerous defendants, including Texas Brine and Occidental, to the litigation in state and federal court. Vulcan was first brought into the litigation as a third-party defendant in August 2013 by Texas Brine. We were then added as a direct and third-party defendant by other parties, including a direct claim by the state of Louisiana. Damage categories encompassed within the litigation have included individual plaintiffs’ claims for property damage, a claim by the State of Louisiana for response costs and civil penalties, claims by Texas Brine for response costs and lost profits, claims for physical damages to nearby oil and gas pipelines and storage facilities (pipelines), and business interruption claims.

In addition to the plaintiffs’ claims, we were also sued for contractual indemnity and comparative fault by both Texas Brine and Occidental. It was alleged that the sinkhole was caused, in whole or in part, by our negligent actions or failure to act. It was also alleged that we breached the salt lease with Occidental, as well as an operating agreement and related contracts with Texas Brine; that we were strictly liable for certain property damages in our capacity as a former lessee of the salt lease; and that we violated certain covenants and conditions in the agreement under which we sold our Chemicals Division to Occidental. We likewise made claims for contractual indemnity and on a basis of comparative fault against Texas Brine and Occidental. Vulcan and Occidental have since dismissed all of their claims against one another. Texas Brine has claims that remain pending against Vulcan and against Occidental.

A bench trial (judge only) began in September 2017 and ended in October 2017 in the pipeline cases. The trial was limited in scope to the allocation of comparative fault or liability for causing the sinkhole, with a damages phase of the trial to be held at a later date. In December 2017, the judge issued a ruling on the allocation of fault among the three defendants as follows: Occidental 50%, Texas Brine 35% and Vulcan 15%. This ruling has been appealed by the parties.

We have settled all but two outstanding cases and our insurers have funded these settlements in excess of our self-insured retention amount. The remaining cases involve Texas Brine and the State of Louisiana. Discovery remains ongoing and we cannot reasonably estimate a range of liability pertaining to these open cases at this time.

■ NEW YORK WATER DISTRICT CASES (DISCONTINUED OPERATIONS) — During the operation of our former Chemicals Division, which was divested to Occidental in 2005, Vulcan manufactured a chlorinated solvent known as 1,1,1-trichloroethane. We are a defendant in eleven cases allegedly involving 1,1,1-trichloroethane. All of the cases are filed in the United States District Court for the Eastern District of New York. According to the various complaints, the plaintiffs are public drinking water providers who serve customers in Nassau County and Suffolk County, New York. It is alleged that our 1,1,1-trichloroethane was stabilized with 1,4-dioxane and that various water wells of the plaintiffs are contaminated with 1,4-dioxane. The cases, against us and other defendants, have been filed by the following plaintiffs: Albertson Water District, Carle Place Water District, Garden City Park Water District, Jericho Water District, Manhasset-Lakeview Water District, Oyster Bay Water District, Port Washington Water District, Roslyn Water District, Suffolk County Water Authority, Water Authority of Great Neck North, and the West Hempstead Water District (collectively, the Cases). The plaintiffs are seeking unspecified compensatory and punitive damages. We will vigorously defend the Cases. At this time we cannot determine the likelihood or reasonably estimate a range of loss, if any, pertaining to the Cases.



Part II	105

■ HEWITT LANDFILL MATTER (SUPERFUND SITE) — In September 2015, the Los Angeles Regional Water Quality Control Board (RWQCB) issued a Cleanup and Abatement Order (CAO) directing Vulcan to assess, monitor, cleanup and abate wastes that have been discharged to soil, soil vapor, and/or groundwater at the former Hewitt Landfill in Los Angeles. The CAO follows a 2014 Investigative Order from the RWQCB that sought data and a technical evaluation regarding the Hewitt Landfill, and a subsequent amendment to the Investigative Order requiring us to provide groundwater monitoring results to the RWQCB and to create and implement a work plan for further investigation of the Hewitt Landfill. In April 2016, we submitted an interim remedial action plan (IRAP) to the RWQCB, proposing an on-site pilot test of a pump and treat system for groundwater; testing and implementation of a leachate recovery system; and storm water capture and conveyance improvements.

Operation of the on-site pilot-scale treatment system began in January 2017 and was completed in April 2017. With completion of the pilot testing and other investigative work, we submitted an amendment to the IRAP (AIRAP) to RWQCB in August 2017 proposing the use of a pump, treat and reinjection system. In December 2017, we submitted an addendum to the AIRAP, incorporating new data acquired since the prior submission. In February 2018, the AIRAP was approved by RWQCB. As a result of this approval, we have begun to implement the on-site source control activities described in the AIRAP, including procurement of vendors to perform the work and additional bench scale testing of the treatment system, which indicated that additional pre and post treatment of the water would be required. Based on the proposals from contractors for construction, operation and maintenance of the facility, we accrued an additional $10,392,000 of other operating expense during the fourth quarter of 2018, bringing the year-to-date and life-to-date total accruals for the on-site system to $19,032,000 and $34,271,000, respectively.

We are also engaged in an ongoing dialogue with the EPA, the Los Angeles Department of Water and Power, and other stakeholders regarding the potential contribution of the Hewitt Landfill to groundwater contamination in the North Hollywood Operable Unit (NHOU) of the San Fernando Valley Superfund Site. We are gathering and analyzing data and developing technical information to determine the extent of possible contribution by the Hewitt Landfill to the groundwater contamination in the area. This work is also intended to assist in identification of other PRPs that may have contributed to groundwater contamination in the area.

The EPA and Vulcan entered into an AOC and Statement of Work having an effective date of September 2017 for the design of two extraction wells south of the Hewitt Site to protect the North Hollywood West (NHW) well field. In November 2017, we submitted a Pre-Design Investigation (PDI) Work Plan to the EPA, which sets forth the activities and schedule for our evaluation of the need for a two-well remedy. These activities were completed between the first and third quarters of 2018, and in December 2018 we submitted a PDI Evaluation Report to the EPA. The PDI Evaluation Report summarizes data collection activities conducted pursuant to the PDI Work Plan, and provides model updates and evaluation of remediation alternatives to protect the NHW and Rinaldi-Toluca well fields from 1,4-dioxane from the Hewitt Site. Vulcan has not yet received comments or feedback from the EPA or the Regional Board on the report. Until the EPA’s review of the PDI Evaluation Report is complete and an effective remedy can be agreed upon, we cannot identify an appropriate remedial action. Given the various stakeholders involved and the uncertainties relating to issues such as testing, monitoring, and remediation alternatives, we cannot reasonably estimate a loss pertaining to this matter.

■ NAFTA ARBITRATION — In September 2018, our subsidiary Legacy Vulcan, LLC (Legacy Vulcan), on its own behalf, and on behalf of our Mexican subsidiary Calizas Industriales del Carmen, S.A. de C.V. (Calica), served the United Mexican States (Mexico) a Notice of Intent to Submit a Claim to Arbitration under Chapter 11 of the North American Free Trade Agreement (NAFTA). Our NAFTA claim relates to the treatment of a portion of our quarrying operations in the State of Quintana Roo, in Mexico’s Yucatan Peninsula, arising from, among other measures, Mexico’s failure to comply with a legally binding zoning agreement and to other unfair, arbitrary and capricious actions by Mexico’s environmental enforcement agency. We assert that these actions are in breach of Mexico’s international obligations under NAFTA and international law.

As required by Article 1118 of NAFTA, we sought to settle this dispute with Mexico through consultations. Notwithstanding our good faith efforts to resolve the dispute amicably, we were unable to do so and filed a Request for Arbitration, which we filed with the International Centre for Settlement of Investment Disputes (ICSID) in December 2018. In January 2019, ICSID registered our Request for Arbitration.

We expect that the NAFTA arbitration will take at least two years to be concluded. At this time, there can be no assurance whether we will be successful in our NAFTA claim, and we cannot quantify the amount we may recover, if any, under this arbitration proceeding if we were successful.



Part II	106

It is not possible to predict with certainty the ultimate outcome of these and other legal proceedings in which we are involved and a number of factors, including developments in ongoing discovery or adverse rulings, or the verdict of a particular jury, could cause actual losses to differ materially from accrued costs. No liability was recorded for claims and litigation for which a loss was determined to be only reasonably possible or for which a loss could not be reasonably estimated. Legal costs incurred in defense of lawsuits are expensed as incurred. In addition, losses on certain claims and litigation described above may be subject to limitations on a per occurrence basis by excess insurance, as described in Note 1 under the caption Claims and Litigation Including Self-insurance.

NOTE 13: EQUITY

Our capital stock consists solely of common stock, par value $1.00 per share. Holders of our common stock are entitled to one vote per share. Our Certificate of Incorporation also authorizes 5,000,000 shares of preferred stock, of which no shares have been issued. The terms and provisions of such shares will be determined by our Board of Directors upon any issuance of preferred shares in accordance with our Certificate of Incorporation.

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

Our common stock purchases (all of which were open market purchases) and subsequent retirements for the years ended December 31 are summarized 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

As of December 31, 2018, 8,297,789 shares may be purchased under the current authorization of our Board of Directors.

Dividends were as follows:



in thousands, except per share data	2018	2017	2016
Dividends
Cash dividends	$ 148,109	$ 132,335	$ 106,333
Cash dividends per share	$ 1.12	$ 1.00	$ 0.80



Part II	107

NOTE 14: OTHER COMPREHENSIVE INCOME

Comprehensive income comprises two subsets: net earnings and other comprehensive income (OCI). The components of other comprehensive income are presented in the accompanying Consolidated Statements of Comprehensive Income and Consolidated Statements of Equity, net of applicable taxes.

Amounts in accumulated other comprehensive income (AOCI), net of tax, at December 31, are as follows:



in thousands	2018	2017	2016
AOCI
Interest rate hedges	$ (11,180)	$ (11,438)	$ (13,300)
Pension and postretirement plans	(161,035)	(138,028)	(126,076)
Total	$ (172,215)	$ (149,466)	$ (139,376)

Changes in AOCI, net of tax, for the three years ended December 31, 2018 are as follows:



		Pension and
	Interest Rate	Postretirement
in thousands	Hedges	Benefit Plans	Total
AOCI
Balances at December 31, 2015	$ (14,494)	$ (105,575)	$ (120,069)
Other comprehensive income (loss)
before reclassifications	0	(20,583)	(20,583)
Amounts reclassified from AOCI	1,194	82	1,276
Net OCI changes	1,194	(20,501)	(19,307)
Balances at December 31, 2016	$ (13,300)	$ (126,076)	$ (139,376)
Other comprehensive income (loss)
before reclassifications	0	(14,106)	(14,106)
Amounts reclassified from AOCI	1,862	2,154	4,016
Net OCI changes	1,862	(11,952)	(10,090)
Balances at December 31, 2017	$ (11,438)	$ (138,028)	$ (149,466)
Released stranded tax effects ASU 2018-02 (Note 9)	(2,464)	(27,165)	(29,629)
Balances at January 1, 2018, due to reclassification	$ (13,902)	$ (165,193)	$ (179,095)
Other comprehensive income (loss)
before reclassifications	2,496	(207)	2,289
Amounts reclassified from AOCI	226	4,365	4,591
Net OCI changes	2,722	4,158	6,880
Balances at December 31, 2018	$ (11,180)	$ (161,035)	$ (172,215)

Amounts reclassified from AOCI to earnings, are as follows:



in thousands	2018	2017	2016
Amortization of Interest Rate Hedge Losses
Interest expense	$ 306	$ 3,070	$ 2,008
Benefit from income taxes	(80)	(1,208)	(814)
Total	$ 226	$ 1,862	$ 1,194
Amortization of Pension and Postretirement Plan
Actuarial Loss and Prior Service Cost
Other nonoperating income	$ 5,906	$ 2,915	$ 134
Benefit from income taxes	(1,541)	(761)	(52)
Total	$ 4,365	$ 2,154	$ 82
Total reclassifications from AOCI to earnings	$ 4,591	$ 4,016	$ 1,276



Part II	108

NOTE 15: SEGMENT REPORTING

We have four operating (and reportable) segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. Management reviews earnings from the product line reporting segments principally at the gross profit level.

The Aggregates segment produces and sells aggregates (crushed stone, sand and gravel, sand, and other aggregates) and related products and services. During 2018, the Aggregates segment principally served markets in twenty states, Washington D.C., Mexico and the Bahamas with a full line of aggregates, and nine additional states with railroad ballast. Customers use aggregates primarily in the construction and maintenance of highways, streets and other public works and in the construction of housing and commercial, industrial and other nonresidential facilities. Customers are served by truck, rail and water distribution networks from our production facilities and sales yards. Due to the high weight-to-value ratio of aggregates, markets generally are local in nature. Quarries located on waterways and rail lines allow us to serve remote markets where local aggregates reserves may not be available.

The Asphalt segment produces and sells asphalt mix in six states: Alabama, Arizona, California, New Mexico, Tennessee and Texas, and includes asphalt construction paving in three states: Alabama, Tennessee and Texas. We entered the Alabama and Tennessee asphalt markets in 2018 and 2017, respectively, through acquisitions (see Note 19).

The Concrete segment produces and sells ready-mixed concrete in five states, Washington D.C. and an immaterial amount in the Bahamas. In 2018, we exited the Georgia ready-mixed concrete market through a divestiture (see Note 19). In 2017, we reentered the California ready-mixed concrete market through an acquisition and exited the Arizona market through a swap (see Note 19).

The Calcium segment consists of a Florida facility that mines, produces and sells calcium products.

Aggregates comprise approximately 95% of asphalt mix by weight and 80% of ready-mixed concrete by weight. Our Asphalt and Concrete segments are primarily supplied with their aggregates requirements from our Aggregates segment. These intersegment sales are made at local market prices for the particular grade and quality of product used in the production of asphalt mix and ready-mixed concrete. Customers for our Asphalt and Concrete segments are generally served locally at our production facilities or by truck. Because asphalt mix and ready-mixed concrete harden rapidly, delivery is time constrained and generally confined to a radius of approximately 20 to 25 miles from the producing facility.

The vast majority of our activities are domestic. We sell a relatively small amount of construction aggregates outside the United States. Total domestic revenues were $4,365,309,000 in 2018, $3,872,494,000 in 2017 and $3,579,427,000 in 2016. Nondomestic Aggregates segment revenues were $17,560,000 in 2018, $17,802,000 in 2017 and $13,240,000 in 2016; there were no significant nondomestic revenues in our Asphalt, Concrete or Calcium segments. Long-lived assets outside the United States, which consist primarily of property, plant & equipment, were $278,520,000 in 2018, $211,282,000 in 2017 and $188,652,000 in 2016. Equity method investments of $39,395,000 in 2018, $22,967,000 in 2017 and $22,965,000 in 2016 are included below in the identifiable assets for the Aggregates segment and in investments and long-term receivables on the accompanying Consolidated Balance Sheets.



Part II	109

SEGMENT FINANCIAL DISCLOSURE



in thousands	2018	2017	2016
Total Revenues
Aggregates 1	$ 3,513,649	$ 3,096,094	$ 2,961,835
Asphalt 2	733,182	622,074	512,310
Concrete	401,999	417,745	330,125
Calcium	8,110	7,740	8,860
Segment sales	$ 4,656,940	$ 4,143,653	$ 3,813,130
Aggregates intersegment sales	(274,071)	(253,357)	(220,463)
Total revenues	$ 4,382,869	$ 3,890,296	$ 3,592,667
Gross Profit
Aggregates 3	$ 991,858	$ 854,524	$ 863,811
Asphalt 3	56,480	91,313	96,608
Concrete 3	49,893	45,201	24,992
Calcium	2,714	2,475	3,474
Total	$ 1,100,945	$ 993,513	$ 988,885
Depreciation, Depletion, Accretion and Amortization (DDA&A)
Aggregates	$ 281,641	$ 245,151	$ 236,472
Asphalt	31,290	25,400	16,797
Concrete	12,539	13,822	12,129
Calcium	272	677	774
Other	20,504	20,915	18,768
Total	$ 346,246	$ 305,965	$ 284,940
Capital Expenditures 4
Aggregates	$ 422,175	$ 421,989	$ 297,737
Asphalt	38,154	12,970	29,002
Concrete	12,291	25,176	10,047
Calcium	22	78	534
Corporate	2,587	4,020	7,621
Total	$ 475,229	$ 464,233	$ 344,941
Identifiable Assets 5
Aggregates	$ 8,887,749	$ 8,409,505	$ 7,589,225
Asphalt	527,226	426,575	259,514
Concrete	266,581	271,818	192,673
Calcium	3,942	4,428	4,959
Total identifiable assets	$ 9,685,498	$ 9,112,326	$ 8,046,371
General corporate assets	102,228	245,919	157,085
Cash and cash equivalents and restricted cash	44,404	146,646	268,019
Total assets	$ 9,832,130	$ 9,504,891	$ 8,471,475


1	Includes product sales, as well as freight & delivery costs that we pass along to our customers, and service revenues (see Note 2) related to aggregates.
2	Includes product sales, as well as service revenues (see Note 2) from our asphalt construction paving business.
3	The 2017 and 2016 amounts have been revised as a result of our adoption of ASU 2017-07 as described in Note 1 under the captions New Accounting Standards and Accounting Standards Recently Adopted.
4	Capital expenditures include capitalized replacements of and additions to property, plant & equipment, including capitalized leases, renewals and betterments. Capital expenditures exclude property, plant & equipment obtained by business acquisitions.
5	Certain temporarily idled assets are included within a segment's Identifiable Assets but the associated DDA&A is shown within Other in the DDA&A section above as the related DDA&A is excluded from segment gross profit.



Part II	110

NOTE 16: SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental information referable to the Consolidated Statements of Cash Flows is summarized below:



in thousands	2018	2017	2016
Cash Payments
Interest (exclusive of amount capitalized)	$ 128,217	$ 285,801	$ 135,039
Income taxes	(65,968)	125,135	102,849
Noncash Investing and Financing Activities
Accrued liabilities for purchases of property,
plant & equipment	$ 37,116	$ 31,267	$ 26,676
Amounts referable to business acquisitions
Liabilities assumed 1	5,405	3,876	798
Consideration payable to seller	4,500	9,681	0
Fair value of noncash assets and liabilities exchanged	0	9,900	0


1	The 2018 amount includes adjustments to 2017 acquisitions.

NOTE 17: ASSET RETIREMENT OBLIGATIONS

Asset retirement obligations (AROs) are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. Recognition of a liability for an ARO is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses.

We record all AROs for which we have legal obligations for land reclamation at estimated fair value. These AROs relate to our underlying land parcels, including both owned properties and mineral leases. For the years ended December 31, we recognized ARO operating costs related to accretion of the liabilities and depreciation of the assets as follows:



in thousands	2018	2017	2016
ARO Operating Costs
Accretion	$ 10,776	$ 11,415	$ 11,059
Depreciation	6,034	6,302	6,353
Total	$ 16,810	$ 17,717	$ 17,412

ARO operating costs are reported in cost of revenues. AROs are reported within other noncurrent liabilities in our accompanying Consolidated Balance Sheets.

Reconciliations of the carrying amounts of our AROs for the years ended December 31 are as follows:



in thousands	2018	2017
Asset Retirement Obligations
Balance at beginning of year	$ 218,117	$ 223,872
Liabilities incurred	20	1,920
Liabilities settled	(13,558)	(21,477)
Accretion expense	10,776	11,415
Revisions, net	10,371	2,387
Balance at end of year	$ 225,726	$ 218,117

ARO liabilities settled during 2018 and 2017 include $6,934,000 and $11,578,000, respectively, of reclamation activities required under a development agreement and conditional use permits at two adjacent aggregates sites on owned property in Southern California. The reclamation required under the development agreement will result in the restoration of 90 acres of previously mined property to conditions suitable for commercial and retail development.



Part II	111

NOTE 18: GOODWILL AND INTANGIBLE ASSETS

Acquired identifiable intangible assets are classified into three categories: (1) goodwill, (2) intangible assets with finite lives subject to amortization and (3) intangible assets with indefinite lives. Goodwill and intangible assets with indefinite lives are not amortized; rather, they are reviewed for impairment at least annually. For additional information about our policies on impairment reviews, see Note 1 under the captions Goodwill Impairment, and Impairment of Long-lived Assets excluding Goodwill.

GOODWILL

Goodwill is recognized when the consideration paid for a business exceeds the fair value of the tangible and identifiable intangible assets acquired. Goodwill is allocated to reporting units for purposes of testing goodwill for impairment. There were no charges for goodwill impairment in the years ended December 31, 2018, 2017 and 2016. Accumulated goodwill impairment losses amount to $252,664,000 in the Calcium segment.

We have four reportable segments organized around our principal product lines: Aggregates, Asphalt, Concrete and Calcium. Changes in the carrying amount of goodwill by reportable segment for the three years ended December 31, 2018 are as follows:



in thousands	Aggregates	Asphalt	Concrete	Calcium	Total
Goodwill
Totals at December 31, 2016	$ 3,003,191	$ 91,633	$ 0	$ 0	$ 3,094,824
Goodwill of acquired businesses 1	27,497	0	0	0	27,497
Totals at December 31, 2017	$ 3,030,688	$ 91,633	$ 0	$ 0	$ 3,122,321
Goodwill of acquired businesses 1	43,075	0	0	0	43,075
Totals at December 31, 2018	$ 3,073,763	$ 91,633	$ 0	$ 0	$ 3,165,396


1	See Note 19 for a summary of acquisitions.

We test goodwill for impairment on an annual basis or more frequently if events or circumstances change in a manner that would more likely than not reduce the fair value of a reporting unit below its carrying value. A decrease in the estimated fair value of one or more of our reporting units could result in the recognition of a material, noncash write-down of goodwill.

INTANGIBLE ASSETS

Intangible assets acquired in business combinations are stated at their fair value determined as of the date of acquisition. Costs incurred to renew or extend the life of existing intangible assets are capitalized. These capitalized renewal/extension costs were immaterial for the years presented. Intangible assets consist of contractual rights in place (primarily permitting and zoning rights), noncompetition agreements, favorable lease agreements, customer relationships and trade names and trademarks. Intangible assets acquired individually or otherwise obtained outside a business combination consist primarily of permitting, permitting compliance and zoning rights and are stated at their historical cost less accumulated amortization.

See Note 19 for the details of the intangible assets acquired in business acquisitions during 2018, 2017 and 2016. Amortization of finite-lived intangible assets is computed based on the estimated life of the intangible assets. Contractual rights in place associated with aggregates reserves are amortized using the unit-of-sales method based on estimated recoverable units. Other intangible assets are amortized principally by the straight-line method. Intangible assets are reviewed for impairment when events or circumstances indicate that the carrying amount may not be recoverable. There were no charges for impairment of intangible assets in 2018 and 2017. During 2016, we incurred $8,180,000 of impairment charges related to intangible Aggregates segment assets.



Part II	112

The gross carrying amount and accumulated amortization by major intangible asset class for the years ended December 31 are summarized below:



in thousands	2018	2017
Gross Carrying Amount
Contractual rights in place	$ 1,107,838	$ 1,050,816
Noncompetition agreements	7,667	7,067
Favorable lease agreements	9,479	9,479
Permitting, permitting compliance and zoning rights	126,538	119,002
Other 1	4,517	4,616
Total gross carrying amount	$ 1,256,039	$ 1,190,980
Accumulated Amortization
Contractual rights in place	$ (122,100)	$ (94,534)
Noncompetition agreements	(4,212)	(2,440)
Favorable lease agreements	(3,533)	(3,179)
Permitting, permitting compliance and zoning rights	(27,464)	(24,352)
Other 1	(3,352)	(2,845)
Total accumulated amortization	$ (160,661)	$ (127,350)
Total Intangible Assets Subject to Amortization, net	$ 1,095,378	$ 1,063,630
Intangible Assets with Indefinite Lives	0	0
Total Intangible Assets, net	$ 1,095,378	$ 1,063,630
Amortization Expense for the Year	$ 34,924	$ 23,765


1	Includes customer relationships and tradenames and trademarks.

Estimated amortization expense for the five years subsequent to December 31, 2018 is as follows:



in thousands
Estimated Amortization Expense for Five Subsequent Years
2019	$ 34,973
2020	33,698
2021	31,695
2022	29,146
2023	28,635



Part II	113

NOTE 19: ACQUISITIONS AND DIVESTITURES

BUSINESS ACQUISITIONS

2018 business acquisitions — During 2018, we purchased the following operations for total consideration of $219,863,000 ($215,363,000 cash and $4,500,000 payable):

	§		Alabama — aggregates, asphalt mix and construction paving operations

	§		California — aggregates and asphalt mix operations

	§		Texas — aggregates rail yards, asphalt mix and construction paving operations

The 2018 acquisitions listed above are reported in our consolidated financial statements as of their respective acquisition dates. None of these acquisitions are material to our results of operations or financial position either individually or collectively. The fair value of consideration transferred for these business acquisitions and the preliminary amounts assigned (pending appraisals of contractual rights in place and property, plant & equipment) to assets acquired and liabilities assumed, are summarized below:



in thousands				2018
Fair Value of Purchase Consideration
Cash				$ 215,363
Payable to seller				4,500
Total fair value of purchase consideration				$ 219,863
Identifiable Assets Acquired and Liabilities Assumed
Accounts and notes receivable, net				$ 15,402
Inventories				11,874
Other current assets				661
Property, plant & equipment				150,274
Other intangible assets
Contractual rights in place				44,163
Deferred income taxes, net				(32,871)
Liabilities assumed				(11,965)
Net identifiable assets acquired				$ 177,538
Goodwill				$ 42,325

As a result of the 2018 acquisitions, we recognized $44,163,000 of amortizable intangible assets (contractual rights in place). The contractual rights in place will be amortized against earnings ($43,072,000 - straight-line over a weighted-average 19.9 years and $1,080,000 - units of sales in excess of 30.0 years) and $7,385,000 will be deductible for income tax purposes over 15 years. Of the $42,325,000 of goodwill recognized, $4,468,000 will be deductible for income tax purposes over 15 years, and $32,871,000 represents the balance of deferred tax liabilities generated from carrying over the seller’s tax basis in the assets acquired.



Part II	114

2017 business acquisitions — During 2017 (excluding the assets immediately divested in the December 2017 Aggregates USA acquisition for $287,292,000), we purchased the following operations related to material business acquisitions for total consideration of $793,523,000:

	§		California — aggregates and ready-mixed concrete operations

	§		Florida — aggregates operations

	§		Georgia — aggregates operations

	§		South Carolina — aggregates operations

	§		Tennessee — asphalt mix and construction paving operations

The amounts of total revenues and net earnings for the material business acquisitions noted above are included in our Consolidated Statement of Comprehensive Income for the year ended December 31, 2017, as follows:



in thousands				2017
Actual Results
Total revenues				$ 162,462
Net earnings				11,830

The unaudited pro forma financial information in the table below summarizes the results of operations for Vulcan and these material business acquisitions as if they were combined as of January 1, 2016. The 2016 financial information does not reflect any cost savings, operating efficiencies or synergies as a result of these combinations. Transactions between Vulcan and these businesses during the periods presented in the pro forma financial information were immaterial and have been eliminated as if the companies were consolidated affiliates during the following periods:



in thousands	2017	2016
Supplemental Pro Forma Results
Total revenues	$ 4,015,891	$ 3,882,257
Net earnings	610,494	433,431

The unaudited pro forma results above may not be indicative of the results that would have been obtained had these acquisitions occurred at the beginning of 2016, nor does it intend to be a projection of future results.

The fair value of consideration transferred for these material business acquisitions and the preliminary amounts assigned as of December 31, 2017 (immaterial adjustments were recorded in 2018 including an increase to goodwill of $750,000) to assets acquired and liabilities assumed, are summarized below:



in thousands				2017
Fair Value of Purchase Consideration
Cash				$ 1,072,978
Payable to seller				7,837
Total fair value of purchase consideration				$ 1,080,815
Identifiable Assets Acquired and Liabilities Assumed
Accounts and notes receivable, net				$ 14,955
Inventories				21,679
Other current assets				608
Investments				3,590
Property, plant & equipment				433,606
Other intangible assets
Contractual rights in place				295,482
Liabilities assumed				(3,894)
Net identifiable assets acquired and retained				$ 766,026
Goodwill				$ 27,497
Net Assets Divested Immediately Upon Acquisition				$ 287,292



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Additionally, during 2017 we acquired the following operations related to immaterial business acquisitions for $48,490,000 of consideration ($36,746,000 cash, $1,844,000 payable and $9,900,000 of fair value of assets swapped):

	§		Arizona — asphalt mix operations

	§		Illinois — aggregates operations

	§		New Mexico — aggregates operations

	§		Tennessee — aggregates operations

	§		Virginia — aggregates and ready-mixed concrete operations

As a collective result of the 2017 acquisitions, we recognized $309,112,000 of amortizable intangible assets (primarily contractual rights in place).The contractual rights in place will be amortized against earnings ($73,879,000 - straight-line over a weighted-average 19.3 years and $235,133,000 - units of sales over an estimated 54.7 years) and deductible for income tax purposes over 15 years. Of the $28,247,000 of goodwill recognized, all will be deductible for income tax purposes over 15 years.

2016 business acquisitions — During 2016, the following operations were acquired for $33,287,000 of consideration ($32,537,000 cash and $750,000 payable):

	§		Georgia — aggregates distribution and logistical operations

	§		New Mexico — asphalt mix operations

	§		Texas — aggregates operations

None of the 2016 acquisitions listed above are material to our results of operations or financial position either individually or collectively. As a result of these 2016 acquisitions, we recognized $16,670,000 of amortizable intangible assets ($15,213,000 contractual rights in place and $1,457,000 of noncompetition agreement).The contractual rights in place will be amortized against earnings ($6,798,000 - straight-line over 20 years and $8,415,000 - units of sales over an estimated 20 years) and deductible for income tax purposes over 15 years.

DIVESTITURES AND PENDING DIVESTITURES

In 2018, we sold:

	§		First quarter — ready-mixed concrete operations in Georgia resulting in a pretax gain of $2,929,000 (we retained all real property which is leased to the buyer, and obtained a long-term aggregates supply agreement)

In 2017, we sold:

	§		Fourth quarter — swapped ready-mixed concrete operations in Arizona (fair value of $9,900,000 and book value of $1,879,000) for asphalt mix operations in Arizona resulting in a pretax gain of $8,021,000

	§		Fourth quarter — as required by the Department of Justice, we immediately divested certain assets obtained in the Aggregates USA acquisition resulting in no gain

In 2016, we sold:

	§		Fourth quarter — surplus land in California and Virginia for net pretax cash proceeds of $19,185,000 resulting in pretax gains of $11,871,000

	§		Fourth quarter — plant relocation reimbursement in Virginia for net pretax cash proceeds of $6,000,000 resulting in a pretax gain of $4,335,000 (this item is presented within other operating expense in the accompanying Consolidated Statement of Comprehensive Income)

No assets met the criteria for held for sale at December 31, 2018, 2017 or 2016.



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NOTE 20: UNAUDITED SUPPLEMENTARY DATA

The following is a summary of selected quarterly financial information (unaudited) for each of the years ended December 31, 2018 and 2017:



	2018
	Three Months Ended
in thousands, except per share data	March 31	June 30	Sept 30	Dec 31
Total revenues	$ 854,474	$ 1,200,151	$ 1,240,197	$ 1,088,047
Gross profit	159,334	323,184	343,142	275,285
Operating earnings	81,195	230,843	249,184	186,491
Earnings from continuing operations	53,395	160,302	179,864	124,280
Net earnings	52,979	159,652	179,151	124,023
Basic earnings per share from continuing operations	$ 0.40	$ 1.21	$ 1.36	$ 0.94
Diluted earnings per share from continuing operations	$ 0.40	$ 1.20	$ 1.34	$ 0.93
Basic net earnings per share	$ 0.40	$ 1.21	$ 1.35	$ 0.94
Diluted net earnings per share	$ 0.39	$ 1.19	$ 1.34	$ 0.93



	2017
	Three Months Ended
in thousands, except per share data	March 31	June 30	Sept 30	Dec 31
Total revenues	$ 787,328	$ 1,030,763	$ 1,094,715	$ 977,490
Gross profit	158,221	290,017	303,758	241,517
Operating earnings	70,388	191,976	227,478	149,202
Earnings from continuing operations	43,523	111,749	110,150	327,969
Net earnings	44,921	120,139	108,579	327,546
Basic earnings per share from continuing operations	$ 0.33	$ 0.84	$ 0.83	$ 2.47
Diluted earnings per share from continuing operations	$ 0.32	$ 0.83	$ 0.82	$ 2.43
Basic net earnings per share	$ 0.34	$ 0.91	$ 0.82	$ 2.47
Diluted net earnings per share	$ 0.33	$ 0.89	$ 0.81	$ 2.43



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