Vulcan Materials CO (VMC) FY 2022 MD&A

ITEM 7

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

The objective of our management’s discussion and analysis is to help investors understand our operations and current business environment from the perspective of our management. The following discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained in this Annual Report. The following generally includes a comparison of our results of operations and liquidity and capital resources for 2022 and 2021. For the discussion of changes from 2020 to 2021 and other financial information related to 2020, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission on February 25, 2022.

EXECUTIVE SUMMARY

FINANCIAL SUMMARY FOR 2022 (compared to 2021)

Total revenues increased $1,763.0 million, or 32%, to $7,315.2 million

Gross profit increased $184.3 million, or 13%, to $1,557.7 million

Selling, administrative and general (SAG) expenses increased 23% to $515.1 million and decreased 0.5 percentage point (50 basis points) as a percentage of total revenues

Operating earnings decreased $59.4 million, or 6%, to $951.4 million

Earnings attributable to Vulcan from continuing operations were $4.45 per diluted share, compared to $5.05 per diluted share

Adjusted earnings attributable to Vulcan from continuing operations were $5.11 per diluted share, compared to $5.04 per diluted share

Net earnings attributable to Vulcan were $575.6 million, a decrease of $95.2 million, or 14%

Adjusted EBITDA was $1,625.6 million, an increase of $174.3 million, or 12%

Aggregates segment sales increased $927.8 million, or 21%, to $5,272.8 million

Aggregates segment freight-adjusted revenues increased $561.3 million, or 17%, to $3,875.2 million

Shipments increased 6%, or 13.5 million tons, to 236.3 million tons

Freight-adjusted sales price increased 10.3%, or $1.53 per ton to $16.40

Aggregates segment gross profit increased $112.8 million, or 9%, to $1,408.5 million

Unit profitability (as measured by gross profit per ton) increased 3% to $5.96 per ton

Asphalt, Concrete and Calcium segment sales increased $1,040.4 million, or 67%, to $2,591.9 million, collectively

Asphalt, Concrete and Calcium segment gross profit increased $71.5 million, or 92%, to $149.2 million, collectively

Returned capital to shareholders via dividends of $212.6 million @ $1.60 per share versus $196.4 million @ $1.48 per share

Our aggregates-led business delivered solid results in 2022 as our teams executed well in a challenging macro-environment. We continued to improve our aggregates unit profitability and demonstrate the resiliency of our business. While net earnings attributable to Vulcan were down 14%, our relentless focus on our operating disciplines coupled with nimble pricing actions to overcome inflationary pressures led to a 12% increase in our full year Adjusted EBITDA. We carry solid pricing momentum into 2023 and are focused on our operating disciplines to manage costs and improve efficiencies. By controlling what we can control, we expect to deliver another year of earnings growth.

At year-end 2022, total debt to Adjusted EBITDA was 2.4x (2.3x on a net debt basis). We remain committed to our stated long-term target leverage range of 2.0x to 2.5x total debt to Adjusted EBITDA.

Return on invested capital was 13.5% and we remain committed to driving further improvement through solid operating earnings growth coupled with disciplined capital management.

Adjusted EBITDA, Aggregates segment freight-adjusted revenues, net debt to Adjusted EBITDA and Return on invested capital are non-GAAP measures. See the definitions and reconciliations within this Item 7 under the caption “Reconciliation of Non-GAAP Financial Measures.”

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CAPITAL ALLOCATION

Our balanced approach to capital allocation remains unchanged. Through economic cycles we intend to balance reinvestment in our business, growth through acquisitions, and return of capital to shareholders while maintaining financial strength and flexibility evidenced by our strong balance sheet and investment-grade credit ratings. Our capital allocation priorities are as follows:

1.Operating Capital (maintain and grow the value of our franchise)

2.Growth Capital (including greenfields and acquisitions)

3.Dividend Growth (with a keen focus on sustainability)

4.Return Excess Cash to Shareholders (primarily via share repurchases)

Our first priority is to maintain and protect our valuable franchise by keeping our operations in good working order to ensure the production of high quality materials and timely delivery of goods and services to our customers. This capital requirement expands and contracts as production and shipment levels change. During 2022, we invested $380.1 million to replace or improve existing property, plant & equipment.

Our second priority is to grow our franchise through internal growth projects and business acquisitions. Internal growth projects have generally been among our highest returning projects. During 2022, we invested $232.5 million in internal growth projects to secure new aggregates reserves, develop new production and/or distribution sites, enhance our distribution capabilities and support the targeted growth of our asphalt and concrete operations. For business acquisitions, we tend to look for bolt-on acquisitions which are easy to integrate and will pursue large business combinations that are the right fit and the right price. During August 2021, we closed on one such large business combination (U.S. Concrete) for $1,634.5 million. We use strategic and returns-based criteria to price potential acquisitions and are disciplined in our approach. We look at a lot of potential acquisitions and only make offers on a few. We closed four business acquisitions during 2022 for total consideration of $594.6 million.

Our third priority is growing the dividend with a keen focus on sustainability through the economic cycle. During 2022, we paid a dividend per share of $1.60 and paid total dividends of $212.6 million.

And finally, if there is excess cash after fulfilling the prior capital allocation priorities, we will consider returning cash to shareholders via share repurchases. During 2022, we made no share repurchases.

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

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MARKET DEVELOPMENTS AND OUTLOOK

Most leading indicators of demand remain healthy in the near term, and we carry strong pricing momentum into 2023. Overall shipments will be dependent upon the depth and duration of the decline in residential construction activity, the timing of highway starts converting to aggregates shipments and the impact of rising interest rates on private nonresidential construction activity as the year progresses. We are encouraged by the strength in leading indicators that support growth in public construction activity, particularly highways, and we are well positioned to benefit in geographic markets where the need is greatest. On the private side, slowing single-family construction activity has outweighed continued growth in multi-family, leading to overall declines in residential demand. Nonresidential demand remains at healthy levels and continues to benefit from manufacturing and other heavy industrial projects. As always, we are focused on the things we can control, and our execution on our operating and commercial disciplines will lead to further improvement in our aggregates unit profitability and earnings growth in 2023.

Our expectations for 2023 include:

Continued acceleration in Aggregates segment cash gross profit per ton improvement ($7.83 in 2022)

Total shipments down 2% to 6% (236.3 million tons in 2022)

Freight-adjusted price growth of 11% to 13% ($16.40 per ton in 2022)

High-single digit increase in freight-adjusted cash cost (freight-adjusted price less segment cash gross profit per ton; $8.57 in 2022)

Total Asphalt, Concrete and Calcium segment cash gross profit collectively in line with 2022 ($268 million in 2022)

Asphalt segment improvement driven by low-single digit growth in volume and price. The price and cost inflection achieved in the second half of 2022 should lead to continued margin improvement in 2023. We expect the Asphalt segment to contribute approximately 40% to 50% of non-aggregates cash gross profit

Concrete segment same-store volumes (we divested approximately 2 million cubic yards in 2022) expected to decline mid-single digit due to slowing residential construction activity. Price growth should offset the higher cost for raw materials. We expect the Concrete segment to contribute approximately 50% to 60% of non-aggregates cash gross profit

SAG expenses of $515 million to $530 million

Interest expense of approximately $195 million

Depreciation, depletion, accretion and amortization expense of approximately $610 million

An effective tax rate of approximately 22%

Net earnings attributable to Vulcan of between $715 million and $835 million

Adjusted EBITDA of between $1,725 million and $1,875 million

Additionally, we expect to spend $600 million to $650 million on capital expenditures, including growth projects. We will continue to review our plans and will adjust as needed, while being thoughtful about preserving liquidity.

Mexico Update

On May 5, 2022, Mexican government officials presented employees at our Calica operations in Quintana Roo, Mexico, with arbitrary shut down orders to immediately cease underwater quarrying and extraction operations. On May 8, 2022, we filed an application in our North American Free Trade Agreement (NAFTA) arbitration seeking permission to file an ancillary claim in connection with this latest shutdown of our remaining Mexico operations. On July 11, 2022, the NAFTA arbitration tribunal granted our application. The ancillary claim will be addressed as part of the pending arbitration, and it is expected that the NAFTA arbitration tribunal will issue a decision no earlier than 2024.

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POSITIONED FOR GROWTH AND VALUE CREATION

DURABLE BUSINESS MODEL TO EXTEND THE CYCLE AND SUSTAIN GROWTH

7% improvement in Aggregates gross profit per ton since 2020

10% improvement in Aggregates cash gross profit per ton since 2020

Industry-leading commercial, logistics, operational and sourcing capabilities

End market fundamentals support continued growth outlook

Poised to benefit from generational investment in infrastructure that could extend and sustain cyclical growth

We have continued to deliver strong financial performance over time and through business cycles. Through our aggregates-led strategy and focus on our four strategic disciplines — commercial excellence, logistics innovation, operational excellence and strategic sourcing (as outlined in Item 1 “Business” under the “Business Strategy” heading) — we have created one of the most profitable public companies in our industry as measured by aggregates gross profit per ton.

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

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Transportation costs are passed along to our customers, and because aggregates have a very high weight-to-value ratio, those costs can add up quickly when transporting aggregates long distances. Having the most extensive distribution network of any aggregates producer sets us apart. Combining our trucking, rail, barge and ocean vessel shipping logistics capabilities allows us to provide better customer solutions and create a seamless customer experience at a competitive price. As an approximation, a truck has a capacity of 20-25 tons of aggregates; a railcar has a capacity of 4-5 truckloads; a barge has a capacity of 65 truckloads; and our ocean vessels have the capacity of 2,500 truckloads.

For additional information regarding our Calica operations in Mexico, see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data.”

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INDUSTRY LEADER WITH CLEAR COMPETITIVE ADVANTAGES

Largest U.S. aggregates producer with best geographic diversity

#1 or #2 aggregates position in markets accounting for approximately 90% of revenues

Leading unit profitability margins driven by operational expertise and pricing performance

75% of the U.S. population growth over the next decade is projected to occur in Vulcan-served states

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

Demand for aggregates correlates positively with changes in population growth, household formation and employment. We have a coast-to-coast footprint that serves 20 of the top 25 highest-growth metropolitan statistical areas (MSAs) and states where 75% of U.S. population growth from 2022 to 2032 is projected to occur. As state and federal spending increases, Vulcan is poised to benefit greatly from growing private and public demand for aggregates, thereby delivering significant long-term value for our shareholders.

Source: Woods & Poole CEDDS 2022

Based on people added from 2022 to 2032

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STRONG CASH FLOW GENERATION AND INVESTMENT-GRADE BALANCE SHEET

Financial capacity to sustain capital reinvestment in current asset base and to fund growth

Maintain an investment-grade credit position

Continue to leverage current capital base to grow earnings and maximize cash generation

Prudently pursue attractive bolt-on acquisitions and greenfields

Focus on continuing to return value to shareholders with dividends and repurchases

Our financial position is strong as evidenced by our long-term investment-grade credit ratings (Fitch BBB/Moody’s Baa2/Standard & Poor’s BBB+). At December 31, 2022, our available liquidity was $1,582.8 million, including $161.4 million of unrestricted cash on hand, significantly higher than our liquidity needs. Our leverage ratio, as measured by total debt to Adjusted EBITDA, has improved from 5.4x at December 31, 2013 to 2.4x at December 31, 2022 (our net debt to Adjusted EBITDA at December 31, 2022 was 2.3x), within our stated leverage target of 2.0 to 2.5x. Over that same period, we also improved the structure of our debt (average maturity from 7 years to 11 years) and reduced the cost of the debt (weighted average interest rate from 7.76% to 4.78%).

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SAFETY, HEALTH AND ENVIRONMENTAL PERFORMANCE

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

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

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

We focus on our environmental stewardship programs with the same intensity that we bring to our health and safety initiatives resulting in 98% citation-free inspections out of all 2022 federal and state environmental inspections. As an industry leader, our aim has always been to meet — and strive to exceed — all federal, state and local environmental regulations. However, environmental sustainability means looking beyond what is required of a company by governments and regulators. We continue to make progress on reducing our carbon footprint, increasing our energy efficiency, measuring and reducing our water use, and managing our land with biodiversity in mind. It’s the right thing to do for society, for our business and our stakeholders.

Our environmental stewardship commitment is designed to protect plant and animal species and habitats, as well as the air we breathe, the water we use and the planet we all share. Our environmental stewardship is reflected in our business strategy. In all parts of our company, from local operations to our corporate and regional offices to our international business and ocean-going shipping, we are focused on ensuring that our operations are efficient in ways that are economically and environmentally sustainable.

We lead community relations programs that serve our neighbors while ensuring that we grow and thrive in the communities where we operate. During 2022, we operated 40 certified wildlife habitat sites, the third largest number of sites in the nation, as certified by the Wildlife Habitat Council. In addition, we provided over 220 scholarships to students nationwide and emphasized diversity, equity and inclusion in our community outreach and contributions.

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

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RESULTS OF OPERATIONS

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

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

CONSOLIDATED OPERATING RESULTS HIGHLIGHTS

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Net earnings attributable to Vulcan for 2022 were $575.6 million ($4.31 per diluted share) compared to $670.8 million ($5.02 per diluted share) in 2021. Each year's results were impacted by discrete items, as follows:

Net earnings attributable to Vulcan for 2022 include:

pretax net gain of $6.1 million related to the sale of excess real estate and businesses

pretax charges of $67.8 million for goodwill and long-lived asset impairments related to the sale of businesses above

pretax charges of $3.1 million for divested operations

pretax charges of $10.6 million associated with non-routine business development

pretax charges of $7.2 million for managerial restructuring

$14.5 million of tax charges related to a Calica net operating loss (NOL) carryforward valuation allowance

Net earnings attributable to Vulcan for 2021 include:

pretax net gain of $114.7 million related to the sale of a reclaimed quarry in Southern California

pretax charges of $1.5 million for divested operations

pretax charges of $4.6 million associated with long-lived asset impairments

pretax charges of $34.4 million associated with non-routine business development

pretax charges of $15.0 million for managerial restructuring (related to U.S. Concrete)

$13.7 million of tax charges related to an increase in the Alabama NOL carryforward valuation allowance

pretax charges of $13.4 million for COVID-19 pandemic direct incremental costs

pretax charges of $12.1 million for pension settlement (see Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data”)

pretax interest charges of $9.4 million related to financing the U.S. Concrete acquisition

Adjusted for these discrete items, earnings attributable to Vulcan from continuing operations (Adjusted Diluted EPS) was $5.11 per diluted share for 2022 compared to $5.04 per diluted share for 2021.

EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

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

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OPERATING RESULTS BY SEGMENT

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

1. AGGREGATES

Our year-over-year aggregates shipments:

increased 6% in 2022

increased 7% in 2021

decreased 3% in 2020

Total aggregates shipments increased 6%, reflecting shipment contribution from acquisitions and healthy construction activity levels.

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

increased 10.3% in 2022

increased 3.0% in 2021

increased 3.2% in 2020

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The rate of pricing growth improved sequentially each quarter this year as a result of improvement in demand visibility. Freight-adjusted pricing increased 10.3% with growth widespread across our footprint.

Aggregates segment gross profit increased 9% to $1,408.5 million, or $5.96 per ton. Cash gross profit per ton improved 5% from the prior year to $7.83. The earnings improvement was widespread across our footprint and resulted from both volume and price growth, as well as effective cost management.

Double-digit price growth and solid operational execution helped offset a $104.4 million unfavorable impact from significantly higher diesel fuel costs and continued energy cost headwinds and inflationary pressures for many parts and supplies. Freight-adjusted unit cash cost of sales increased 15%, or $1.13 per ton. Excluding the impact of higher diesel fuel costs, freight-adjusted unit cash cost of sales increased 9%. Shipments were negatively impacted by the absence of tons available from our Mexico operations which were unexpectedly and arbitrarily shut down by the Mexican government in May of 2022 (for additional information, see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data”). Pricing momentum and a focus on our operating disciplines will help us manage costs and improve efficiencies in 2023.

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2. ASPHALT

Our year-over-year asphalt mix shipments:

increased 7% in 2022

decreased 4% in 2021

decreased 7% in 2020

Asphalt segment gross profit was $57.3 million, an increase of $36.1 million driven by robust pricing gains partially offset by a 36% increase in unit costs for liquid asphalt. Asphalt segment cash gross profit was $92.4 million, a 62% increase from the prior year. Asphalt pricing increased 21%, or $12.46 per ton. Volume improved 7% for the year, benefiting from solid growth in Arizona and California, our two largest asphalt markets, as well as growth from acquisitions completed during 2022.

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3. CONCRETE

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

increased 88% in 2022 1

increased 90% in 2021 1

decreased 5% in 2020

Concrete segment gross profit increased $35.0 million to $89.3 million, benefiting mostly from the earnings contribution of acquisitions. Cash gross profit increased $76.6 million to $172.4 million. Average selling prices increased 11%, partially offsetting higher raw materials, diesel and labor costs.

4. CALCIUM

Calcium segment gross profit increased $0.4 million from 2021 to $2.6 million.

In total, the 2022 gross profit contribution from our three non-aggregates (Asphalt, Concrete and Calcium) segments was $149.2 million, a $71.5 million or 92% increase from 2021.

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SELLING, ADMINISTRATIVE AND GENERAL (SAG) EXPENSES

in millions

As a percentage of total revenues, SAG expense was:

7.0% in 2022 — decreased 0.5 percentage points (50 basis points)

7.5% in 2021 — increased 0.10 percentage points (10 basis points)

7.4% in 2020 — decreased 0.10 percentage points (10 basis points)

Our comparative total company employment levels at year-end:

increased 6% in 2022

increased 26% in 2021

decreased 2% in 2020

The 2021 increase in our employment level was primarily the result of our August 2021 acquisition of U.S. Concrete (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”). As noted above, 2022 SAG expenses were $515.1 million or 7.0% as a percentage of total revenues, down from 7.5% in 2021. The current year includes a full year of overhead expenses associated with U.S. Concrete whereas the prior year only includes four months. Additionally, increased routine business development activities, more normalized travel expenses and travel related to U.S. Concrete integration activities contributed to the $97.5 million increase in SAG expenses. We remain focused on further leveraging our overhead cost structure.

GAIN ON SALE OF PROPERTY, PLANT & EQUIPMENT AND BUSINESSES

in millions

The 2022 gain on sale of property, plant & equipment and businesses of $10.7 million includes a pretax gain of $23.5 million from the sale of excess real estate in Southern California partially offset by a pretax loss of $17.4 million related to the sale of our concrete operations in New Jersey, New York and Pennsylvania. The 2021 gain on sale of property, plant & equipment and businesses of $120.1 million includes a pretax net gain of $114.7 from the sale of Southern California real estate (previously mined land that we reclaimed for commercial and retail development). We remain focused on our efforts to maximize the value of our portfolio of quarry operations as they move through their life-cycle of land management. For additional details, see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data.”

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LOSS ON IMPAIRMENTS

Loss on impairments was $67.9 million in 2022 which includes a $50.9 million goodwill impairment charge and a $16.9 million long-lived asset impairment charge related to the New Jersey, New York and Pennsylvania concrete operations that were sold during the fourth quarter. Loss on impairments was $4.6 million in 2021.

See Note 18 “Goodwill and Intangible Assets” and Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data” for additional discussion.

OTHER OPERATING EXPENSE, NET

Other operating expense is composed primarily of idle facilities expense, environmental remediation costs and gain (loss) on settlement of AROs. Total other operating expense and significant discrete items included in the total were:

$34.0 million in 2022 — includes discrete items as follows:

$3.1 million of charges associated with divested operations

$10.6 million of non-routine business development charges (excludes items included in cost of revenues)

$7.2 million of managerial restructuring charges (related to acquisitions)

$60.5 million in 2021 — includes discrete items as follows:

$1.5 million of charges associated with divested operations

$23.7 million of non-routine business development charges (excludes items included in cost of revenues)

$13.4 million of charges related to COVID-19 pandemic direct incremental costs

$15.0 million of managerial restructuring charges (related to U.S. Concrete)

OTHER NONOPERATING INCOME (EXPENSE), NET

Other nonoperating income was $5.1 million in 2022 and $10.7 million in 2021, composed primarily of pension and postretirement benefit costs (excluding service costs), foreign currency transaction gains/losses, Rabbi Trust gains/losses and net earnings/losses of nonconsolidated equity method investments. During 2021, we incurred $12.1 million of non-cash pension settlement charges — this partial settlement will benefit future expense and funding requirements (see Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data”).

INTEREST EXPENSE

in millions

Interest expense was $169.2 million in 2022 compared to $149.3 million in 2021. This increase was primarily due to a higher debt level resulting from financing the August 2021 acquisition of U.S. Concrete. See Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data” for additional discussion.

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INCOME TAXES

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

The $7.1 million decrease in our 2022 income tax expense was primarily related to a decrease in earnings from continuing operations partially offset by the tax impact from the impairment of non-tax deductible goodwill. The $44.3 million increase in our 2021 income tax expense was primarily due to an increase in earnings from continuing operations and the increase of our Alabama NOL valuation allowance.

In May 2022, Mexican government officials unexpectedly and arbitrarily shut down our Calica operations in Mexico. The impact of the shutdown, combined with recent increased costs (primarily due to underwater mining) has resulted in substantial losses. In 2022, Calica generated a net operating loss (NOL) deferred tax asset of $14.5 million. Based on the weight of all available positive and negative evidence, we have concluded that it is more likely than not that Calica will be unable to realize the NOL deferred tax asset during the ten-year carryforward period. Therefore, we recorded a valuation allowance of $14.5 million for 2022. Should the Mexican government lift the shutdown and/or we are successful in our NAFTA claim, we will reevaluate the need for a valuation allowance against the NOL deferred tax asset.

In February 2021, the Alabama Business Competitiveness Act (ABC Act) was signed into law. The ABC Act contained a provision requiring most taxpayers to change from a three-factor, double-weighted sales method to a single-sales factor method to apportion income to Alabama. This provision had the effect of significantly reducing our apportionment of income to Alabama, thereby further inhibiting our ability to utilize our Alabama NOL carryforward. As a result, in 2021, we increased the valuation allowance by $13.7 million. No other material tax impacts resulted from the enactment of this Act.

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

DISCONTINUED OPERATIONS

Pretax loss from discontinued operations were:

$(25.2) million in 2022

$(4.5) million in 2021

$(4.7) million in 2020

Pretax loss from discontinued operations for 2022 and 2021 resulted primarily from general and product liability costs, including legal defense costs and environmental remediation costs associated with our former Chemicals business. In addition, 2022 includes a $15.3 million charge for a litigation matter (see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data”). For additional information about discontinued operations, see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data.”

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KNOWN TRENDS OR UNCERTAINTIES

As described in the Executive Summary, inflationary pressures and labor constraints were trends impacting our operations in 2022. Although inflationary pressures can create short- to medium-term headwinds, the combination of inflation and improving visibility of demand has created and may continue to create a favorable environment for price increases. Additionally, labor constraints (especially truck drivers) have caused delays and inefficiencies in our operations as well as those of our customers. If labor constraints continue and demand remains strong, our operations may proceed at a slower pace, which may effectively extend the recovery while allowing us the opportunity to compound price, control costs and grow earnings.

Further, the Mexican government has taken actions adverse to our property and operations in that country. On May 5, 2022, Mexican government officials presented employees at our Calica operations in Quintana Roo, Mexico with arbitrary shutdown orders to immediately cease underwater quarrying and extraction operations. On May 13, 2022, the Mexican government suspended the three-year customs permit granted in March 2022 to Calica and began a proceeding that could result in the revocation of that permit. We strongly believe that the actions taken by Mexico are arbitrary and illegal, and we intend to vigorously pursue all lawful avenues available to us in order to protect our rights, under both Mexican and international law. For additional information regarding our Calica operations, see Note 12 “Commitments and Contingencies” in Item 8 “Financial Statements and Supplementary Data.”

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

AGGREGATES SEGMENT FREIGHT-ADJUSTED REVENUES

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

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CASH GROSS PROFIT

GAAP does not define “cash gross profit,” and it should not be considered as an alternative to earnings measures defined by GAAP. We and the investment community use this metric to assess the operating performance of our business. Additionally, we present this metric as we believe that it closely correlates to long-term shareholder value. We do not use this metric as a measure to allocate resources. Cash gross profit adds back noncash charges for depreciation, depletion, accretion and amortization to gross profit. Segment cash gross profit per unit is computed by dividing segment cash gross profit by units shipped. Segment cash cost of sales per unit is computed by subtracting segment cash gross profit per unit from segment freight-adjusted sales price. Reconciliation of these metrics to their nearest GAAP measures are presented below:

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EBITDA AND ADJUSTED EBITDA

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

ADJUSTED DILUTED EPS attributable to vulcan FROM CONTINUING OPERATIONS

Similar to our presentation of Adjusted EBITDA, we present Adjusted diluted earnings per share (EPS) attributable to Vulcan from continuing operations to provide a more consistent comparison of earnings performance from period to period. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP. Reconciliation of this metric to its nearest GAAP measure is presented below:

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NET DEBT TO ADJUSTED EBITDA

Net debt to Adjusted EBITDA is not a GAAP measure and should not be considered as an alternative to metrics defined by GAAP. We, the investment community and credit rating agencies use this metric to assess our leverage. Net debt subtracts cash and cash equivalents and restricted cash from total debt. Reconciliation to its nearest GAAP measure is presented below:

return on invested capital

We define “Return on Invested Capital” (ROIC) as Adjusted EBITDA for the trailing-twelve months divided by average invested capital (as illustrated below) during the trailing 5-quarters. Our calculation of ROIC is considered a non-GAAP financial measure because we calculate ROIC using the non-GAAP metric EBITDA. We believe that our ROIC metric is meaningful because it helps investors assess how effectively we are deploying our assets. Although ROIC is a standard financial metric, numerous methods exist for calculating a company’s ROIC. As a result, the method we use to calculate our ROIC may differ from the methods used by other companies. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP. Reconciliation of this metric to its nearest GAAP measure is presented below (numbers may not foot due to rounding):

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2023 PROJECTED EBITDA

The following reconciliation to the mid-point of the range of 2023 Projected EBITDA excludes adjustments (as noted in Adjusted EBITDA above) as they are difficult to forecast (timing or amount). Due to the difficulty of forecasting such adjustments, we are unable to estimate their significance. This metric is not defined by GAAP and should not be considered as an alternative to earnings measures defined by GAAP. Reconciliation of this metric to its nearest GAAP measure is presented below:

Because GAAP financial measures on a forward-looking basis are not accessible, and reconciling information is not available without unreasonable effort, we have not provided reconciliations for forward-looking non-GAAP measures, other than the reconciliation of Projected EBITDA as noted above. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results.

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LIQUIDITY AND FINANCIAL RESOURCES

Our primary sources of liquidity are cash provided by our operating activities, a substantial, committed bank line of credit and our commercial paper program. Additional sources of capital include access to the capital markets, the sale of surplus real estate and dispositions of nonstrategic operating assets. We believe these financial resources are sufficient to fund our business requirements for 2023, including:

contractual obligations

capital expenditures

debt service obligations

dividend payments

potential acquisitions

potential share repurchases

During 2023, we expect to spend between $600 million and $650 million on capital expenditures, including growth projects. Excluding future cash requirements for capital expenditures, our future contractual payments as of December 31, 2022 are summarized in the table below:

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As of December 31, 2022, we were contingently liable for $786.5 million within 470 surety bonds underwritten by various surety companies. These bonds guarantee our performance and are required primarily by states and municipalities and their related agencies. The top five in amount totaled $206.0 million (26%) and were for certain construction contracts and reclamation obligations. We have agreed to indemnify the underwriting companies against any exposure under the surety bonds. No material claims have been made against our surety bonds.

We have no material off-balance sheet arrangements, such as financing or unconsolidated variable interest entities.

Our balanced approach to capital deployment remains unchanged. We intend to balance reinvestment in our business, growth through acquisitions and return of capital to shareholders, while sustaining financial strength and flexibility.

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

maintain substantial bank line of credit borrowing capacity

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

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

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

We will continue to assess our liquidity sources and needs in order to take appropriate actions to meet our objectives.

CASH

Included in our December 31, 2022 cash and cash equivalents and restricted cash balances of $161.5 million is $0.1 million of restricted cash (see Note 1 “Summary of Significant Accounting Policies” in Item 8 “Financial Statements and Supplementary Data” under the caption Restricted Cash).

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

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2022 versus 2021 — Net cash provided by operating activities was $1,148.2 million during 2022, a $136.3 million increase compared to 2021 which primarily resulted from an increase in net earnings excluding non-cash charges for depreciation, depletion, accretion and amortization and impairment losses.

Days sales outstanding, a measurement of the time it takes to collect receivables, were 50.9 days at December 31, 2022 compared to 47.6 days at December 31, 2021. Additionally, our over 90 day balance of $69.1 million at December 31, 2022 was up from $46.0 million at December 31, 2021. All customer accounts are actively managed, and no losses in excess of amounts reserved are currently expected.

2022 versus 2021 — Net cash used for investing activities was $1,053.0 million during 2022, a $821.1 million decrease in cash used compared to 2021. During 2022, we acquired businesses for $529.2 million of cash consideration as compared to $1,639.4 million of cash consideration in 2021, accounting for most of the decrease. Additionally, during 2022, we invested $612.6 million in our existing operations (includes changes in accruals for property, plant & equipment), a $161.3 million increase compared to 2021. Of this $612.6 million, $232.5 million was invested in internal growth projects to enhance our distribution capabilities, develop new production sites and enhance existing production facilities and other growth opportunities. Further, proceeds from the sale of property, plant & equipment and businesses were down $127.8 million in 2022 from 2021, primarily reflecting the 2021 sale of reclaimed real estate in Southern California (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data”).

2022 VERSUS 2021 — Net cash used for financing activities in 2022 was $175.2 million, compared to $94.3 million used in 2021. The 2022 activity includes a $100.0 million net draw on our line of credit. The 2021 activities include: a) cash paid to retire the $500.0 million floating rate notes due March 2021, b) $13.3 million of financing costs for a new bridge facility and delayed draw term loan facility (see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data”), c) proceeds of $1,600.0 million from the draw on the delayed draw term loan facility, d) the pay down of $500.0 million on the delayed draw term loan facility, and e) $434.5 million to retire U.S. Concrete’s outstanding notes assumed in the acquisition.

Additionally, capital returned to our shareholders increased by $16.2 million as a result of higher dividends ($1.60 per share compared to $1.48 per share).

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DEBT

Certain debt measures as of December 31 are outlined below:

At December 31, 2022, total debt to Adjusted EBITDA was 2.4 times or 2.3 times on a net debt basis reflecting $161.5 million of cash on hand. Our weighted-average debt maturity was 11.0 years.

DELAYED DRAW TERM LOAN, LINE OF CREDIT AND COMMERCIAL PAPER PROGRAM

In June 2021, concurrent with the announcement of the pending acquisition of U.S. Concrete (see Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data” for additional information), we obtained a $2,200.0 million bridge facility commitment from Truist Bank. Later, in June 2021, we entered into a $1,600.0 million unsecured delayed draw term loan with a subset of the banks that provide our line of credit and terminated the bridge facility commitment. The delayed draw term loan was drawn in August 2021 for $1,600.0 million upon the acquisition of U.S. Concrete, was paid down to $1,100.0 million in September 2021 and was further paid down to $550.0 million in August 2022 (amounts repaid are no longer available for borrowing). In March 2022, the delayed draw term loan was amended to extend the maturity date from August 2024 to August 2026. The delayed draw term loan contains covenants customary for an unsecured investment-grade facility and mirror those in our line of credit. As of December 31, 2022, we were in compliance with the delayed draw term loan covenants. Borrowings, cost ranges and other details are described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.” Financing costs for the bridge facility commitment and the delayed draw term loan facility totaled $13.3 million, $9.4 million of which was recognized as interest expense in 2021.

Our unsecured line of credit was amended in March 2022 to extend the maturity date from September 2025 to September 2026. It was further amended in August 2022 to increase the borrowing capacity from $1,000.0 million to $1,600.0 million and extend the maturity date from September 2026 to August 2027. Our line of credit contains covenants customary for an unsecured investment-grade facility. Covenants, borrowings, cost ranges and other details are described in Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.” As of December 31, 2022, we were in compliance with the line of credit covenants, the margin for Secured Overnight Financing Rate (SOFR) borrowings was 1.125%, the margin for base rate borrowings was 0.125%, and the commitment fee for the unused amount was 0.100%.

In August 2022, we established a $1,600.0 million commercial paper program through which we borrowed $550.0 million that was used to partially repay the delayed draw term loan. Commercial paper borrowings bear interest at rates determined at the time of borrowing and as agreed between us and the commercial paper investors.

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As of December 31, 2022, our available borrowing capacity under the line of credit was $1,421.4 million. Utilization of the borrowing capacity was as follows:

$100.0 million was borrowed

$78.6 million was used to support standby letters of credit

TERM DEBT

Essentially all of our $3,941.9 million (face value) of term debt (which includes the $550.0 million delayed draw term loan and the $550.0 million commercial paper) is unsecured. All of the covenants in the debt agreements are customary for investment-grade facilities. As of December 31, 2022, we were in compliance with all term debt covenants.

In connection with the August 2021 acquisition of U.S. Concrete, we assumed $434.5 million (fair value) of senior notes due 2029 and retired these notes in September 2021.

For additional information regarding term debt, see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.”

DEBT PAYMENTS AND MATURITIES

Scheduled debt payments during 2022 were $5.2 million spread throughout the year. Scheduled debt payments during 2021 included the aforementioned $500.0 million to retire the floating rate notes due in March, $9.4 million in July and $6.0 million in October.

As of December 31, 2022, maturities for the next four quarters and for the next five years are as follows (excluding any borrowings on the line of credit):

For additional information regarding debt payments and maturities, see Note 6 “Debt” in Item 8 “Financial Statements and Supplementary Data.”

DEBT RATINGS

Our debt ratings and outlooks as of December 31, 2022 are as follows:

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EQUITY

The number of our common stock issuances and purchases are as follows:

As of December 31, 2022, there were 8,064,851 shares remaining under the February 2017 authorization by our Board of Directors. Depending upon market, business, legal and other conditions, we may purchase shares from time to time through the open market (including plans designed to comply with Rule 10b5-1 of the Securities Exchange Act of 1934) and/or privately negotiated transactions. The authorization has no time limit, does not obligate us to purchase any specific number of shares, and may be suspended or discontinued at any time.

The detail of our common stock purchases (all of which were open market purchases) are as follows:

There were no shares held in treasury as of December 31, 2022, 2021 and 2020.

STANDBY LETTERS OF CREDIT

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

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CRITICAL ACCOUNTING POLICIES

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

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

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

1.Goodwill impairment

2.Impairment of long-lived assets excluding goodwill

3.Business combinations and purchase price allocation

4.Pension and other postretirement benefits

5.Environmental compliance costs

6.Claims and litigation including self-insurance

7.Income taxes

1. GOODWILL IMPAIRMENT

Goodwill represents the excess of the cost of net assets acquired in business combinations over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Goodwill impairment exists when the fair value of a reporting unit is less than its carrying amount. Goodwill is tested for impairment on an annual basis or more frequently whenever events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment evaluation is a critical accounting policy because goodwill is material to our total assets (as of December 31, 2022, goodwill represents 26% of total assets), and the evaluation involves the use of significant estimates, assumptions and judgment.

HOW WE TEST GOODWILL FOR IMPAIRMENT

Goodwill is tested for impairment at the reporting unit level, one level below our operating segments. We have identified 17 reporting units (of which 12 carry goodwill) based primarily on geographic location. We have the option of either assessing qualitative factors to determine whether it is more likely than not that the carrying value of our reporting units exceeds their respective fair value or proceeding directly to a quantitative test. We elected to perform the quantitative impairment test for all years presented.

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

HOW WE DETERMINE CARRYING VALUE AND FAIR VALUE

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

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OUR FAIR VALUE ASSUMPTIONS

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

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

RESULTS OF OUR IMPAIRMENT TESTS

The results of our annual impairment tests for 2020 through 2021 indicated that the fair values of all reporting units with goodwill substantially exceeded (in excess of 100%) their carrying values. The results of our annual impairment test for 2022 indicated that the fair values of all reporting units with goodwill exceeded their carrying values by approximately 10% to greater than 100%. The reporting units with the smallest excess of fair value versus carrying value include concrete operations acquired with U.S. Concrete in August 2021.

During the third quarter of 2022, we recognized an interim goodwill impairment loss of $50.9 million for a reporting unit that was subsequently sold during the fourth quarter. Refer to Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data” for further information.

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

2. IMPAIRMENT OF LONG-LIVED ASSETS EXCLUDING GOODWILL

We evaluate the carrying value of long-lived assets, including intangible assets subject to amortization, when events and circumstances indicate that the carrying value may not be recoverable. The impairment evaluation is a critical accounting policy because long-lived assets are material to our total assets (as of December 31, 2022, net property, plant & equipment represents 43% of total assets, while net other intangible assets represents 12% of total assets), and the evaluation involves the use of significant estimates, assumptions and judgment. The carrying value of long-lived assets is considered impaired when the estimated undiscounted cash flows from such assets are less than their carrying value. In that event, we recognize a loss equal to the amount by which the carrying value exceeds the fair value.

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

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

During the third quarter of 2022, we recognized a long-lived asset impairment loss of $16.9 million for assets classified as held for sale (subsequently sold during the fourth quarter). Refer to Note 19 “Acquisitions and Divestitures” in Item 8 “Financial Statements and Supplementary Data” for further information.

During 2021 and 2020, we recorded no significant losses on impairment of long-lived assets.

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We maintain certain long-lived assets that are not currently being used in our operations. These assets totaled $516.1 million at December 31, 2022, essentially flat from December 31, 2021. Of the total $516.1 million, approximately 40% relates to real estate held for future development and expansion of our operations. In addition, approximately 20% is comprised of real estate (principally former mining sites) pending development as commercial or residential real estate, reservoirs or landfills. The remaining 40% is composed of aggregates, asphalt and concrete operating assets idled temporarily. We evaluate the useful lives and the recoverability of these assets whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

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

3. BUSINESS COMBINATIONS AND PURCHASE PRICE ALLOCATION

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

HOW WE DETERMINE AND ALLOCATE THE PURCHASE PRICE

The purchase price is determined based on the fair value of consideration transferred to and liabilities assumed from the seller as of the date of acquisition. We allocate the purchase price to the fair values of the tangible and identifiable intangible assets acquired and liabilities assumed as of the date of acquisition. Goodwill is recorded for the excess of the purchase price over the net fair value of the identifiable assets acquired and liabilities assumed. The purchase price allocation is a critical accounting policy because the estimation of fair values of acquired assets and assumed liabilities is judgmental and requires various assumptions. Additionally, the amounts assigned to depreciable and amortizable assets compared to amounts assigned to goodwill, which is not amortized, can significantly affect our results of operations.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction and therefore represents an exit price. A fair value measurement assumes the highest and best use of the asset by market participants. The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as described below:

Level 1: Quoted prices in active markets for identical assets or liabilities

‎Level 2: Inputs that are derived principally from, or corroborated by, observable market data

‎Level 3: Inputs that are unobservable and significant to the overall fair value measurement

Level 1 fair values are used to value investments in publicly-traded entities and assumed obligations for publicly-traded long-term debt.

Level 2 fair values are typically used to value acquired machinery and equipment, land, buildings, and assumed liabilities for asset retirement obligations, environmental remediation and compliance obligations. Additionally, Level 2 fair values are typically used to value assumed contracts at other-than-market rates.

Level 3 fair values are used to value acquired mineral reserves as well as leased mineral interests (referred to in our financial statements as contractual rights in place) and other identifiable intangible assets. We determine the fair values of owned mineral reserves and leased mineral interests using a lost profits approach and/or an excess earnings approach. These valuation techniques require management to estimate future cash flows. The estimate of future cash flows is based on available historical information and future expectations and assumptions determined by management, but is inherently uncertain. Key assumptions in estimating future cash flows include sales price, shipment volumes, production costs and capital needs. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate of return that a hypothetical market participant would assume if purchasing the acquired business, with an adjustment for the risk of these assets not generating the projected cash flows.

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

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MEASUREMENT PERIOD ADJUSTMENTS

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

4. PENSION AND OTHER POSTRETIREMENT BENEFITS

Accounting for pension and other postretirement benefits requires that we use assumptions for the valuation of projected benefit obligations (PBO) and the performance of plan assets. Each year, we review our assumptions for discount rates (used for PBO, service cost, and interest cost calculations), expected return on plan assets and the cost of covered healthcase benefits. Due to plan changes made in 2013, annual pay increases 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.

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.

RATE OF INCREASE IN THE PER CAPITA COST OF COVERED HEALTHCARE BENEFITS — We project the expected increases in the cost of covered healthcare benefits.

See Note 10 “Benefit Plans” in Item 8 “Financial Statements and Supplementary Data” for the discount rates used for PBO, service cost, and interest cost calculations; the expected return on plan assets; and the rate of increase in the per capita cost of healthcare benefits.

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

As of the December 31, 2022 measurement date, the fair value of our pension plan assets decreased from $860.5 million for the prior year-end to $637.8 million due primarily to the rise in interest rates and their impact on the fixed income portfolio. Our postretirement plans are unfunded.

The discount rate is the weighted-average of the spot rates for each cash flow on the yield curve for high-quality bonds as of the measurement date. As of the December 31, 2022 measurement date, the PBO of our pension plans decreased from $915.4 million to $691.1 million. This decrease was primarily due to the increase in discount rates for the plans (approximately 2.2 to 2.6 percentage points). The PBO of our postretirement plans decreased from $46.0 million to $41.8 million. This decrease was primarily due to the increase in discount rates for the plans (approximately 2.3 to 2.9 percentage points).

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During 2023, we expect to recognize net pension expense of $16.3 million and net postretirement expense of $4.3 million compared to expense of $0.6 million and expense of $1.5 million, respectively, in 2022. The expected increase in pension expense is primarily due to actual asset performance in 2022 that was lower than expected and the significant increase in discount rates, offset by an increase in the long-term return on assets assumption from 4.00% to 4.85%. The increase in postretirement expense is primarily due to unfavorable claims experience and an increase in healthcare trend rates, offset by the increase in discount rates.

We do not anticipate that contributions to the funded pension plans will be required during 2023, and we do not anticipate making a discretionary contribution. We currently do not anticipate that the funded status of any of our plans will fall below statutory thresholds requiring accelerated funding or constraints on benefit levels or plan administration.

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

5. ENVIRONMENTAL COMPLIANCE COSTS

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

HOW WE ACCOUNT FOR ENVIRONMENTAL COSTS

To account for environmental costs, we:

expense or capitalize environmental costs consistent with our capitalization policy

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

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

At the early stages of a remediation effort, environmental remediation liabilities are not easily quantified due to the uncertainties of various factors. The range of an estimated remediation liability is defined and redefined as events in the remediation effort occur, but generally liabilities are recognized no later than completion of the remedial feasibility study. When we can estimate a range of probable loss, we accrue the most likely amount. If no amount in the range of probable loss is considered most likely, the minimum loss in the range is accrued. As of December 31, 2022, the difference between the amount accrued and the maximum loss in the range for all sites for which a range can be reasonably estimated was $6.4 million — this amount does not represent our maximum exposure to loss for all environmental remediation obligations as it excludes those sites for which a range of loss cannot be reasonably estimated at this time. Our environmental remediation obligations are recorded on an undiscounted basis.

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

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

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6. CLAIMS AND LITIGATION INCLUDING SELF-INSURANCE

We are involved with claims and litigation, including items covered under our self-insurance program. We are self-insured for losses related to workers' compensation up to $2.0 million per occurrence and automotive and general/product liability up to $10.0 million per occurrence. We have excess coverage on a per occurrence basis beyond these retention levels.

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

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

HOW WE ASSESS THE PROBABILITY OF LOSS

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

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

7. INCOME TAXES

VALUATION OF OUR DEFERRED TAX ASSETS

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

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

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

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LIABILITY FOR UNRECOGNIZED TAX BENEFITS

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

Generally, we are not subject to significant changes in income taxes by any taxing jurisdiction for the years before 2019. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits is appropriate.

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

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

NEW ACCOUNTING STANDARDS

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

FORWARD-LOOKING STATEMENTS

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

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