EX-13.01 3 d529448dex1301.htm EX-13.01 EX-13.01

Exhibit 13.01

STATEMENT OF FINANCIAL RESPONSIBILITY AND MANAGEMENT’S REPORT

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management’s Statement of Responsibility

The management of Martin Marietta Materials, Inc. (the “Company” or “Martin Marietta”), is responsible for the consolidated financial statements, the related financial information contained in this 2017 Annual Report and the establishment and maintenance of adequate internal control over financial reporting. The consolidated balance sheets for Martin Marietta, at December 31, 2017 and 2016, and the related consolidated statements of earnings, comprehensive earnings, total equity and cash flows for each of the three years in the period ended December 31, 2017, include amounts based on estimates and judgments and have been prepared in accordance with accounting principles generally accepted in the United States applied on a consistent basis.

A system of internal control over financial reporting is designed to provide reasonable assurance, in a cost-effective manner, that assets are safeguarded, transactions are executed and recorded in accordance with management’s authorization, accountability for assets is maintained and financial statements are prepared and presented fairly in accordance with accounting principles generally accepted in the United States. Internal control systems over financial reporting have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company operates in an environment that establishes an appropriate system of internal control over financial reporting and ensures that the system is maintained, assessed and monitored on a periodic basis. This internal control system includes examinations by internal audit staff and oversight by the Audit Committee of the Board of Directors.

The Company’s management recognizes its responsibility to foster a strong ethical climate. Management has issued written policy statements that document the Company’s business code of ethics. The importance of ethical behavior is regularly communicated to all employees through the distribution of the Code of Ethical Business Conduct booklet and through ongoing education and review programs designed to create a strong commitment to ethical business practices.

The Audit Committee of the Board of Directors, which consists of four independent, nonemployee directors, meets periodically and separately with management, the independent auditors and the internal auditors to review the activities of each. The Audit Committee meets standards established by the Securities and Exchange Commission (SEC) and the New York Stock Exchange as they relate to the composition and practices of audit committees.

Management’s Report on Internal Control over Financial Reporting

The management of Martin Marietta is responsible for establishing and maintaining adequate control over financial reporting. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on management’s assessment under the 2013 framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.

The 2017 consolidated financial statements and effectiveness of internal control over financial reporting have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report appears on the following page.

 

LOGO

     

LOGO

C. Howard Nye

     

James A. J. Nickolas

Chairman, President and Chief Executive Officer

      Senior Vice President and Chief Financial Officer

February 23, 2018

     

 

Martin Marietta  |  Page 7


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Shareholders of Martin Marietta Materials, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Martin Marietta Materials, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of earnings, comprehensive earnings, total equity, and cash flows for each of the two years in the period ended December 31, 2017, including the related notes and schedule of valuation and qualifying accounts for each of the two years in the period ended December 31, 2017 appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Raleigh, North Carolina

  

/s/ PricewaterhouseCoopers LLP

February 23, 2018

   We have served as the Company’s auditor since 2016.

 

Martin Marietta  |  Page 8


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Board of Directors and Shareholders of Martin Marietta Materials, Inc.

We have audited the accompanying consolidated statements of earnings, comprehensive earnings, total equity and cash flows of Martin Marietta Materials, Inc. and consolidated subsidiaries for the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Martin Marietta Materials, Inc. and consolidated subsidiaries for the year ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

 

 

LOGO

Raleigh, North Carolina

February 23, 2016, except for the recently adopted accounting pronouncements discussed in Note A and the effects of the segment change discussed in Note O, as to which the date is May 12, 2017

 

Martin Marietta  |  Page 9


 

CONSOLIDATED STATEMENTS OF EARNINGS for years ended December 31

 

  

 

(add 000, except per share)   

 

2017

          2016           2015  

Net Sales

   $   3,721,428        $   3,576,767          3,268,116  

Freight and delivery revenues

     244,166            241,982            271,454  

Total revenues

     3,965,594            3,818,749            3,539,570  

Cost of sales

     2,749,488          2,665,029          2,541,196  

Freight and delivery costs

     244,166            241,982            271,454  

Total cost of revenues

     2,993,654            2,907,011            2,812,650  

Gross Profit

     971,940          911,738          726,920  

Selling, general and administrative expenses

     262,128          241,606          210,754  

Acquisition-related expenses

     8,638          909          6,346  

Other operating expenses and (income), net

     793            (8,043          15,653  

Earnings from Operations

     700,381          677,266          494,167  

Interest expense

     91,487          81,677          76,287  

Other nonoperating (income) and expenses, net

     (10,034          (11,439          4,079  

Earnings before income tax (benefit) expense

     618,928          607,028          413,801  

Income tax (benefit) expense

     (94,457          181,584            124,863  

Consolidated net earnings

     713,385          425,444          288,938  

Less: Net earnings attributable to noncontrolling interests

     43          58          146  

Net Earnings Attributable to Martin Marietta

   $ 713,342          $ 425,386          $ 288,792  

Net Earnings Attributable to Martin Marietta Per Common Share (see Note A)

            

–  Basic attributable to common shareholders

   $ 11.30          $ 6.66          $ 4.31  

–  Diluted attributable to common shareholders

   $ 11.25          $ 6.63          $ 4.29  

Weighted-Average Common Shares Outstanding

            

–  Basic

     62,932            63,610            66,770  

–  Diluted

     63,217            63,861            67,020  

The notes on pages 15 through 41 are an integral part of these financial statements.

 

Martin Marietta  |  Page 10


 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS for years ended December 31  

 

  

 

(add 000)   

 

2017

          2016           2015  

Consolidated Net Earnings

   $   713,385          $   425,444          $   288,938  

Other comprehensive (loss) earnings, net of tax:

            

Defined benefit pension and postretirement plans:

            

Net loss arising during period, net of tax of $(2,625), $(19,734) and $(4,530), respectively

     (8,052        (31,620        (7,101

Amortization of prior service credit, net of tax of $(547), $(617) and $(731), respectively

     (883        (992        (1,149

Amortization of actuarial loss, net of tax of $5,271, $4,437 and $6,551, respectively

     8,503          7,138          10,299  

Amount recognized in net periodic pension cost due to settlement, net of tax of $8, $44 and $0, respectively

     13          71           

Amount recognized in net periodic pension cost due to special plan termination benefits, net of tax of $0, $293 and $811, respectively

                471            1,274  
     (419        (24,932        3,323  

Foreign currency translation gain (loss)

     1,140          (898        (3,542

Amortization of terminated value of forward starting interest rate swap agreements into interest expense, net of tax of $571, $541 and $509, respectively

     872            826            771  
       1,593            (25,004          552  

Consolidated comprehensive earnings

     714,978          400,440          289,490  

Less: Comprehensive earnings attributable to noncontrolling interests

     53          119          161  

Comprehensive Earnings Attributable to Martin Marietta

   $ 714,925          $ 400,321          $ 289,329  

The notes on pages 15 through 41 are an integral part of these financial statements.

 

Martin Marietta  |  Page 11


 

CONSOLIDATED BALANCE SHEETS at December 31

 

  

 

Assets (add 000)   

 

2017

          2016  

Current Assets:

       

Cash and cash equivalents

   $   1,446,364        $ 50,038  

Accounts receivable, net

     487,240          457,910  

Inventories, net

     600,591          521,624  

Other current assets

     96,965          56,813  

Total Current Assets

     2,631,160            1,086,385  

Property, plant and equipment, net

     3,592,813          3,423,395  

Goodwill

     2,160,290          2,159,337  

Operating permits, net

     439,116          442,202  

Other intangibles, net

     67,233          69,110  

Other noncurrent assets

     101,899          120,476  

Total Assets

   $ 8,992,511          $   7,300,905  

Liabilities and Equity (add 000, except parenthetical share data)

                     

Current Liabilities:

       

Accounts payable

   $ 186,638        $ 178,598  

Accrued salaries, benefits and payroll taxes

     44,255          47,428  

Pension and postretirement benefits

     13,652          9,293  

Accrued insurance and other taxes

     64,958          60,093  

Current maturities of long-term debt

     299,909          180,036  

Other current liabilities

     87,804          71,140  

Total Current Liabilities

     694,216            546,588  

Long-term debt

     2,727,294          1,506,153  

Pension, postretirement and postemployment benefits

     244,043          248,086  

Deferred income taxes, net

     410,723          663,019  

Other noncurrent liabilities

     233,758          194,469  

Total Liabilities

     4,310,034            3,158,315  

Equity:

       

Common stock ($0.01 par value; 100,000,000 shares authorized; 62,873,000 and 63,176,000 shares outstanding at December 31, 2017 and 2016, respectively)

     628          630  

Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares outstanding)

               

Additional paid-in capital

     3,368,007          3,334,461  

Accumulated other comprehensive loss

     (129,104        (130,687

Retained earnings

     1,440,069            935,574  

Total Shareholders’ Equity

     4,679,600          4,139,978  

Noncontrolling interests

     2,877            2,612  

Total Equity

     4,682,477          4,142,590  

Total Liabilities and Equity

   $ 8,992,511          $ 7,300,905  

The notes on pages 15 through 41 are an integral part of these financial statements.

 

Martin Marietta  |  Page 12


 

CONSOLIDATED STATEMENTS OF CASH FLOWS for years ended December 31

 

  

 

(add 000)   

 

2017

          2016           2015  

Cash Flows from Operating Activities:

            

Consolidated net earnings

   $ 713,385        $ 425,444        $ 288,938  

Adjustments to reconcile consolidated net earnings to net cash provided by operating activities:

            

Depreciation, depletion and amortization

     297,162          285,253          263,587  

Stock-based compensation expense

     30,460          20,481          13,589  

(Gain) Loss on divestitures and sales of assets

     (19,366        410          14,093  

Deferred income taxes, net

     (239,056        67,050          85,225  

Other items, net

     (13,157        (17,730        (5,972

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:

            

Accounts receivable, net

     (29,329        (25,072        12,309  

Inventories, net

     (78,966        (47,381        (21,525

Accounts payable

     (17,874        (8,116        (40,053

Other assets and liabilities, net

     14,619          (11,106        (29,591

Net Cash Provided by Operating Activities

     657,878            689,233            580,600  

Cash Flows from Investing Activities:

            

Additions to property, plant and equipment

     (410,325        (387,267        (318,232

Acquisitions

     (12,095        (178,768        (43,215

Cash received in acquisition

              4,246          63  

Proceeds from divestitures and sales of assets

     35,941          6,476          448,122  

Payment of railcar construction advances

     (43,594        (82,910        (25,234

Reimbursement of railcar construction advances

     43,594          82,910          25,234  

Repayments from affiliate

                       1,808  

Net Cash (Used for) Provided By Investing Activities

     (386,479          (555,313          88,546  

Cash Flows from Financing Activities:

            

Borrowings of long-term debt

     2,408,830          560,000          230,000  

Repayments of long-term debt

     (1,065,048        (449,306        (244,704

Payments of deferred acquisition consideration

     (2,774                  

Debt issuance costs

     (2,204        (2,300         

Change in bank overdraft

              (10,235        10,052  

Payments on capital lease obligations

     (3,543        (3,364        (6,616

Dividends paid

     (108,852        (105,036        (107,462

Distributions to owners of noncontrolling interest

              (400        (325

Contributions by noncontrolling interest to joint venture

     212          44           

Repurchase of common stock

     (99,999        (259,228        (519,962

Proceeds from exercise of stock options

     10,110          27,257          37,230  

Shares withheld for employees’ income tax obligations

     (11,805        (9,723        (7,601

Net Cash Provided by (Used for) Financing Activities

     1,124,927            (252,291          (609,388

Net Increase (Decrease) in Cash and Cash Equivalents

     1,396,326          (118,371        59,758  

Cash and Cash Equivalents, beginning of year

     50,038            168,409            108,651  

Cash and Cash Equivalents, end of year

   $ 1,446,364          $ 50,038          $ 168,409  

The notes on pages 15 through 41 are an integral part of these financial statements.

 

Martin Marietta  |  Page 13


 

CONSOLIDATED STATEMENTS OF TOTAL EQUITY

 

  

 

(add 000, except per share data)   Shares of
Common
Stock
    Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
(Loss) Earnings
    Retained
Earnings
    Total
Shareholders’
Equity
    Non-
controlling
Interests
   

Total

Equity

 

Balance at December 31, 2014

    67,293     $ 671     $ 3,243,619     $ (106,159)     $ 1,213,035     $ 4,351,166     $ 1,582     $ 4,352,748  

Consolidated net earnings

                            288,792       288,792       146       288,938  

Other comprehensive earnings

                      537             537       15       552  

Dividends declared ($1.60 per common share)

                            (107,462     (107,462)             (107,462)  

Issuances of common stock for stock award plans

    471       5       30,619                   30,624             30,624  

Repurchases of common stock

    (3,285     (33                 (519,929     (519,962)             (519,962)  

Stock-based compensation expense

                13,589                   13,589             13,589  

Noncontrolling interest acquired from business combination

                                        1,475       1,475  

Purchase of subsidiary shares from noncontrolling interest

                                        (325)       (325)  

Balance at December 31, 2015

    64,479       643       3,287,827       (105,622)       874,436       4,057,284       2,893       4,060,177  

Consolidated net earnings

                            425,386       425,386       58       425,444  

Other comprehensive (loss) earnings

                      (25,065)             (25,065)       61       (25,004

Dividends declared ($1.64 per common share)

                            (105,036     (105,036)             (105,036

Issuances of common stock for stock award plans

    285       3       26,109                   26,112             26,112  

Repurchases of common stock

    (1,588     (16)                   (259,212     (259,228)             (259,228

Stock-based compensation expense

                20,481                   20,481             20,481  

Distributions to owners of noncontrolling interest

                                        (400)       (400

Contribution from owners of noncontrolling interest

                44                   44             44  

Balance at December 31, 2016

    63,176       630       3,334,461       (130,687)       935,574       4,139,978       2,612       4,142,590  

Consolidated net earnings

                            713,342       713,342       43       713,385  

Other comprehensive earnings

                      1,583             1,583       10       1,593  

Dividends declared ($1.72 per common share)

                            (108,852     (108,852)             (108,852

Issuances of common stock for stock award plans

    155       2       14,891                   14,893             14,893  

Shares withheld for employees’ income tax obligations

                (11,805                 (11,805)             (11,805

Repurchases of common stock

    (458     (4                 (99,995     (99,999)             (99,999

Stock-based compensation expense

                30,460                   30,460             30,460  

Contribution from owners of noncontrolling interest

                                        212       212  

Balance at December 31, 2017

    62,873     $ 628     $ 3,368,007     $ (129,104)     $ 1,440,069     $ 4,679,600     $ 2,877     $ 4,682,477  

The notes on pages 15 through 41 are an integral part of these financial statements.

 

Martin Marietta  |  Page 14


NOTES TO FINANCIAL STATEMENTS

 

 

Note A: Accounting Policies

Organization. Martin Marietta Materials, Inc. (the “Company” or “Martin Marietta”) is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of 282 quarries, mines and distribution yards to its customers in 30 states, Canada, the Bahamas and the Caribbean Islands. In the western United States, Martin Marietta also provides cement and downstream products, namely, ready mixed concrete, asphalt and paving services, in markets where the Company has a leading aggregates position. Specifically, the Company has two cement plants in Texas, five cement distribution facilities and 152 ready mixed concrete and asphalt plants in Texas, Colorado, Louisiana and Arkansas. The Company’s heavy-side building materials are used in infrastructure, nonresidential and residential construction projects. Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast. The aggregates, cement, ready mixed concrete and asphalt and paving product lines are reported collectively as the “Building Materials” business. As of December 31, 2017, the Building Materials business contains the following reportable segments: Mid-America Group, Southeast Group and West Group. The Mid-America Group operates in Indiana, Iowa, northern Kansas, Kentucky, Maryland, Minnesota, Missouri, eastern Nebraska, North Carolina, Ohio, South Carolina, Virginia, Washington and West Virginia. The Southeast Group has operations in Alabama, Florida, Georgia, Tennessee, Nova Scotia and the Bahamas. The West Group operates in Arkansas, Colorado, southern Kansas, Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah and Wyoming. The following states accounted for 74% of the Building Materials business’ 2017 net sales: Texas, Colorado, North Carolina, Iowa and Georgia.

The Company also operates a Magnesia Specialties business, which produces magnesia-based chemical products used in industrial, agricultural and environmental applications, and dolomitic lime sold primarily to customers in the steel and mining industries. Magnesia Specialties’ production facilities are located in Ohio and Michigan, and products are shipped to customers worldwide.

Use of Estimates. The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make certain estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of

revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets and other long-lived assets and assumptions used in the calculation of income tax (benefit) expense, retirement and other postemployment benefits, and the allocation of the purchase price to the fair values of assets acquired and liabilities assumed as part of business combinations. These estimates and assumptions are based on management’s judgment. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and adjusts such estimates and assumptions when facts and circumstances dictate. Changes in credit, equity and energy markets and changes in construction activity increase the uncertainty inherent in certain estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from estimates. Changes in estimates, including those resulting from continuing changes in the economic environment, are reflected in the consolidated financial statements for the period in which the change in estimate occurs.

Basis of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Partially-owned affiliates are either consolidated or accounted for at cost or as equity investments, depending on the level of ownership interest or the Company’s ability to exercise control over the affiliates’ operations. Intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition. Total revenues include sales of materials and services provided to customers, net of discounts or allowances, if any, and include freight and delivery costs billed to customers. Revenues for product sales are recognized when risks associated with ownership have passed to unaffiliated customers. Typically, this occurs when finished products are shipped. Revenues derived from the paving business are recognized using the percentage-of-completion method under the revenue-cost approach. Under the revenue-cost approach, recognized contract revenue equals the total estimated contract revenue multiplied by the percentage of completion. Recognized costs equal the total estimated contract cost multiplied by the percentage of completion. The percentage of completion is determined by costs incurred to date as a percentage of total costs estimated for the project.

Freight and Delivery Costs. Freight and delivery costs represent pass-through transportation costs incurred and paid

 

 

Martin Marietta  |  Page 15


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

by the Company to third-party carriers to deliver products to customers. These costs are then billed to the customers.

Cash and Cash Equivalents. Cash equivalents are comprised of highly-liquid instruments with original maturities of three months or less from the date of purchase. The Company manages its cash and cash equivalents to ensure short-term operating cash needs are met and excess funds are managed efficiently. When operating cash is not sufficient to meet current needs, the Company borrows money under its existing credit facilities. The Company utilizes excess cash to either pay down credit facility borrowings or invest in money market funds, money market demand deposit accounts or offshore time deposit accounts. Money market demand deposits and offshore time deposit accounts are exposed to bank solvency risk.

Customer Receivables. Customer receivables are stated at cost. The Company does not typically charge interest on customer accounts receivables. The Company records an allowance for doubtful accounts, which includes a provision for probable losses based on historical write offs and a specific reserve for accounts deemed at risk. The Company writes off customer receivables as bad debt expense when it becomes probable based upon customer facts and circumstances that such amounts will not be collected.

Inventories Valuation. Inventories are stated at the lower of cost or net realizable value. Costs for finished products and in process inventories are determined by the first-in, first-out method. Carrying value for expendable parts and supplies are determined by the weighted-average cost method. The Company records an allowance for finished product inventories based on an analysis of inventory on hand in excess of historical sales for a twelve-month period or five-year average and future demand. The Company also establishes an allowance for expendable parts over five years old and supplies over one year old.

Post-production stripping costs, which represent costs of removing overburden and waste materials to access mineral deposits, are a component of inventory production costs and recognized in cost of sales in the same period as the revenue from the sale of the inventory.

Property, Plant and Equipment. Property, plant and equipment are stated at cost.

The estimated service lives for property, plant and equipment are as follows:

Class of Assets    Range of Service Lives

Buildings

   5 to 20 years

Machinery & Equipment

   2 to 20 years

Land Improvements

   5 to 60 years

The Company begins capitalizing quarry development costs at a point when reserves are determined to be proven or probable, economically mineable and when demand supports investment in the market. Capitalization of these costs ceases when production commences. Capitalized quarry development costs are classified as land improvements and depreciated over the life of the reserves.

The Company reviews relevant facts and circumstances to determine whether to capitalize or expense pre-production stripping costs when additional pits are developed at an existing quarry. If the additional pit operates in a separate and distinct area of the quarry, these costs are capitalized as quarry development costs and depreciated over the life of the uncovered reserves. Additionally, a separate asset retirement obligation is created for additional pits when the liability is incurred. Once a pit enters the production phase, all post-production stripping costs are charged to inventory production costs as incurred.

Mineral reserves and mineral interests acquired in connection with a business combination are valued using an income approach over the life of the reserves.

Depreciation is computed based on estimated service lives, principally using the straight-line method. Depletion of mineral reserves is calculated based on proven and probable reserves using the units-of-production method on a quarry-by-quarry basis.

Property, plant and equipment are reviewed for impairment whenever facts and circumstances indicate that the carrying amount of an asset group may not be recoverable. An impairment loss is recognized if expected future undiscounted cash flows over the estimated remaining service life of the related asset are less than the asset’s carrying value.

Repair and Maintenance Costs. Repair and maintenance costs that do not substantially extend the life of the Company’s plant and equipment are expensed as incurred.

Goodwill and Intangible Assets. Goodwill represents the excess purchase price paid for acquired businesses over

 

 

Martin Marietta  |  Page 16


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

the estimated fair value of identifiable assets and liabilities. Other intangibles represent amounts assigned principally to contractual agreements and are amortized ratably over periods based on related contractual terms.

The Company’s reporting units, which represent the level at which goodwill is tested for impairment, are based on the geographic segments of the Building Materials business. Goodwill is assigned to the respective reporting unit(s) based on the location of acquisitions at the time of consummation. Goodwill is tested for impairment by comparing the reporting unit’s fair value to its carrying value, which represents Step 1 of a two-step approach. However, prior to Step 1, the Company may perform an optional qualitative assessment and evaluate macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and other business or reporting unit-specific events. If the Company concludes it is more-likely-than-not (i.e., a likelihood of more than 50%) that a reporting unit’s fair value is higher than its carrying value, the Company does not perform any further goodwill impairment testing for that reporting unit. Otherwise, it proceeds to Step 1 of its goodwill impairment analysis. The Company may bypass the qualitative assessment for any reporting unit in any period and proceed directly with the quantitative calculation in Step 1. If the reporting unit’s fair value exceeds its carrying value, no further calculation is necessary. A reporting unit with a carrying value in excess of its fair value constitutes a Step 1 failure and may lead to an impairment charge.

The carrying values of goodwill and other indefinite-lived intangible assets are reviewed annually, as of October 1, for impairment. An interim review is performed between annual tests if facts and circumstances indicate potential impairment. The carrying value of other amortizable intangibles is reviewed if facts and circumstances indicate potential impairment. If a review indicates the carrying value is impaired, a charge is recorded.

Retirement Plans and Postretirement Benefits. The Company sponsors defined benefit retirement plans and also provides other postretirement benefits. The Company recognizes the funded status, defined as the difference between the fair value of plan assets and the benefit obligation, of its pension plans and other postretirement benefits as an asset or liability on the consolidated balance sheets. Actuarial gains or losses that arise during the year are

not recognized as net periodic benefit cost in the same year, but rather are recognized as a component of accumulated other comprehensive earnings or loss. Those amounts are amortized over the participants’ average remaining service period and recognized as a component of net periodic benefit cost. The amount amortized is determined using a corridor approach and represents the excess over 10% of the greater of the projected benefit obligation or pension plan assets.

Stock-Based Compensation. The Company has stock-based compensation plans for employees and its Board of Directors. The Company recognizes all forms of stock-based awards that vest, including stock options, as compensation expense. The compensation expense is the fair value of the awards at the measurement date and is recognized over the requisite service period.

The fair value of restricted stock awards, incentive compensation stock awards and Board of Directors’ fees paid in the form of common stock are based on the closing price of the Company’s common stock on the awards’ respective grant dates. The fair value of performance stock awards is determined by a Monte Carlo simulation methodology.

In 2017 and 2016, the Company did not issue any stock options. For stock options issued prior to 2016, the Company used the accelerated expense recognition method. The accelerated recognition method requires stock options that vest ratably to be divided into tranches. The expense for each tranche is allocated to its particular vesting period.

The Company uses the lattice valuation model to determine the fair value of stock option awards. The lattice valuation model takes into account employees’ exercise patterns based on changes in the Company’s stock price and other variables. The period of time for which options are expected to be outstanding is a derived output of the lattice valuation model and includes the following considerations: vesting period of the award, expected volatility of the underlying stock and employees’ ages.

Key assumptions used in determining the fair value of the stock options awarded in 2015 were:

 

Risk-free interest rate

     2.20%  

Dividend yield

     1.20%  

Volatility factor

     36.10%  

Expected term

     8.5 years  
 

 

Martin Marietta  |  Page 17


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Based on these assumptions, the weighted-average fair value of each stock option granted in 2015 was $57.71.

The risk-free interest rate reflects the interest rate on zero-coupon U.S. government bonds, available at the time each option was granted, having a remaining life approximately equal to the option’s expected life. The dividend yield represents the dividend rate expected to be paid over the option’s expected life. The Company’s volatility factor measures the amount by which its stock price is expected to fluctuate during the expected life of the option and is based on historical stock price changes. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates forfeitures and will ultimately recognize compensation cost only for those stock-based awards that vest.

Environmental Matters. The Company records a liability for an asset retirement obligation at fair value in the period in which it is incurred. The asset retirement obligation is recorded at the acquisition date of a long-lived tangible asset if the fair value can be reasonably estimated. A corresponding amount is capitalized as part of the asset’s carrying amount. The fair value is affected by management’s assumptions regarding the scope of the work required, inflation rates and quarry closure dates.

Further, the Company records an accrual for other environmental remediation liabilities in the period in which it is probable that a liability has been incurred and the appropriate amounts can be estimated reasonably. Such accruals are adjusted as further information develops or circumstances change. Generally, these costs are not discounted to their present value or offset for potential insurance or other claims or potential gains from future alternative uses for a site.

Income Taxes. Deferred income taxes, net, on the consolidated balance sheets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, net of valuation allowances. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense or benefit in the period of enactment.

Uncertain Tax Positions. The Company recognizes a tax benefit when it is more-likely-than-not, based on the technical merits, that a tax position would be sustained upon examination by a taxing authority. The amount to be recognized is measured as the largest amount of tax benefit that is greater than 50%

likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Company’s unrecognized tax benefits are recorded in other liabilities on the consolidated balance sheets or as an offset to the deferred tax asset for tax carryforwards where available.

The Company records interest accrued in relation to unrecognized tax benefits as income tax expense. Penalties, if incurred, are recorded as operating expenses in the consolidated statements of earnings.

Sales Taxes. Sales taxes collected from customers are recorded as liabilities until remitted to taxing authorities and therefore are not reflected in the consolidated statements of earnings.

Start-Up Costs. Noncapital start-up costs for new facilities and products are charged to operations as incurred.

Warranties. The Company’s construction contracts contain warranty provisions covering defects in materials, design or workmanship that generally run from nine months to one year after project completion. Due to the nature of its projects, including contract owner inspections of the work both during construction and prior to acceptance, the Company has not experienced material warranty costs for these short-term warranties and therefore does not believe an accrual for these costs is necessary. The ready mixed concrete product line carries a longer warranty period, for which the Company has accrued an estimate of warranty cost based on experience with the type of work and any known risks relative to the projects. These costs were not material to the Company’s consolidated results of operations for the years ended December 31, 2017, 2016 and 2015.

Consolidated Comprehensive Earnings and Accumulated Other Comprehensive Loss. Consolidated comprehensive earnings for the Company consist of consolidated net earnings, adjustments for the funded status of pension and postretirement benefit plans, foreign currency translation adjustments and the amortization of the value of terminated forward starting interest rate swap agreements into interest expense, and are presented in the Company’s consolidated statements of comprehensive earnings.

Accumulated other comprehensive loss consists of unrecognized gains and losses related to the funded status of the pension and postretirement benefit plans, foreign currency translation and the unamortized value of terminated forward starting interest rate swap agreements, and is presented on the Company’s consolidated balance sheets.

 

 

Martin Marietta  |  Page 18


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The components of the changes in accumulated other comprehensive loss and related cumulative noncurrent deferred tax assets are as follows:

 

years ended December 31

(add 000)

 

 

Pension and

Postretirement

Benefit Plans

 

    

  Foreign

  Currency

 

    

Unamortized

Value of

Terminated

Forward

Starting Interest

Rate Swap

 

    

Total   

 

 
 

 

 
     

 

2017  

 

 

 

 

Accumulated other comprehensive loss at beginning of period

    $ (128,373)      $ (1,162    $ (1,152)      $     (130,687)  
   

 

 

 

Other comprehensive (loss) earnings before reclassifications, net of tax

      (8,062)        1,140        –         (6,922)  

Amounts reclassified from accumulated other comprehensive loss, net of tax

      7,633                872         8,505   
   

 

 

 

Other comprehensive (loss) earnings, net of tax

      (429)        1,140        872         1,583   
   

 

 

 

Accumulated other comprehensive loss at end of period

    $ (128,802)      $ (22    $ (280)      $ (129,104)  
   

 

 

 

Cumulative noncurrent deferred tax assets at end of period

    $ 79,938       $      $ 178       $ 80,116   
   

 

 

 
       

2016  

 

 

 

 

Accumulated other comprehensive loss at beginning of period

    $ (103,380)      $ (264    $ (1,978)      $ (105,622)  
   

 

 

 

Other comprehensive loss before reclassifications, net of tax

      (31,678)        (898      –         (32,576)  

Amounts reclassified from accumulated other comprehensive loss, net of tax

      6,685                826         7,511   
   

 

 

 

Other comprehensive (loss) earnings, net of tax

      (24,993)        (898      826         (25,065)  
   

 

 

 

Accumulated other comprehensive loss at end of period

    $ (128,373)      $ (1,162    $ (1,152)      $ (130,687)  
   

 

 

 

Cumulative noncurrent deferred tax assets at end of period

    $ 82,044       $      $ 749       $ 82,793   
   

 

 

 
       

2015  

 

 

 

 

Accumulated other comprehensive (loss) earnings at beginning of period

    $ (106,688)      $      3,278      $ (2,749)      $ (106,159)  
   

 

 

 

Other comprehensive loss before reclassifications, net of tax

      (7,116)        (3,542      –         (10,658)  

Amounts reclassified from accumulated other comprehensive loss, net of tax

      10,424                771         11,195   
   

 

 

 

Other comprehensive earnings (loss), net of tax

      3,308         (3,542      771         537   
   

 

 

 

Accumulated other comprehensive loss at end of period

    $     (103,380)      $ (264    $ (1,978)      $ (105,622)  
   

 

 

 

Cumulative noncurrent deferred tax assets at end of period

    $ 66,467       $      $ 1,290       $ 67,757   
   

 

 

 

Reclassifications out of accumulated other comprehensive loss are as follows:

 

years ended December 31

(add 000)

   2017       2016      2015      

Affected line items in the

consolidated statements of earnings

 

Pension and postretirement benefit plans

         

Special plan termination benefit

   $     $ 764     $ 2,085     

Settlement charge

     21       115           

Amortization of:

         

Prior service credit

     (1,430     (1,609     (1,880   

Actuarial loss

     13,774       11,575       16,850     
     12,365       10,845       17,055      Other nonoperating (income) and expenses, net

Tax effect

     (4,732     (4,160     (6,631    Income tax (benefit) expense

Total

   $ 7,633     $ 6,685     $ 10,424     

Unamortized value of terminated forward starting interest rate swap

         

Additional interest expense

   $ 1,443     $ 1,367     $ 1,280      Interest expense

Tax effect

     (571     (541     (509    Income tax (benefit) expense

Total

   $ 872     $ 826     $ 771     

 

 

Martin Marietta  |  Page 19


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Earnings Per Common Share. The Company computes earnings per share (EPS) pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The Company pays nonforfeitable dividend equivalents during the vesting period on its restricted stock awards and incentive stock awards made prior to 2016, which results in these being considered participating securities.

The numerator for basic and diluted earnings per common share is net earnings attributable to Martin Marietta, reduced by dividends and undistributed earnings attributable to the Company’s unvested restricted stock awards and incentive stock awards issued prior to 2016. The denominator for basic earnings per common share is the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are computed assuming that the weighted-average number of common shares is increased by the conversion, using the treasury stock method, of awards issued to employees and nonemployee members of the Company’s Board of Directors under certain stock-based compensation arrangements if the conversion is dilutive.

The following table reconciles the numerator and denominator for basic and diluted earnings per common share:

 

years ended December 31                     
(add 000)    2017      2016      2015  

 

 

Net earnings attributable to Martin Marietta

   $  713,342      $ 425,386      $ 288,792  

Less: Distributed and undistributed earnings attributable to unvested awards

     2,029        1,775        1,252  

Basic and diluted net earnings attributable to common shareholders attributable to Martin Marietta

   $ 711,313      $ 423,611      $ 287,540  

Basic weighted-average common shares outstanding

     62,932        63,610        66,770  

Effect of dilutive employee and director awards

     285        251        250  

Diluted common weighted-average shares outstanding

     63,217        63,861        67,020  

New Accounting Pronouncements

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the Financial Accounting Standards Board (FASB) issued an accounting standards update (ASU), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which revises the financial statement presentation for periodic pension and postretirement expense or credit, other than service cost. ASU 2017-07 requires net periodic benefit cost or credit, with the exception of service cost, to be presented retrospectively as nonoperating expense. As permitted by ASU 2017-07, the Company used the pension and other postretirement benefit plan disclosures for the comparative prior periods as a practical expedient to estimate amounts for retrospective application. Service cost remains a component of earnings from operations and represent the only cost of pension and postretirement expense eligible for capitalization, notably in the Company’s inventory standards. The Company early adopted this standard effective January 1, 2017. For the year ended December 31, 2016, the Company reclassified $2,772,000, $6,399,000 and $774,000 from cost of sales; selling, general and administrative expenses; and other operating income and expenses, respectively, to nonoperating expense. For the year ended December 31, 2015, the Company reclassified $5,153,000, $7,480,000 and $2,118,000 from cost of sales; selling, general and administrative expenses; and other operating income and expenses, respectively, to nonoperating expense.

Stock Compensation

The FASB issued ASU Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) on accounting for stock compensation. The new standard was effective January 1, 2017 and requires, prospectively, all excess tax benefits and tax deficiencies to be recorded as income tax benefit or expense in the income statement in the period the awards vest or are settled as a discrete item. Additionally, ASU 2016-09 requires any excess tax benefits be reflected as an operating activity in the statement of cash flows retrospectively. Further, any shares withheld for personal income taxes are classified as a financing activity in the statement of cash flows and retrospectively applied. As a result of the Company’s adoption of ASU 2016-09, for the years ended December 31, 2016 and 2015, shares withheld for employees’ income tax obligations reclassified from operating activities were $3,787,000 and

 

 

Martin Marietta  |  Page 20


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

$7,449,000, respectively. The Company reclassified excess tax benefits from stock-based compensation of $6,792,000 for the year ended December 31, 2016, from financing activities to operating activities. There was no excess tax benefit from stock-based compensation for the year ended December 31, 2015. Although the adoption of the new standard did not have a cumulative effect, it creates volatility in the Company’s income tax rate in periods when share-based compensation awards either vest or are exercised.

Pending Accounting Pronouncements

Revenue Recognition Standard

The FASB issued ASU Revenue From Contracts with Customers (ASU 2014-09), which amends the accounting guidance on revenue recognition. The new standard intends to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The new standard is effective January 1, 2018 and the Company expects to adopt using a full retrospective approach. The Company has completed its assessment of the provisions of the new standard and determined the impact of adoption will not be material to its consolidated financial statements.

Lease Standard

In February 2016, the FASB issued a new accounting standard, Accounting Codification Standard 842 – Leases, intending to improve financial reporting of leases and to provide more transparency of off-balance sheet leasing obligations. The guidance requires virtually all leases, excluding mineral interest leases, to be recorded on the balance sheet and provides guidance on the recognition of lease expense and income. The new standard is effective January 1, 2019 and must be applied on a modified retrospective approach. However, the FASB is proposing an option for transition that would permit the application of the new standard at the adoption date instead of the earliest comparative period presented in the financial statements. The Company is currently assessing the impact of the new standard on its financial statements. The Company believes the new standard will have a material effect on its consolidated balance sheet but has not quantified the impact at this time.

In January 2018, the FASB issued ASU Land Easement Practical Expedient for Transition to Topic 842 (ASU 2018-01). ASU 2018-01 permits the election to not evaluate

land easements under the new lease guidance that existed or expired before the adoption of the new standard and that were not previously accounted for as leases under current guidance. The Company will adopt ASU 2018-01 concurrently with the new lease standard.

Note B: Goodwill and Other Intangible Assets

The following table shows the changes in goodwill by reportable segment and in total:

 

    Mid-
America
Group
    Southeast
Group
    West
Group
    Total  

December 31

       

(add 000)

    2017  

Balance at beginning of period

  $ 281,403     $ 50,346     $ 1,827,588     $ 2,159,337  

Acquisitions

                230       230  

Purchase price adjustments

                723       723  

Balance at end of period

  $ 281,403     $ 50,346     $ 1,828,541     $ 2,160,290  
      2016  

Balance at beginning of period

  $ 281,403     $ 50,346     $ 1,736,486     $ 2,068,235  

Acquisitions

                91,174       91,174  

Divestitures

                (72     (72

Balance at end of period

  $ 281,403     $ 50,346     $ 1,827,588     $ 2,159,337  

Intangible assets subject to amortization consist of the following:

 

December 31
(add 000)
   Gross
Amount
     Accumulated
Amortization
    Net
Balance
 
     2017  

Noncompetition agreements

   $ 6,274      $ (6,144   $ 130  

Customer relationships

     45,755        (17,351     28,404  

Operating permits

     458,952        (26,436     432,516  

Use rights and other

     16,946        (10,377     6,569  

Trade names

     12,800        (7,947     4,853  

Total

   $ 540,727      $ (68,255   $ 472,472  
       2016  

Noncompetition agreements

   $ 6,274      $ (6,106   $ 168  

Customer relationships

     45,755        (13,636     32,119  

Operating permits

     455,095        (19,493     435,602  

Use rights and other

     16,946        (9,239     7,707  

Trade names

     12,800        (5,681     7,119  

Total

   $   536,870      $   (54,155   $   482,715  
 

 

Martin Marietta  |  Page 21


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Intangible assets deemed to have an indefinite life and not being amortized consist of the following:

 

December 31
(add 000)
   Building
Materials
Business
     Magnesia
Specialties
     Total  
     2017  

Operating permits

   $ 6,600      $      $ 6,600  

Use rights

     24,432               24,432  

Trade names

     280        2,565        2,845  

Total

   $ 31,312      $ 2,565      $ 33,877  
                2016           

Operating permits

   $ 6,600      $      $ 6,600  

Use rights

     19,152               19,152  

Trade names

     280        2,565        2,845  

Total

   $   26,032      $   2,565      $   28,597  

During 2017, the Company acquired $10,270,000 of intangibles, consisting of the following:

 

(add 000, except year data)   Amount     Weighted-average
amortization period
 

Subject to amortization:

   

  Operating permits

  $ 4,990       40 years  

Not subject to amortization:

   

  Use rights

    5,280       N/A  

Total

  $   10,270    

Total amortization expense for intangible assets for the years ended December 31, 2017, 2016 and 2015 was $14,178,000, $13,922,000 and $13,962,000, respectively.

The estimated amortization expense for intangible assets for each of the next five years and thereafter is as follows:

 

(add 000)  

2018

   $ 13,070  

2019

     12,114  

2020

     12,078  

2021

     11,387  

2022

     9,805  

Thereafter

     414,018  

Total

   $     472,472  

Note C: Business Combinations

Completed Acquisitions

In February 2016, the Company acquired the outstanding stock of Rocky Mountain Materials and Asphalt, Inc. and Rocky Mountain Premix, Inc. The acquisition provides more than 500 million tons of mineral reserves and expands the Company’s presence along the Front Range of the Rocky Mountains, home to 80% of Colorado’s population. The acquired operations are reported within the West Group.

In July 2016, the Company acquired the remaining interest in Ratliff Ready-Mix, L.P. (Ratliff), which operates ready mixed concrete plants in central Texas. These operations are reported in the West Group. Prior to the acquisition, the Company owned a 40% interest in Ratliff which was accounted for under the equity method. The Company was required to remeasure the existing 40% interest in Ratliff at fair value upon closing of the transaction, resulting in a gain of $5,863,000, which is recorded in other nonoperating income, net.

The impact of these acquisitions on the operating results was not considered material; therefore, pro forma financial information is not included.

Pending Acquisition of Bluegrass Materials

On June 26, 2017, the Company announced a definitive agreement to acquire Bluegrass Materials Company (Bluegrass) for $1,625,000,000 in cash. The Company will not acquire any of Bluegrass’ cash and cash equivalents nor will it assume any of Bluegrass’ outstanding debt. Bluegrass is the largest privately held, pure-play aggregates business in the United States and has a portfolio of 23 active sites with more than 125 years of strategically-located, high-quality reserves, in Maryland, Georgia, South Carolina, Kentucky, Tennessee and Pennsylvania. These operations complement the Company’s existing southeastern footprint and provide a new growth platform within the southern portion of the Northeast. The Company and Bluegrass are continuing to work closely and cooperatively with the Department of Justice in its review of the proposed transaction. The parties currently anticipate that the proposed acquisition will be completed in the first half of 2018. In 2017, the Company incurred acquisition-related expenses of $8,638,000 for this pending transaction.

 

 

Martin Marietta  |  Page 22


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Note D: Accounts Receivable, Net

 

December 31

(add 000)

     2017       2016  

Customer receivables

   $ 480,073     $ 456,508  

Other current receivables

     9,557       7,668  
     489,630       464,176  

Less allowances

     (2,390     (6,266

Total

   $   487,240     $   457,910  

Of the total accounts receivable, net, balances, $2,819,000 and $2,578,000 at December 31, 2017 and 2016, respectively, were due from unconsolidated affiliates.

Note E: Inventories, Net

 

December 31

(add 000)

     2017       2016  

Finished products

   $ 552,999     $ 479,291  

Products in process and raw materials

     62,761       61,171  

Supplies and expendable parts

     128,792       116,024  
     744,552       656,486  

Less allowances

     (143,961     (134,862

Total

   $   600,591     $   521,624  

Note F: Property, Plant and Equipment, Net

 

December 31

(add 000)

     2017       2016  

Land and land improvements

   $ 974,622     $ 915,158  

Mineral reserves and interests

      1,162,289       1,114,560  

Buildings

     154,564       151,115  

Machinery and equipment

     4,006,619       3,766,975  

Construction in progress

     199,973       167,722  
     6,498,067       6,115,530  

Less accumulated depreciation, depletion and amortization

     (2,905,254     (2,692,135

Total

   $ 3,592,813     $   3,423,395  

The gross asset value and accumulated amortization for machinery and equipment recorded under capital leases at December 31 were as follows:

 

(add 000)

     2017       2016  

Machinery and equipment under capital leases

   $ 23,919     $ 23,117  

Less accumulated amortization

     (11,243     (8,077

Total

   $     12,676     $     15,040  

Depreciation, depletion and amortization expense related to property, plant and equipment was $279,808,000, $268,935,000 and $246,874,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Depreciation, depletion and amortization expense includes amortization of machinery and equipment under capital leases.

Interest cost of $3,616,000, $3,543,000 and $5,832,000 was capitalized during 2017, 2016 and 2015, respectively.

At December 31, 2017 and 2016, $57,665,000 and $58,332,000, respectively, of the Building Materials business’ net property, plant and equipment were located in foreign countries, namely the Bahamas and Canada.

Note G: Long-Term Debt

 

December 31

(add 000)

     2017       2016  

6.60% Senior Notes, due 2018

   $ 299,871     $ 299,483  

4.25% Senior Notes, due 2024

     395,814       395,252  

7% Debentures, due 2025

     124,180       124,090  

3.450% Senior Notes, due 2027

     296,628        

3.500% Senior Notes, due 2027

     494,352        

6.25% Senior Notes, due 2037

     228,033       227,975  

4.250% Senior Notes, due 2047

     591,688        

Floating Rate Senior Notes, due 2019, interest rate of 2.13% at December 31, 2017

     298,102        

Floating Rate Senior Notes, due, 2020 interest rate of 2.10% at December 31, 2017

     298,227        

Floating Rate Senior Notes, due 2017, interest rate of 2.10% at December 31, 2016

           299,033  

Revolving Facility, due 2022, interest rate of 1.86% at December 31, 2016

           160,000  

Trade Receivable Facility, interest rate of 1.34% at December 31, 2016

           180,000  

Other notes

     308       356  

Total

     3,027,203       1,686,189  

Less current maturities

     (299,909     (180,036

Long-term debt

   $   2,727,294     $   1,506,153  

The Company’s 6.60% Senior Notes due 2018, 7% Debentures due 2025, 6.25% Senior Notes due 2037, 4.25% Senior Notes due 2024, 3.450% Senior Notes due 2027, 3.500% Senior Notes due 2027, 4.250% Senior Notes due 2047, Floating Rate Senior Notes due 2019 and Floating Rate Senior Notes due 2020 (collectively, the “Senior Notes”) are senior unsecured obligations of the Company, ranking equal in right of payment with the Company’s existing and future unsubordinated indebtedness. Upon a change-of-control repurchase event and a resulting below-investment-grade credit rating, the Company would be required to make an offer to repurchase all outstanding Senior Notes, with the exception of the 7% Debentures due 2025, at a price in cash equal to 101% of the principal amount of the Senior Notes, plus any accrued and unpaid interest to, but not including, the purchase date.

 

 

Martin Marietta  |  Page 23


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The Senior Notes are carried net of original issue discount, which is being amortized by the effective interest method over the life of the issue. With the exception of the Floating Rate Senior Notes due 2019 and the Floating Rate Senior Notes due 2020, the Senior Notes are redeemable prior to their respective maturity dates at a make-whole redemption price. The principal amount, effective interest rate and maturity date for the Company’s Senior Notes are as follows:

 

     Principal
Amount
(add 000)
  Effective
Interest
Rate
  Maturity
Date

6.60% Senior Notes

    $ 300,000   6.81%   April 15, 2018

4.25% Senior Notes

    $ 400,000   4.25%   July 2, 2024

7% Debentures

    $ 125,000   7.12%   December 1, 2025

3.450% Senior Notes

    $ 300,000   3.47%   June 1, 2027

3.500% Senior Notes

    $ 500,000   3.53%   December 15, 2027

6.25% Senior Notes

    $ 230,000   6.45%   May 1, 2037

4.250% Senior Notes

    $ 600,000   4.27%   December 15, 2047

Floating Rate Senior Notes, due 2019

    $
300,000

  Three-month
LIBOR +
0.50%
  December 20, 2019

Floating Rate Senior Notes, due 2020

    $
300,000

  Three-month
LIBOR +
0.65%
  May 22, 2020

On May 22, 2017, the Company issued $300,000,000 aggregate principal amount of Floating Rate Senior Notes due in 2020 (the “2020 Floating Rate Notes”) and $300,000,000 aggregate principal amount of 3.450% Senior Notes due in 2027 (the “3.450% Senior Notes”), unsecured obligations of the Company. The 3.450% Senior Notes may be redeemed in whole or in part prior to March 1, 2027 at a make-whole redemption price, or on or after March 1, 2027 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, and in either case plus unpaid interest, if any, accrued thereon to, but excluding, the date of redemption. The 2020 Floating Rate Notes bear interest at a rate, reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) for U.S. Dollars plus 0.65% (or 65 basis points) and may not be redeemed prior to their stated maturity date of May 22, 2020.

On December 20, 2017, the Company issued $300,000,000 aggregate principal amount of Floating Rate Senior Notes due 2019 (the “2019 Floating Rate Notes”), $500,000,000 aggregate principal amount of 3.500% Senior Notes due 2027 (the “2027 3.500% Fixed Rate Notes”) and $600,000,000 aggregate principal amount of 4.250% Senior Notes due 2047 (the “2047 Fixed Rate Notes”), all of which are unsecured obligations of the Company and rank equally in right of payment with all of its existing and future

unsubordinated indebtedness. The net proceeds of the offering are expected to be used to finance, in part, the previously announced Bluegrass acquisition (the “Acquisition”) and to repay the $300,000,000 6.60% Senior Notes due April 15, 2018. The Company may not redeem the 2019 Floating Rate Notes prior to their stated maturity date of December 20, 2019. If the Acquisition is not consummated prior to September 30, 2018, the purchase agreement is terminated prior to September 30, 2018, or the Company publicly announces at any time prior to September 30, 2018 that it will no longer pursue the consummation of the Acquisition, the Company will be required to redeem all of the outstanding 2027 3.500% Fixed Rate Notes and the 2047 Fixed Rate Notes pursuant to a special mandatory redemption at a price equal to 101% of the aggregate principal amounts, plus accrued and unpaid interest. The 2019 Floating Rate Notes are not subject to the special mandatory redemption.

The Company has a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, Branch Banking and Trust Company (BB&T), Deutsche Bank Securities, Inc., SunTrust Bank, and Wells Fargo Bank, N.A., as Co-Syndication Agents, and the lenders party thereto (the “Credit Agreement”), which provides for a $700,000,000 five-year senior unsecured revolving facility (the “Revolving Facility”). Borrowings under the Revolving Facility bear interest, at the Company’s option, at rates based upon LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a ratings-based pricing grid.

The Credit Agreement requires the Company’s ratio of consolidated net debt-to-consolidated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), as defined, for the trailing-twelve months (the “Ratio”) to not exceed 3.50x as of the end of any fiscal quarter, provided that the Company may exclude from the Ratio debt incurred in connection with certain acquisitions during the quarter or three preceding quarters so long as the Ratio calculated without such exclusion does not exceed 3.75x. Additionally, if no amounts are outstanding under both the Revolving Facility and the trade receivable securitization facility (discussed later), consolidated debt, including debt for which the Company is a co-borrower (see Note N), may be reduced by the Company’s unrestricted cash and cash equivalents in excess of $50,000,000, such reduction not to exceed $200,000,000, for purposes of the covenant calculation.

 

 

Martin Marietta  |  Page 24


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

In December 2017, the Company amended its credit agreement to exclude debt obtained to fund the pending Bluegrass acquisition from the Ratio. The Company was in compliance with this Ratio at December 31, 2017.

On December 5, 2017, the Company extended its Revolving Facility by one year. The Revolving Facility expires on December 5, 2022, with any outstanding principal amounts, together with interest accrued thereon, due in full on that date. Available borrowings under the Revolving Facility are reduced by any outstanding letters of credit issued by the Company under the Revolving Facility. At December 31, 2017 and 2016, the Company had $2,301,000 and $2,507,000, respectively, of outstanding letters of credit issued under the Revolving Facility. The Company paid the bank group an upfront loan commitment fee that is being amortized over the life of the Revolving Facility. The Revolving Facility includes an annual facility fee.

The Company, through a wholly-owned special-purpose subsidiary, has a $300,000,000 trade receivable securitization facility (the “Trade Receivable Facility”). On September 27, 2017, the Company extended the maturity to September 26, 2018. The Trade Receivable Facility, with SunTrust Bank, Regions Bank, PNC Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, and certain other lenders that may become a party to the facility from time to time, is backed by eligible trade receivables, as defined. Borrowings are limited to the lesser of the facility limit or the borrowing base, as defined, of $338,784,000 and $332,302,000 at December 31, 2017 and 2016, respectively. These receivables are originated by the Company and then sold or contributed to the wholly-owned special-purpose subsidiary. The Company continues to be responsible for the servicing and administration of the receivables purchased by the wholly-owned special-purpose subsidiary. Borrowings under the Trade Receivable Facility bear interest at a rate equal to one-month LIBOR plus 0.725%, subject to change in the event that this rate no longer reflects the lender’s cost of lending. The Trade Receivable Facility contains a cross-default provision to the Company’s other debt agreements.

The Company’s long-term debt maturities for the five years following December 31, 2017, and thereafter are:

 

(add 000)

        

2018

   $ 299,909  

2019

     298,157  

2020

     298,286  

2021

     65  

2022

     90  

Thereafter

     2,130,696  

Total

   $     3,027,203  

The Company has a $5,000,000 short-term line of credit. No amounts were outstanding under this line of credit at December 31, 2017 or 2016.

Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. For the years ended December 31, 2017, 2016 and 2015, the Company recognized $1,443,000, $1,367,000 and $1,280,000, respectively, as additional interest expense. The amortization of the terminated value of the forward starting interest rate swap agreements will be completed in April 2018 and will increase 2018 interest expense by approximately $463,000.

Note H: Financial Instruments

The Company’s financial instruments include temporary cash investments, accounts receivable, notes receivable, bank overdraft, accounts payable, publicly-registered long-term notes, debentures and other long-term debt.

Temporary cash investments are placed primarily in money market funds and money market demand deposit accounts with financial institutions. The Company’s cash equivalents have maturities of less than three months. Due to the short maturity of these investments, they are carried on the consolidated balance sheets at cost, which approximates fair value.

Accounts receivable are due from a large number of customers, primarily in the construction industry, and are dispersed across wide geographic and economic regions. However, accounts receivable are more heavily concentrated in certain states, namely Texas, Colorado, North Carolina, Iowa and Georgia. The estimated fair values of accounts receivable approximate their carrying amounts.

 

 

Martin Marietta  |  Page 25


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Notes receivable are primarily promissory notes with customers and are not publicly traded. Management estimates that the fair value of notes receivable approximates its carrying amount.

Bank overdraft represents amounts to be funded to financial institutions for checks that have cleared the bank. The estimated fair value of the bank overdraft approximates its carrying value.

Accounts payable represent amounts owed to suppliers and vendors. The estimated fair value of accounts payable approximates its carrying amount due to the short-term nature of the payables.

The carrying values and fair values of the Company’s long-term debt were $3,027,203,000 and $3,144,902,000, respectively, at December 31, 2017 and $1,686,189,000 and $1,752,338,000, respectively, at December 31, 2016. The estimated fair value of the Company’s publicly-registered long-term debt was estimated based on Level 2 of the fair value hierarchy using quoted market prices. The estimated fair values of other borrowings, which primarily represent variable-rate debt, approximate their carrying amounts as the interest rates reset periodically.

Note I: Income Taxes

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). The 2017 Tax Act is comprehensive legislation that includes provisions that lower the federal statutory corporate income tax rate from 35% to 21% beginning in 2018 and imposes a one-time transition tax on undistributed foreign earnings. U.S. GAAP generally requires the effects of a tax law change to be recorded as a component of income tax expense in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118) to address situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act.

The Company has recognized the net tax benefit related to the impact of the 2017 Tax Act for the remeasurement of deferred tax assets and liabilities and included this amount in its consolidated financial statements for the year ended December 31, 2017, on a provisional basis. The ultimate impact may differ from this provisional amount, possibly materially, due to among other things, additional analysis, changes in interpretations and assumptions the Company has made, and additional interpretive regulatory guidance that may be issued. The

Company has not recorded a provisional amount to account for the transition tax on undistributed foreign earnings, as it is not expected to be material to its results of operations. In accordance with SAB 118, the Company may record additional provisional amounts during a measurement period not to extend beyond one year of the enactment date of the 2017 Tax Act. The accounting is expected to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018 and any measurement period adjustments will be recognized as income tax expense or benefit in 2018.

The components of the Company’s income tax (benefit) expense are as follows:

 

years ended December 31

(add 000)

     2017       2016       2015  

Federal income taxes:

      

Current

   $ 129,236     $ 97,975     $ 20,627  

Deferred

     (239,304     68,899       85,295  

Total federal income tax (benefit) expense

     (110,068     166,874       105,922  

State income taxes:

      

Current

     14,843       15,189       18,153  

Deferred

     (882     (1,149     930  

Total state income taxes

     13,961       14,040       19,083  

Foreign income taxes:

      

Current

     1,175       1,064       99  

Deferred

     475       (394     (241

Total foreign income taxes

     1,650       670       (142

Income tax (benefit) expense

   $   (94,457   $   181,584     $   124,863  

As discussed above, deferred tax expense for the year ended December 31, 2017 includes a tax benefit in the amount of $258,103,000 for the provisional impact of the 2017 Tax Act.

The increase in 2016 federal current tax expense compared with 2015 is primarily attributable to an increase in earnings. For the years ended December 31, 2016 and 2015, the benefit related to the utilization of federal net operating loss (NOL) carryforwards, reflected in current tax expense, was $11,852,000 and $156,554,000, respectively.

For the year ended December 31, 2016, excess tax benefits attributable to stock-based compensation transactions that were recorded to shareholders’ equity amounted to $6,792,000. For the year ended December 31, 2015, the realized tax benefit for stock-based compensation transactions was $871,000 less than the amounts estimated during the vesting periods, resulting in a decrease in the pool of excess tax credits.

For the years ended December 31, 2017 and 2016, foreign pretax earnings were $10,566,000 and $3,865,000, respectively.

 

 

Martin Marietta  |  Page 26


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

For the year ended December 31, 2015 foreign pretax loss was $1,175,000.

The Company’s effective income tax rate varied from the statutory United States income tax rate because of the following tax differences:

 

years ended December 31

     2017       2016       2015  

Statutory tax rate

     35.0     35.0     35.0

(Reduction) increase resulting from:

      

Provisional remeasurement of deferred taxes

     (41.7            

Effect of statutory depletion

     (5.6     (5.4     (7.8

State income taxes, net of federal tax benefit

     1.5       1.5       3.0  

Domestic production deduction

     (2.2     (2.0     (0.1

Stock based compensation

     (1.0     (0.1     (0.3

Other items

     (1.3     0.9       0.4  

Effective income tax rate

     (15.3 %)      29.9     30.2

The change in the effective income tax rate in 2017 compared with 2016 is attributable to the impact of the 2017 Tax Act. The statutory depletion deduction for all years is calculated as a percentage of sales, subject to certain limitations. Due to these limitations, the impact of changes in the sales volumes and earnings may not proportionately affect the Company’s statutory depletion deduction and the corresponding impact on the effective income tax rate. The growth in non-depletable income reduced the impact of the statutory depletion deduction on the effective income tax rate in 2017 and 2016 compared with 2015.

The 2016 state tax impact on the effective income tax rate decreased compared to 2015 due to changes in apportionment of taxable income to states with lower tax rates and the reduction in certain states’ statutory tax rates.

The Company is entitled to receive a 9% tax deduction related to income from domestic (i.e., United States) production activities. The deduction reduced income tax expense and increased consolidated net earnings by $15,461,000, or $0.25 per diluted share, in 2017; $13,583,000, or $0.21 per diluted share, in 2016; and $222,000, or less than $0.01 per diluted share, in 2015. The impact on the 2015 effective income tax rate was limited by the significant utilization of NOL carryforwards. The domestic production deduction was eliminated by the 2017 Tax Act and will not generate a tax benefit in future years.

The principal components of the Company’s deferred tax assets and liabilities are as follows:

 

     Deferred  
December 31    Assets (Liabilities)  
(add 000)    2017     2016  

Deferred tax assets related to:

    

Employee benefits

   $ 16,059     $ 61,462  

Inventories

     56,242       71,490  

Valuation and other reserves

     22,989       38,206  

Net operating loss carryforwards

     11,780       10,507  

Accumulated other comprehensive loss

     80,116       82,793  

AMT credit carryforward

           2,771  

Gross deferred tax assets

        187,186          267,229  

Valuation allowance on deferred tax assets

     (10,349     (8,521

Total net deferred tax assets

     176,837       258,708  

Deferred tax liabilities related to:

    

Property, plant and equipment

     (407,400     (635,576

Goodwill and other intangibles

     (168,506     (268,999

Other items, net

     (11,654     (17,152

Total deferred tax liabilities

     (587,560     (921,727

Deferred income taxes, net

   $ (410,723   $ (663,019

Deferred tax assets for employee benefits result from the temporary differences between the deductions for pension and post-retirement obligations, incentive compensation and stock-based compensation transactions. For financial reporting purposes, such amounts are expensed based on authoritative accounting guidance. For income tax purposes, amounts related to pension and postretirement obligations and incentive compensation are deductible as funded. Amounts related to stock-based compensation transactions are deductible for income tax purposes upon vesting or exercise of the underlying award.

The Company had no domestic federal NOL carryforwards at December 31, 2017 and 2016. The Company had domestic state NOL carryforwards of $197,916,000 and $220,532,000 at December 31, 2017 and 2016, respectively. These carryforwards have various expiration dates through 2036. At December 31, 2017 and 2016, deferred tax assets associated with these carryforwards were $11,780,000 and $10,507,000, respectively, net of the federal benefit of the state deduction, for which valuation allowances of $10,085,000 and $8,303,000, respectively, were recorded. The Company also had domestic tax credit carryforwards of $1,342,000 and $1,441,000 at December 31, 2017 and 2016, respectively, which expire in 2031. At December 31, 2017 and 2016, deferred tax assets associated with these carryforwards were $1,060,000 and $937,000, respectively, net of the federal benefit of the state deduction, for which valuation allowances of $264,000 and

 

 

Martin Marietta  |  Page 27


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

$218,000, respectively, were recorded. At December 31, 2016 the Company also had an Alternative Minimum Tax credit carryforward of $17,192,000, which was fully utilized during 2017. The deferred tax asset associated with this carryforward, net of unrecognized tax benefits, was $2,771,000.

Deferred tax liabilities for property, plant and equipment result from accelerated depreciation methods being used for income tax purposes as compared with the straight-line method for financial reporting purposes.

Deferred tax liabilities related to goodwill and other intangibles reflect the cessation of goodwill amortization for financial reporting purposes, while amortization continues for income tax purposes.    

The Company provides deferred taxes, as required, on the undistributed net earnings of all non-U.S. subsidiaries for which the indefinite reversal criterion has not been met. The Company expects to permanently reinvest the earnings from its wholly-owned Canadian and Bahamian subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries’ undistributed net earnings. The wholly-owned Canadian subsidiary’s undistributed net earnings are estimated to be $43,587,000 at December 31, 2017. The determination of the unrecognized deferred tax liability for temporary differences related to the investment in the wholly-owned Canadian subsidiary is not practicable due to the lack of clarity in the tax repatriation statutes included in the 2017 Tax Act. The Bahamian subsidiary has no undistributed net earnings.

The 2017 Tax Act requires mandatory deemed repatriation of undistributed foreign earnings, through a one-time transition tax based on post-1986 earnings and profits that were previously deferred from U.S. income taxes. The transition tax will be finalized during a measurement period not to extend beyond one year of the enactment date of the 2017 Tax Act. The Company does not believe the tax will be material to its results of operations.

The 2017 Tax Act also changed the deduction allowed for executive compensation by expanding the definition of employees subject to the $1 million deduction limitation and by eliminating the exception from the limitation for performance-based

compensation. The 2017 Tax Act includes a transition rule that exempts from these changes compensation provided pursuant to a written binding contract in effect on November 2, 2017. The Company has interpreted this transition rule such that there is no impact to its current provision or to its deferred tax assets recorded for employee benefits. However, should the Internal Revenue Service issue further guidance on what qualifies as a written binding contract, the Company may have to recognize additional tax expense.

The following table summarizes the Company’s unrecognized tax benefits, excluding interest and correlative effects:

 

years ended December 31

(add 000)

   2017     2016     2015  

Unrecognized tax benefits at beginning of year

   $ 21,807     $ 18,727     $ 21,107  

Gross increases – tax positions in prior years

     1,396       2,401       3,079  

Gross decreases – tax positions in prior years

     (672     (1,924     (3,512

Gross increases – tax positions in current year

     4,961       4,650       4,978  

Gross decreases – tax positions in current year

     (946     (2,047     (594

Lapse of statute of limitations

     (4,179           (6,331

Unrecognized tax benefits at end of year

   $   22,367     $   21,807     $   18,727  

At December 31, 2017, 2016 and 2015, unrecognized tax benefits of $10,399,000, $11,603,000 and $7,975,000, respectively, related to interest accruals and permanent income tax differences, net of federal tax benefits, would have favorably affected the Company’s effective income tax rate if recognized.

Unrecognized tax benefits are reversed as a discrete event if an examination of applicable tax returns is not initiated by a federal or state tax authority within the statute of limitations or upon effective settlement with federal or state tax authorities. Management believes its accrual for unrecognized tax benefits is sufficient to cover uncertain tax positions reviewed during audits by taxing authorities. The Company anticipates that it is reasonably possible that its unrecognized tax benefits may decrease up to $3,333,000, excluding indirect benefits, during the twelve-months ending December 31, 2018, due to the expiration of the statute of limitations for the 2014 tax year.

 

 

Martin Marietta  |  Page 28


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

For the years ended December 31, 2017 and 2015, $3,922,000 or $0.06 per diluted share, and $2,364,000 or $0.04 per diluted share, respectively, were reversed into income upon the statute of limitations expiration for the 2010 through 2013 tax years.

The Company’s open tax years subject to federal, state or foreign examinations are 2011 through 2017.

Note J: Retirement Plans, Postretirement and Postemployment Benefits

The Company sponsors defined benefit retirement plans that cover substantially all employees. Additionally, the Company provides other postretirement benefits for certain employees, including medical benefits for retirees and their spouses and retiree life insurance. Employees starting on or after January 1, 2002 are not eligible for postretirement welfare plans. The Company also provides certain benefits, such as disability benefits, to former or inactive employees after employment but before retirement.

The measurement date for the Company’s defined benefit plans, postretirement benefit plans and postemployment benefit plans is December 31.

Defined Benefit Retirement Plans. Retirement plan assets are invested in listed stocks, bonds, hedge funds, real estate and cash equivalents. Defined retirement benefits for salaried employees are based on each employee’s years of service and average compensation for a specified period of time before retirement. Defined retirement benefits for hourly employees are generally stated amounts for specified periods of service.

The Company sponsors a Supplemental Excess Retirement Plan (SERP) that generally provides for the payment of retirement benefits in excess of allowable Internal Revenue Code limits. The SERP generally provides for a lump-sum payment of vested benefits. When these benefit payments exceed the sum of the service and interest costs for the SERP during a year, the Company recognizes a pro-rata portion of the SERP’s unrecognized actuarial loss as settlement expense.

The net periodic retirement benefit cost of defined benefit plans includes the following components:

 

years ended December 31

(add 000)

   2017     2016     2015  

Service cost

   $ 26,805     $ 22,167     $ 23,001  

Interest cost

     36,101       35,879       33,151  

Expected return on assets

     (39,759     (37,699     (36,385

Amortization of:

      

Prior service cost

     311       350       422  

Actuarial loss

     14,138       12,074       17,159  

Transition asset

     (1     (1     (1

Settlement charge

     21       124        

Termination benefit charge

           764       2,085  

Net periodic benefit cost

   $  37,616     $  33,658     $  39,432  

The components of net periodic benefit cost other than service cost are included in the line item Other nonoperating (income) and expenses, net, in the consolidated statements of earnings.

The expected return on assets is a calculation based on applying an annually selected expected rate of return assumption to the estimated fair value of the plan assets, giving consideration to contributions and benefits paid. The termination benefit charge represents the increased benefits payable to former Texas Industries, Inc. (TXI) executives as part of their change-in-control agreements.

The Company recognized the following amounts in consolidated comprehensive earnings:

 

years ended December 31

(add 000)

   2017     2016     2015  

Actuarial loss

   $   13,343     $   52,028     $   9,916  

Amortization of:

      

Prior service cost

     (311     (350     (422

Actuarial loss

     (14,138     (12,074     (17,159

Transition asset

     1       1       1  

Special plan termination benefits

           (764     (2,085

Settlement charge

     (21     (124      

Net prior service cost

                 2,338  

Total

   $ (1,126   $ 38,717     $ (7,411

Accumulated other comprehensive loss includes the following amounts that have not yet been recognized in net periodic benefit cost:

 

December 31   2017     2016  
(add 000)   Gross     Net of tax     Gross     Net of tax  

Prior service cost

  $ 115     $ 71     $ 425     $ 261  

Actuarial loss

    217,240       134,066       218,056       133,083  

Transition asset

    (6     (4     (7     (4

Total

  $   217,349     $   134,133     $   218,474     $   133,340  
 

 

Martin Marietta  |  Page 29


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The prior service cost, actuarial loss and transition asset expected to be recognized in net periodic benefit cost during 2018 are $104,000 (net of deferred taxes of $26,000), $13,184,000 (net of deferred taxes of $3,263,000) and $1,000, respectively. These amounts are included in accumulated other comprehensive loss at December 31, 2017.

The defined benefit plans’ change in projected benefit obligation is as follows:

 

years ended December 31

(add 000)

     2017       2016  

Net projected benefit obligation at beginning of year

   $ 831,849     $ 754,543  

Service cost

     26,805       22,167  

Interest cost

     36,101       35,879  

Actuarial loss

     56,675       49,760  

Gross benefits paid

     (72,095     (30,500

Net projected benefit obligation at end of year

   $   879,335     $   831,849  

The Company’s change in plan assets, funded status and amounts recognized on the Company’s consolidated balance sheets are as follows:

 

years ended December 31

(add 000)

     2017       2016  

Change in plan assets:

    

Fair value of plan assets at beginning of year

   $ 596,207     $ 546,512  

Actual return on plan assets, net

     83,091       35,432  

Employer contributions

     30,903       44,763  

Gross benefits paid

     (72,095     (30,500

Fair value of plan assets at end of year

   $   638,106     $ 596,207  

December 31

(add 000)

     2017       2016  

Funded status of the plan at end of year

   $ (241,229   $ (235,642

Accrued benefit cost

   $ (241,229   $ (235,642

December 31

(add 000)

     2017       2016  

Amounts recognized on consolidated balance sheets consist of:

    

Current liability

   $ (11,092   $ (6,223

Noncurrent liability

     (230,137     (229,419

Net amount recognized at end of year

   $ (241,229   $ (235,642

The accumulated benefit obligation for all defined benefit pension plans was $792,912,000 and $752,659,000 at December 31, 2017 and 2016, respectively.

Benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets are as follows:

 

December 31

(add 000)

     2017        2016  

Projected benefit obligation

   $ 879,335      $ 831,849  

Accumulated benefit obligation

   $ 792,912      $ 752,659  

Fair value of plan assets

   $  638,106      $  596,207  

Weighted-average assumptions used to determine benefit obligations as of December 31 are:

 

       2017        2016  

Discount rate

     3.76%        4.29%  

Rate of increase in future compensation levels

     4.50%        4.50%  

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 are:

 

      2017      2016      2015  

Discount rate

     4.29%        4.67%        4.25%  

Rate of increase in future compensation levels

     4.50%        4.50%        4.50%  

Expected long-term rate of return on assets

     6.75%        7.00%        7.00%  

The expected long-term rate of return on assets is based on a building-block approach, whereby the components are weighted based on the allocation of pension plan assets.

For 2017 and 2016, the Company estimated the remaining lives of participants in the pension plans using the RP-2014 Base Table. The no-collar table was used for salaried participants and the blue-collar table, reflecting the experience of the Company’s participants, was used for hourly participants. The Company used mortality improvement scales MP-2017 and MP-2016 for the years 2017 and 2016, respectively. The change in mortality improvement scale in 2017 did not have a material impact on the projected benefit obligation.

The target allocation for 2017 and the actual pension plan asset allocation by asset class are as follows:

 

     Percentage of Plan Assets  
     2017      December 31  
     Target                

Asset Class

     Allocation        2017        2016  

Equity securities

     54%        57%        57%  

Debt securities

     30%        29%        28%  

Hedge funds

     8%        7%        7%  

Real estate

     8%        7%        8%  

Total

     100%        100%        100%  
 

 

Martin Marietta  |  Page 30


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The Company’s investment strategy is for approximately 50% of equity securities to be invested in mid-sized to large capitalization U.S. funds, with the remaining invested in small capitalization, emerging markets and international funds. Debt securities, or fixed income investments, are invested in funds benchmarked to the Barclays U.S. Aggregate Bond Index.

The fair values of pension plan assets by asset class and fair value hierarchy level are as follows:

 

December 31

(add 000)

  Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
   

Total

Fair

Value

 
    2017  

Equity securities:

 

   

  Mid-sized to large cap

  $     $ 177,497     $     $ 177,497  

  Small cap, international and emerging growth funds

          186,272             186,272  

Debt securities:

 

   

  Core fixed income

          182,225             182,225  

Real estate

                46,467       46,467  

Hedge funds

                45,604       45,604  

Cash

    41                   41  

Total

  $ 41     $ 545,994     $ 92,071     $ 638,106  
      2016  

Equity securities:

 

   

  Mid-sized to large cap

  $     $ 169,176     $     $ 169,176  

  Small cap, international and emerging growth funds

          169,678             169,678  

Debt securities:

 

   

  Core fixed income

          168,282             168,282  

Real estate

                44,890       44,890  

Hedge funds

                44,036       44,036  

Cash

    145                   145  

Total

  $     145     $  507,136     $  88,926     $  596,207  

Real estate investments are stated at estimated fair value, which is 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 values of real estate investments generally do not reflect transaction costs which may be incurred upon disposition of the real estate investments and do not necessarily represent the prices at which the real estate investments would be sold or repaid, since market prices of real estate investments can only be determined by negotiation between a willing buyer and seller. An independent valuation consultant is employed to determine the fair value of the real estate investments. The value of hedge funds is based on the values of the sub-fund investments. In

determining the fair value of each sub-fund’s investment, the hedge funds’ Board of Trustees uses the values provided by the sub-funds and any other considerations that may, in its judgment, increase or decrease such estimated value.

The change in the fair value of pension plan assets valued using significant unobservable inputs (Level 3) is as follows:

 

years ended December 31

(add 000)

   Real
Estate
    Hedge
Funds
 
   2017  

Balance at beginning of year

   $ 44,890     $ 44,036  

Purchases, sales, settlements, net

     (83      

Actual return on plan assets held at period end

     1,660       1,568  

Balance at end of year

   $ 46,467     $ 45,604  
       2016  

Balance at beginning of year

   $ 23,242     $ 39,219  

Purchases, sales, settlements, net

     18,579       3,100  

Actual return on plan assets held at period end

     3,069       1,717  

Balance at end of year

   $   44,890     $   44,036  

In 2017 and 2016, the Company made combined pension plan and SERP contributions of $30,903,000 and $44,763,000, respectively. The Company currently estimates that it will contribute $37,400,000 to its pension and SERP plans in 2018.

The expected benefit payments to be paid from plan assets for each of the next five years and the five-year period thereafter are as follows:

 

(add 000)

        

2018

   $ 43,090  

2019

   $ 40,894  

2020

   $ 43,143  

2021

   $ 44,568  

2022

   $ 46,359  

Years 2023 - 2027

   $   261,475  

Postretirement Benefits. The net periodic postretirement benefit credit cost for postretirement plans includes the following components:    

 

years ended December 31

      

(add 000)

     2017       2016       2015  

Service cost

   $ 80     $ 85     $ 137  

Interest cost

           727             863             928  

Amortization of:

      

  Prior service credit

     (1,741     (1,959     (2,302

  Actuarial gain

     (364     (499     (309

  Settlement credit

           (9      

Total net periodic benefit credit

   $ (1,298   $ (1,519   $ (1,546
 

 

Martin Marietta  |  Page 31


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The components of net periodic benefit credit other than service cost are included in the line item Other nonoperating (income) and expenses, net, in the consolidated statements of earnings.

The Company recognized the following amounts in consolidated comprehensive earnings:    

 

years ended December 31

      

(add 000)

     2017       2016       2015  

Actuarial loss (gain)

   $ 1,236     $ 686     $ (626

Net prior service credit

     (3,902     (1,326      

Settlement credit

           9        

Amortization of:

      

  Prior service credit

     1,741       1,959       2,302  

  Actuarial gain

     364       499       309  

Total

   $ (561   $ 1,827     $  1,985  

Accumulated other comprehensive loss includes the following amounts that have not yet been recognized in net periodic benefit credit or cost:    

 

     2017       2016  
(add 000)    Gross     Net of tax     Gross     Net of tax  

Prior service credit

   $ (6,314   $ (3,899   $ (4,153   $ (2,551

Actuarial gain

     (2,256     (1,393     (3,857     (2,369

Total

   $ (8,570   $ (5,292   $ (8,010   $ (4,920

The prior service credit and actuarial gain expected to be recognized in net periodic benefit cost during 2018 is $2,445,000 (net of a deferred tax liability of $605,000) and $226,000 (net of a deferred tax liability of $56,000), respectively, and are included in accumulated other comprehensive loss at December 31, 2017.    

The postretirement health care plans’ change in benefit obligation is as follows:    

 

years ended December 31

    

(add 000)

     2017       2016  

Net benefit obligation at beginning of year

   $ 20,591     $ 23,408  

Service cost

     80       85  

Interest cost

     727       863  

Participants’ contributions

     3,421       2,616  

Actuarial loss

     1,236       688  

Gross benefits paid

     (6,806     (5,743

Plan amendments

     (3,902     (1,326

Net benefit obligation at end of year

   $   15,347     $   20,591  

The Company’s change in plan assets, funded status and amounts recognized on the Company’s consolidated balance sheets are as follows:    

 

years ended December 31

    

(add 000)

     2017       2016  

Change in plan assets:

    

Fair value of plan assets at beginning of year

   $     $  

Employer contributions

     3,385       3,127  

Participants’ contributions

     3,421       2,616  

Gross benefits paid

     (6,806     (5,743

Fair value of plan assets at end of year

   $     $  

December 31

    

(add 000)

     2017       2016  

Funded status of the plan at end of year

   $ (15,347   $ (20,591

Accrued benefit cost

   $ (15,347   $ (20,591

December 31

    

(add 000)

     2017       2016  

Amounts recognized on consolidated balance sheets consist of:

    

Current liability

   $ (2,560   $ (3,070

Noncurrent liability

     (12,787     (17,521

Net amount recognized at end of year

   $ (15,347   $ (20,591

Weighted-average assumptions used to determine the post-retirement benefit obligations as of December 31 are:

 

       2017       2016  

Discount rate

     3.47     3.78

Weighted-average assumptions used to determine net post-retirement benefit cost for the years ended December 31 are:

 

       2017       2016       2015  

Discount rate

     3.78     4.25     3.83

For 2017 and 2016, the Company estimated the remaining lives of participants in the postretirement plan using the RP-2014 Base Table. The no-collar table was used for salaried participants and the blue-collar table, reflecting the experience of the Company’s participants, was used for hourly participants. The Company used mortality improvement scales MP-2017 and MP-2016 for the years 2017 and 2016, respectively. The change in mortality improvement scale in 2017 did not have a material impact on the projected benefit obligation.

 

 

Martin Marietta  |  Page 32


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Assumed health care cost trend rates at December 31 are:

 

       2017        2016  

Health care cost trend rate assumed for next year

     7.0%        7.0%  

Rate to which the cost trend rate gradually declines

     5.0%        5.0%  

Year the rate reaches the ultimate rate

     2022        2021  

Assumed health care cost trend rates have a significant effect on the amounts reported for the Company’s health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects:

 

     One Percentage Point  

(add 000)

     Increase        (Decrease)  

Total service and interest cost components

   $ 41      $ (34

Postretirement benefit obligation

   $   783      $ (631

The Company estimates that it will contribute $2,560,000 to its postretirement health care plans in 2018.

The total expected benefit payments to be paid by the Company, net of participant contributions, for each of the next five years and the five-year period thereafter are as follows:

 

(add 000)

        

2018

   $   2,560  

2019

   $ 1,610  

2020

   $ 1,557  

2021

   $ 1,470  

2022

   $ 1,393  

Years 2023 - 2027

   $ 4,888  

Defined Contribution Plans. The Company maintains defined contribution plans that cover substantially all employees. These plans, qualified under Section 401(a) of the Internal Revenue Code, are retirement savings and investment plans for the Company’s salaried and hourly employees. Under certain provisions of these plans, the Company, at established rates, matches employees’ eligible contributions. The Company’s matching obligations were $14,893,000 in 2017, $13,235,000 in 2016 and $12,444,000 in 2015.

Postemployment Benefits. The Company had accrued postemployment benefits of $1,119,000 and $1,146,000 at December 31, 2017 and 2016, respectively.

Note K: Stock-Based Compensation

The shareholders approved, on May 19, 2016, the Martin Marietta Amended and Restated Stock-Based Award Plan. The Martin Marietta Materials, Inc. Stock-Based Award Plan, as amended from time to time (along with the Amended Omnibus Securities Award Plan, originally approved in 1994, the “Plans”) is still effective for awards made prior to 2017. The Company has been authorized by the Board of Directors to repurchase shares of the Company’s common stock for issuance under the stock-based award plans (see Note M).

The Company grants restricted stock awards under the Plans to a group of executive officers, key personnel and nonemployee members of the Board of Directors. The vesting of certain restricted stock awards is based on certain performance criteria over a specified period of time. In addition, certain awards are granted to individuals to encourage retention and motivate key employees. These awards generally vest if the employee is continuously employed over a specified period of time and require no payment from the employee. Awards granted to nonemployee members of the Board of Directors vest immediately.

Additionally, an incentive compensation stock plan has been adopted under the Plans whereby certain participants may elect to use up to 50% of their annual incentive compensation to acquire units representing shares of the Company’s common stock at a 20% discount to the market value on the date of the incentive compensation award. Certain executive officers are required to participate in the incentive compensation stock plan at certain minimum levels. Participants receive unrestricted shares of common stock in an amount equal to their respective units generally at the end of a 34-month period of additional employment from the date of award or at retirement beginning at age 62. All rights of ownership of the common stock convey to the participants upon the issuance of their respective shares at the end of the ownership-vesting period.

 

 

Martin Marietta  |  Page 33


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The following table summarizes information for restricted stock awards and incentive compensation stock awards for 2017:

 

     Restricted Stock –        Restricted Stock –      Incentive  
      Service Based        Performance Based      Compensation Stock  
           Weighted-Average              Weighted-Average            Weighted-Average  
      Number of
Awards
   

Grant-Date

Fair Value

       Number of
Awards
    Grant-Date
Fair Value
     Number of
Awards
    Grant-Date
Fair Value
 

January 1, 2017

     307,317     $ 125.36          111,317     $ 122.22        40,549     $ 114.44  

Awarded

     80,181     $ 213.76          47,997     $ 207.73        19,981     $ 208.68  

Distributed

     (68,828   $ 121.40          (17,692   $ 129.14        (21,784   $ 108.44  

Forfeited

     (3,830   $ 156.40          (1,623   $ 150.38        (236   $ 124.41  

December 31, 2017

     314,840     $ 151.84          139,999     $   150.34        38,510     $   166.67  

 

The weighted-average grant-date fair value of service-based restricted stock awards granted during 2017, 2016 and 2015 was $213.76, $128.48 and $154.26, respectively. The weighted-average grant-date fair value of performance-based restricted stock awards granted during 2017, 2016 and 2015 was $207.73, $124.41 and $108.53, respectively. The weighted-average grant-date fair value of incentive compensation stock awards granted during 2017, 2016 and 2015 was $208.68, $124.41 and $108.53, respectively.

The aggregate intrinsic values for unvested restricted stock awards and unvested incentive compensation stock awards at December 31, 2017 were $100,538,000 and $3,377,000, respectively, and were based on the closing price of the Company’s common stock at December 31, 2017, which was $221.04. The aggregate intrinsic values of restricted stock awards distributed during the years ended December 31, 2017, 2016 and 2015 were $15,771,000, $9,738,000 and $11,387,000, respectively. The aggregate intrinsic values of incentive compensation stock awards distributed during the years ended December 31, 2017, 2016 and 2015 were $2,601,000, $1,941,000 and $983,000, respectively. The aggregate intrinsic values for distributed awards were based on the closing prices of the Company’s common stock on the dates of distribution.

Under the Plans, prior to 2016, the Company granted options to employees to purchase its common stock at a price equal to the closing market value at the date of grant. Options become exercisable in four annual installments beginning one year after date of grant. Options granted starting 2013 expire ten years after the grant date while outstanding options granted prior to 2013 expire eight years after the grant date.

In connection with the TXI acquisition, completed in 2014, the Company issued 821,282 Martin Marietta stock options (Replacement Options) to holders of outstanding TXI stock options at the acquisition date. The Company issued 0.7 Replacement Options for each outstanding TXI stock option, and the Replacement Option prices reflected the exchange ratio. The Replacement Options will expire on the original contractual dates when the TXI stock options were initially issued. Consistent with the terms of the Company’s other outstanding stock options, Replacement Options expire 90 days after employment is terminated.    

Prior to 2009, each nonemployee member of the Board of Directors received 3,000 non-qualified stock options annually. These options have an exercise price equal to the market value at the date of grant, vested immediately and expire ten years from the grant date.    

The following table includes summary information for stock options as of December 31, 2017:    

 

          Weighted-     Weighted-Average  
          Average     Remaining  
    Number of     Exercise     Contractual  
     Options     Price     Life (years)  

Outstanding at January 1, 2017

    406,891     $ 93.27    

Exercised

    (104,093   $ 98.68    

Terminated

    (840   $ 80.52    

Outstanding at December 31, 2017

    301,958     $ 91.44       3.6  

Exercisable at December 31, 2017

    261,380     $   83.37       3.1  

The weighted-average grant-date exercise price of options granted during 2015 was $154.58. The aggregate intrinsic values of options exercised during the years ended December 31, 2017, 2016 and 2015 were $13,247,000,

 

 

Martin Marietta  |  Page 34


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

$22,571,000 and $7,318,000, respectively, and were based on the closing prices of the Company’s common stock on the dates of exercise. The aggregate intrinsic values for options outstanding and exercisable at December 31, 2017 were $39,135,000 and $35,984,000, respectively, and were based on the closing price of the Company’s common stock at December 31, 2017, which was $221.04. The excess tax benefits for stock options exercised during the years ended December 31, 2017, 2016 and 2015 were $3,483,000, $4,238,000 and $551,000, respectively.

At December 31, 2017, there are approximately 836,000 awards available for grant under the Plans. In 2016, the Company’s shareholders approved the registration of an additional 800,000 shares of common stock under the Plans. As part of approving the registered shares, the Company agreed to not issue any additional awards under the legacy TXI plan. The awards available for grant under the Plans at December 31, 2017 reflect no awards available under the legacy TXI plan.

In 1996, the Company adopted the Shareholder Value Achievement Plan to award shares of the Company’s common stock to key senior employees based on certain common stock performance criteria over a long-term period. Under the terms of this plan, 250,000 shares of common stock were reserved for issuance. Through December 31, 2017, 42,025 shares have been issued under this plan. No awards have been granted under this plan after 2000.

The Company adopted and the shareholders approved the Common Stock Purchase Plan for Directors in 1996, which provides nonemployee members of the Board of Directors the election to receive all or a portion of their total fees in the form of the Company’s common stock. Beginning in 2016, members of the Board of Directors were not required to defer any of their fees in the form of the Company’s common stock. Under the terms of this plan, 300,000 shares of common stock were reserved for issuance. Nonemployee members of the Board of Directors elected to defer portions of their fees representing 2,132, 3,699 and 4,035 shares of the Company’s common stock under this plan during 2017, 2016 and 2015, respectively.

The following table summarizes stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015, unrecognized compensation cost for nonvested

awards at December 31, 2017 and the weighted-average period over which unrecognized compensation cost will be recognized:    

 

(add 000,

except year data)

  Stock
Options
    Restricted
Stock
    Incentive
Compen-
sation
Stock
    Directors’
Awards
    Total  

Stock-based compensation expense recognized for years ended December 31:

 

       

2017

  $ 684     $ 28,657     $ 661     $ 458     $ 30,460  

2016

  $ 1,646     $ 17,747     $ 442     $ 646     $ 20,481  

2015

  $   2,679     $ 9,809     $ 376     $  725     $ 13,589  

Unrecognized compensation cost at December 31, 2017:

 

    $ 292     $  24,116     $  458     $     $  24,866  

Weighted-average period over which unrecognized compensation cost will be recognized:

 

    1.1 years       2.0 years       1.6 years          

The following presents expected stock-based compensation expense in future periods for outstanding awards as of December 31, 2017:

 

(add 000)

        

2018

   $ 15,559  

2019

     8,299  

2020

     645  

2021

     269  

2022

     94  

Total

   $   24,866  

Stock-based compensation expense is included in selling, general and administrative expenses in the Company’s consolidated statements of earnings.

Note L: Leases

Total lease expense for operating leases was $90,731,000, $85,945,000 and $80,417,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company’s operating leases generally contain renewal and/ or purchase options with varying terms. The Company has royalty agreements that generally require royalty payments based on tons produced or total sales dollars and also contain minimum payments. Total royalties, principally for leased properties, were $51,827,000, $55,257,000 and $53,658,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company also has capital lease obligations for machinery and equipment.

 

 

Martin Marietta  |  Page 35


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Future minimum lease and royalty commitments for all non-cancelable agreements and capital lease obligations as of December 31, 2017 are as follows:    

 

           Operating  
           Leases and  
     Capital     Royalty  
(add 000)    Leases     Commitments  

2018

   $ 4,205     $ 121,234  

2019

     3,750       64,504  

2020

     2,247       58,731  

2021

     1,371       55,290  

2022

     913       52,781  

Thereafter

     3,993       345,860  

Total

     16,479     $  698,400  

Less: imputed interest

     (3,231  

Present value of minimum lease payments

      13,248    

Less: current capital lease obligations

     (3,623  

Long-term capital lease obligations

   $ 9,625    

Of the total future minimum commitments, $204,418,000 relates to the Company’s contracts of affreightment.

Note M: Shareholders’ Equity

The authorized capital structure of the Company includes 100,000,000 shares of common stock, with a par value of $0.01 a share. At December 31, 2017, approximately 1,986,000 common shares were reserved for issuance under stock-based award plans.

Pursuant to authority granted by its Board of Directors, the Company can repurchase up to 20,000,000 shares of common stock. The Company repurchased 457,742, 1,587,987 and 3,285,380 shares of common stock during 2017, 2016 and 2015, respectively. At December 31, 2017, 14,668,891 shares of common stock were remaining under the Company’s repurchase authorization.

In addition to common stock, the Company’s capital structure includes 10,000,000 shares of preferred stock with a par value of $0.01 a share. On October 21, 2006, the Board of Directors adopted a Rights Agreement (the “Rights Agreement”) and reserved 200,000 shares of Junior Participating Class B Preferred Stock for issuance. In accordance with the Rights Agreement, the Company issued a dividend of one right for each share of the Company’s common stock outstanding as of October 21, 2006, and one right continues to attach to each share of common stock issued thereafter. The rights will become exercisable if any person or group acquires

beneficial ownership of 15% or more of the Company’s common stock. Once exercisable and upon a person or group acquiring 15% or more of the Company’s common stock, each right (other than rights owned by such person or group) entitles its holder to purchase, for an exercise price of $315 per share, a number of shares of the Company’s common stock (or in certain circumstances, cash, property or other securities of the Company) having a market value of twice the exercise price, and under certain conditions, common stock of an acquiring company having a market value of twice the exercise price. If any person or group acquires beneficial ownership of 15% or more of the Company’s common stock, the Company may, at its option, exchange the outstanding rights (other than rights owned by such acquiring person or group) for shares of the Company’s common stock or Company equity securities deemed to have the same value as one share of common stock or a combination thereof, at an exchange ratio of one share of common stock per right. The Company’s Rights Agreement expired on October 21, 2016.

Note N: Commitments and Contingencies

Legal and Administrative Proceedings. The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. In the opinion of management and counsel, based upon currently-available facts, it is remote that the ultimate outcome of any litigation and other proceedings, including those pertaining to environmental matters (see Note A), relating to the Company and its subsidiaries, will have a material adverse effect on the overall results of the Company’s operations, its cash flows or its financial position.

Asset Retirement Obligations. The Company incurs reclamation and teardown costs as part of its mining and production processes. Estimated future obligations are discounted to their present value and accreted to their projected future obligations via charges to operating expenses. Additionally, the fixed assets recorded concurrently with the liabilities are depreciated over the period until retirement activities are expected to occur. Total accretion and depreciation expenses for 2017, 2016 and 2015 were $8,682,000, $8,823,000 and $6,767,000, respectively, and are included in other operating income and expenses, net, in the consolidated statements of earnings.

 

 

Martin Marietta  |  Page 36


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The following shows the changes in the asset retirement obligations:    

 

years ended December 31

    

(add 000)

     2017       2016  

Balance at beginning of year

   $ 101,106     $ 89,604  

Accretion expense

     4,768       4,288  

Liabilities incurred and liabilities assumed in business combinations

     7,940       6,700  

Liabilities settled

     (309     166  

Revisions in estimated cash flows

     (3,852     348  

Balance at end of year

   $   109,653     $   101,106  

Other Environmental Matters. The Company’s operations are subject to and affected by federal, state and local laws and regulations relating to the environment, health and safety and other regulatory matters. Certain of the Company’s operations may, from time to time, involve the use of substances that are classified as toxic or hazardous within the meaning of these laws and regulations. Environmental operating permits are, or may be, required for certain of the Company’s operations, and such permits are subject to modification, renewal and revocation. The Company regularly monitors and reviews its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental remediation liability is inherent in the operation of the Company’s businesses, as it is with other companies engaged in similar businesses. The Company has no material provisions for environmental remediation liabilities and does not believe such liabilities will have a material adverse effect on the Company in the future.

The United States Environmental Protection Agency (EPA) includes the lime industry as a national enforcement priority under the federal Clean Air Act (CAA). As part of the industry-wide effort, the EPA issued Notices of Violation/Findings of Violation (NOVs) to the Company in 2010 and 2011 regarding its compliance with the CAA New Source Review (NSR) program at its Magnesia Specialties dolomitic lime manufacturing plant in Woodville, Ohio. The Company has been providing information to the EPA in response to these NOVs and has had several meetings with the EPA. Although the Company believes it is in substantial compliance with the NSR program, it anticipates that it will reach a settlement of this matter with the EPA. The Company believes any costs related to any required upgrades to capital equipment will be spread over time and that those costs and any related penalties will not have a material adverse effect on the Company’s results of operations or its financial condition.

Insurance Reserves. The Company has insurance coverage with large deductibles for workers’ compensation, automobile liability, marine liability and general liability claims. The Company is also self-insured for health claims. At December 31, 2017 and 2016, reserves of $48,061,000 and $42,184,000, respectively, were recorded for all such insurance claims. The Company carries various risk deductible workers’ compensation policies related to its workers’ compensation liabilities. The Company records the workers’ compensation reserves based on an actuarial-determined analysis. This analysis calculates development factors, which are applied to total reserves within the workers’ compensation program. While the Company believes the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience and/or significant changes in these assumptions may materially affect workers’ compensation costs.

Letters of Credit. In the normal course of business, the Company provides certain third parties with standby letter of credit agreements guaranteeing its payment for certain insurance claims, contract performance and permit requirements. At December 31, 2017, the Company was contingently liable for $45,028,000 in letters of credit, of which $2,301,000 were issued under the Company’s Revolving Facility. The obligations for insurance claims are accrued on the Company’s consolidated balance sheets.

Surety Bonds. In the normal course of business, at December 31, 2017, the Company was contingently liable for $348,253,000 in surety bonds required by certain states and municipalities and their related agencies. The bonds are principally for certain insurance claims, construction contracts, reclamation obligations and mining permits guaranteeing the Company’s own performance. Certain of these underlying obligations, including those for asset retirement requirements and insurance claims, are accrued on the Company’s consolidated balance sheets. Five of these bonds total $90,625,000, or 26%, of all outstanding surety bonds. The Company has indemnified the underwriting insurance companies, Liberty Mutual and W.R. Berkley, against any exposure under the surety bonds. In the Company’s past experience, no material claims have been made against these financial instruments.

 

 

Martin Marietta  |  Page 37


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Borrowing Arrangements with Affiliate. The Company is a co-borrower with an unconsolidated affiliate for a revolving line of credit agreement with BB&T, of which $15,775,000 was outstanding as of December 31, 2017. The line of credit was amended in January 2018 to extend the maturity to March 2020 and reduce the line of credit from $25,000,000 to $15,500,000. The affiliate has agreed to reimburse and indemnify the Company for any payments and expenses the Company may incur from this agreement. The Company holds a lien on the affiliate’s membership interest in a joint venture as collateral for payment under the revolving line of credit.

In 2014, the Company loaned the unconsolidated affiliate a total of $6,000,000 as an interest-only note due December 31, 2019.

Purchase Commitments. The Company had purchase commitments for property, plant and equipment of $191,582,000 as of December 31, 2017. The Company also had other purchase obligations related to energy and service contracts of $123,883,000 as of December 31, 2017. The Company’s contractual purchase commitments as of December 31, 2017 are as follows:

 

(add 000)        

2018

   $   238,280    

2019

     37,275    

2020

     10,983    

2021

     8,809    

2022

     1,616    

Thereafter

     18,502    

Total

   $   315,465    

Capital expenditures in 2017, 2016 and 2015 that were purchase commitments as of the prior year end were $83,748,000, $62,927,000 and $116,681,000, respectively.

Employees. Approximately 11% of the Company’s employees are represented by a labor union. All such employees are hourly employees. The Company maintains collective bargaining agreements relating to the union employees within the Building Materials business and Magnesia Specialties segment. Of the Magnesia Specialties segment, located in Manistee, Michigan and Woodville, Ohio, 100% of its hourly employees are represented by labor unions. The Manistee collective bargaining agreement expires in August 2019. The Woodville collective bargaining agreement expires in May 2018.

Note O: Segments

The Building Materials business is comprised of divisions which represent operating segments. Certain divisions are consolidated into reportable segments for financial reporting purposes as they meet the aggregation criteria. The Building Materials business contains three reportable segments: Mid-America Group, Southeast Group and West Group. The Magnesia Specialties business represents an individual operating and reportable segment. The accounting policies used for segment reporting are the same as those described in Note A.

The Company’s evaluation of performance and allocation of resources are based primarily on earnings from operations. Consolidated earnings from operations include net sales less cost of sales, selling, general and administrative expenses, acquisition-related expenses, other operating income and expenses, net, and exclude interest expense, other nonoperating income and expenses, net, and tax expense/benefit. Corporate consolidated earnings from operations primarily include depreciation on capitalized interest, expenses for corporate administrative functions, acquisition-related expenses, net, and other nonrecurring and/or non-operational income and expenses excluded from the Company’s evaluation of segment performance and resource allocation. All long-term debt and related interest expense are held at Corporate.

Assets employed by segment include assets directly identified with those operations. Corporate assets consist primarily of cash and cash equivalents; property, plant and equipment for corporate operations; investments and other assets not directly identifiable with a reportable segment.

In connection with a management change effective January 1, 2017, the cement product line is reported in the West Group. All segment information has been reclassified to conform to the presentation of the Company’s current reportable segments and for the adoption of ASU 2017-07.

 

 

Martin Marietta  |  Page 38


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The following tables display selected financial data for the Company’s reportable segments.

 

years ended December 31

(add 000)

 

 

   
Total revenues    2017     2016     2015  

Mid-America Group

   $   1,053,325     $   1,017,098     $ 926,251  

Southeast Group

     362,555       321,078       304,472  

West Group

     2,279,723       2,223,515       2,062,968  

Total Building
Materials Business

     3,695,603       3,561,691       3,293,691  

Magnesia Specialties

     269,991       257,058       245,879  

Total

   $ 3,965,594     $ 3,818,749     $   3,539,570  
Net sales                      

Mid-America Group

   $ 982,109     $ 945,123     $ 851,854  

Southeast Group

     348,409       304,451       285,302  

West Group

     2,142,839       2,089,192       1,903,452  

Total Building
Materials Business

     3,473,357       3,338,766       3,040,608  

Magnesia Specialties

     248,071       238,001       227,508  

Total

   $ 3,721,428     $ 3,576,767     $ 3,268,116  
Gross profit (loss)         

Mid-America Group

   $ 335,394     $ 306,560     $ 257,002  

Southeast Group

     74,642       57,286       34,359  

West Group

     465,595       466,790       360,667  

Total Building
Materials Business

     875,631       830,636       652,028  

Magnesia Specialties

     89,399       89,603       79,057  

Corporate

     6,910       (8,501     (4,165

Total

   $ 971,940     $ 911,738     $ 726,920  
Selling, general and administrative expenses  

Mid-America Group

   $ 53,937     $ 52,712     $ 52,227  

Southeast Group

     17,144       17,245       18,353  

West Group

     102,650       95,631       92,988  

Total Building
Materials Business

     173,731       165,588       163,568  

Magnesia Specialties

     9,537       9,617       9,408  

Corporate

     78,860       66,401       37,778  

Total

   $ 262,128     $ 241,606     $ 210,754  
Earnings (Loss) from operations  

Mid-America Group

   $ 284,789     $ 258,422     $ 207,619  

Southeast Group

     61,238       41,653       16,712  

West Group

     360,544       379,417       256,042  

Total Building
Materials Business

     706,571       679,492       480,373  

Magnesia Specialties

     79,431       79,306       69,301  

Corporate

     (85,621     (81,532     (55,507

Total

   $ 700,381     $ 677,266     $ 494,167  

years ended December 31

(add 000)

 

 

     
Assets employed    2017      2016      2015  

Mid-America Group

   $   1,532,867      $ 1,406,526      $ 1,304,574  

Southeast Group

     616,344        594,967        583,369  

West Group

     5,014,231        4,904,018        4,561,432  

Total Building Materials Business

     7,163,442        6,905,511        6,449,375  

Magnesia Specialties

     152,257        150,969        147,795  

Corporate

     1,676,812        244,425        360,441  

Total

   $ 8,992,511      $   7,300,905      $   6,957,611  
Depreciation, depletion and amortization  

Mid-America Group

   $ 69,691      $ 64,295      $ 61,693  

Southeast Group

     30,780        30,590        31,644  

West Group

     169,853        164,653        147,619  

Total Building Materials Business

     270,324        259,538        240,956  

Magnesia Specialties

     10,070        10,354        9,992  

Corporate

     16,768        15,361        12,639  

Total

   $ 297,162      $ 285,253      $ 263,587  
Total property additions  

Mid-America Group

   $ 139,505      $ 152,014      $ 77,640  

Southeast Group

     34,636        30,588        12,155  

West Group

     240,793        338,795        244,844  

Total Building Materials Business

     414,934        521,397        334,639  

Magnesia Specialties

     11,129        8,944        8,916  

Corporate

     12,558        10,430        20,561  

Total

   $ 438,621      $ 540,771      $ 364,116  
Property additions through acquisitions  

Mid-America Group

   $ 60      $ 1,524      $ 4,385  

Southeast Group

                    

West Group

     2,420        132,112        35,965  

Total Building Materials Business

     2,480        133,636        40,350  

Magnesia Specialties

                    

Corporate

                    

Total

   $ 2,480      $ 133,636      $ 40,350  

The Building Materials business includes the aggregates, cement, ready mixed concrete and asphalt and paving product lines. All cement, ready mixed concrete and asphalt and paving product lines are reported within in the West Group. The following tables, which are reconciled to consolidated amounts, provide total revenues, net sales and gross profit by line of business: Building Materials (further divided by product line) and Magnesia Specialties. Interproduct revenues and interproduct sales represent sales from the aggregates product line to the ready mixed concrete and asphalt and paving product lines and sales from the cement product line to the ready mixed concrete product line.

 

 

Martin Marietta  |  Page 39


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

years ended December 31

(add 000)

 

 

   
Total revenues    2017     2016     2015  

Aggregates

   $   2,341,540     $ 2,267,574     $   2,120,245  

Cement

     384,112       375,814       475,725  

Ready Mixed Concrete

     936,979       903,803       657,831  

Asphalt and Paving1

     296,956       261,612       229,561  

Less: Interproduct revenues1

     (263,984     (247,112     (189,671

Total Building
Materials Business

     3,695,603       3,561,691       3,293,691  

Magnesia Specialties

     269,991       257,058       245,879  

Total

   $ 3,965,594     $ 3,818,749     $ 3,539,570  
Net sales  

Aggregates

   $ 2,137,225     $ 2,060,876     $ 1,896,143  

Cement

     371,525       364,445       455,382  

Ready Mixed Concrete

     936,062       902,635       656,531  

Asphalt and Paving1

     292,529       257,922       222,223  

Less: Interproduct sales1

     (263,984     (247,112     (189,671

Total Building Materials Business

     3,473,357       3,338,766       3,040,608  

Magnesia Specialties

     248,071       238,001       227,508  

Total

   $ 3,721,428     $   3,576,767     $ 3,268,116  

 

1 

2016 and 2015 amounts have been revised to reflect the elimination of $83,500,000 and $ 61,400,000, respectively, of asphalt sales to the paving operations within that product line.

Gross profit (loss)  

Aggregates

   $ 601,968      $   558,318     $   470,688  

Cement

     117,313        120,201       103,813  

Ready Mixed Concrete

     91,670        99,042       42,110  

Asphalt and Paving

     64,680        53,075       35,417  

Total Building Materials Business

     875,631        830,636       652,028  

Magnesia Specialties

     89,399        89,603       79,057  

Corporate

     6,910        (8,501     (4,165

Total

   $   971,940      $ 911,738     $ 726,920  

Domestic and foreign total revenues are as follows:

 

years ended December 31                
(add 000)    2017      2016      2015  

Domestic

   $   3,901,323      $   3,761,651      $   3,493,462  

Foreign

     64,271        57,098        46,108  

Total

   $   3,965,594      $ 3,818,749      $ 3,539,570  

Note P: Supplemental Cash Flow Information

The components of the change in other assets and liabilities, net, are as follows:

 

years ended December 31              
(add 000)    2017     2016     2015  

Other current and noncurrent assets

   $ (19,424   $ 9,171     $ (3,631

Accrued salaries, benefits and payroll taxes

     136       16,942       (4,854

Accrued insurance and other taxes

     4,866       (2,688     4,425  

Accrued income taxes

     (11,044     (12,523     (4,364

Accrued pension, postretirement and postemployment benefits

     1,980       (15,955     (18,153

Other current and noncurrent liabilities

     38,105       (6,053     (3,014

Change in other assets and liabilities, net

   $     14,619     $   (11,106)     $   (29,591

Noncash investing and financing activities are as follows:

 

years ended December 31

(add 000)

   2017      2016      2015  

Accrued liabilities for purchases of property, plant and equipment

   $   61,644      $   38,566      $   22,285  

Acquisition of assets through capital lease

   $ 811      $ 1,399      $ 1,445  

Acquisition of assets through asset exchange

   $ 2,476      $      $ 5,000  

Sale of asset to settle liability

   $ 900      $      $  

Supplemental disclosures of cash flow information are as follows:

 

years ended December 31

(add 000)

   2017      2016      2015  

Cash paid for interest

   $ 78,902      $ 73,664      $ 71,011  

Cash paid for income taxes

   $   155,771      $   124,342      $   46,774  
 

 

Martin Marietta  |  Page 40


NOTES TO FINANCIAL STATEMENTS

 

 

Note Q: Other Operating Expenses and (Income), Net

Other operating expenses and income, net, are comprised generally of gains and losses on the sale of assets; gains and losses related to certain customer accounts receivable; rental, royalty and services income; accretion expense, depreciation expense and gains and losses related to asset retirement obligations. These net amounts represented an expense of $793,000 in 2017, income of $8,043,000 in 2016 and an expense of $15,653,000 in 2015. The 2017 amount primarily reflects $19,366,000 of gains on the sale of assets, offset by $12,668,000 of nonrecurring repair costs related to certain of the Company’s leased railcars and approximately $10,813,000 of executive retirement expense. The net expense for 2015 reflects the net impact of the divestitures of the California cement operations and the San Antonio asphalt operations.

    

 

 

Martin Marietta  |  Page 41


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS

 

 

LOGO

INTRODUCTORY OVERVIEW

Martin Marietta Materials, Inc. (the “Company” or “Martin Marietta”), is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of 282 quarries and distribution yards to customers in 30 states, Canada, the Bahamas and the Caribbean Islands. In the western United States, Martin Marietta

also provides cement and downstream products, namely ready mixed concrete, asphalt and paving services, in markets where the Company has a leading aggregates position. Specifically, the Company has two cement plants in Texas and ready mixed concrete and asphalt operations in Texas, Colorado, Louisiana and Arkansas. Paving services are exclusively in Colorado. The Company’s heavy-side building materials are used in infrastructure, nonresidential and residential construction projects. Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast. The aggregates, cement, ready mixed concrete, asphalt and paving product lines are reported collectively as the “Building Materials” business.

As more fully discussed in the Consolidated Strategic Objectives section, geography is critically important for the Building Materials business. The Company conducts its Building Materials business through three reportable segments, organized by geography: Mid-America Group, Southeast Group and West Group. The Mid-America and Southeast Groups provide aggregates products only. The West Group provides aggregates, cement and downstream products. Further, the following states accounted for 74% of the Building Materials business net sales in 2017: Texas, Colorado, North Carolina, Iowa and Georgia.

The Building Materials business is a mature, cyclical business, dependent on activity within the construction marketplace. The United States is currently experiencing the third-longest economic recovery since the Great Depression. As of December 31, 2017, the current expansion, which started in June 2009, has lasted 102 months. By comparison, the average trough-to-peak expansionary cycle since 1938 was 60 months

 

 

LOGO

 

Reportable
Segments
  Mid-America Group   Southeast Group   West Group

Operating

Locations

 

 

Indiana, Iowa, northern Kansas, Kentucky, Maryland, Minnesota, Missouri, eastern Nebraska, North Carolina, Ohio, South Carolina, Virginia, Washington and West Virginia

 

  Alabama, Florida, Georgia, Tennessee, Nova Scotia and the Bahamas   Arkansas, Colorado, southern Kansas, Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah and Wyoming

Product Lines

  Aggregates   Aggregates  

Aggregates, Cement, Ready Mixed Concrete, Asphalt and Paving Services

 

Plant Types

  Quarries, Mines and Distribution Facilities   Quarries, Mines and Distribution Facilities  

Quarries, Mines, Plants and Distribution Facilities

 

 

Modes of
Transportation  

 

  Truck and Railcar   Truck, Railcar and Ship   Truck and Railcar

 

Martin Marietta  |  Page 42


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

and, in May 2018, the current cycle will become the second-longest economic recovery since the Great Depression. During this current economic expansion, however, governmental uncertainty, labor shortages and record levels of precipitation have slowed the pace of heavy construction activity, resulting in a slow, steady, extended construction cycle that is expected to continue over the next several years. The Company’s overall aggregates product line shipments remain approximately 10% below mid-cycle demand. Importantly, the level of recovery varies within the Company’s geographic footprint. Specifically, North Carolina and Georgia, key states in the Mid-America and Southeast Groups, respectively, are approximately 20% below mid-cycle demand, while Texas, a key state in the West Group, is modestly above mid-cycle demand.

Magnesia Specialties

The Company also operates a Magnesia Specialties business with production facilities in Michigan and Ohio. The Magnesia Specialties business produces magnesia-based chemicals products which are used in industrial, agricultural and environmental applications. It also produces dolomitic lime sold primarily to customers in the steel and mining industries. Magnesia Specialties’ products are shipped to customers worldwide.

Consolidated Strategic Objectives

The Company’s strategic planning process, or Strategic Operating Analysis and Review (SOAR), provides the framework for execution of Martin Marietta’s long-term strategic plan. Guided by this framework and giving consideration to the cyclicality of the Building Materials business, the Company determines capital allocation priorities to maximize long-term shareholder value. The Company’s strategy includes ongoing evaluation of aggregates-led opportunities of scale in new domestic markets (i.e., platform acquisitions), expansion through acquisitions that complement existing operations (i.e., bolt-on acquisitions), divestitures of assets that are not consistent with stated strategic goals, and arrangements with other companies engaged in similar or complementary businesses. The Company finances such opportunities with the goal of preserving its financial flexibility by having a leverage ratio (consolidated debt-to-consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA) within a target range of 2.0 times to 2.5 times within a reasonable time following the completion of a transaction.

By purposeful design, the Company, currently with leading positions in 85% of its markets, will continue to be an aggregates-led business, focusing on markets with strong, underlying growth fundamentals and where it can sustain or achieve a leading market position. In 2017, the aggregates product line represented 59% of consolidated total revenues. As part of its long-term strategic plan, the Company may pursue strategic cement and targeted downstream opportunities. For Martin Marietta, strategic cement and targeted downstream operations are located in vertically-integrated markets where the Company has, or envisions a clear path toward, a leading aggregates position. Additionally, strategic cement operations are those where market supply cannot be meaningfully interdicted by water.

LOGO

 

 

Martin Marietta  |  Page 43


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

LOGO

 

Generally, the Company’s building materials products are both sourced and sold locally. As a result, geography is critically important when assessing market attractiveness and growth opportunities. Attractive geographies a) exhibit population growth and/or population density, both of which are drivers of heavy-side building materials consumption; b) have business and employment diversity, drivers of greater economic stability; and c) have a superior state financial position, a driver of public infrastructure growth and support.

In order to assess population growth and density, the Company focuses on the megaregions of the United States. Megaregions are large networks of metropolitan population centers covering thousands of square miles. According to America 2050, a planning and policy program of the Regional Plan Association (RPA), a majority of the nation’s population and economic growth through 2050 will occur in 11 megaregions. The Company has a significant strategic presence in five of the megaregions. The Company’s leading positions in the Front Range and Texas Triangle megaregions and its enhanced position in the Piedmont Atlantic, primarily the Atlanta area, are the results of acquisitions

since 2011, evidence of the successful execution of SOAR. The megaregions and the key states for the Company are more fully discussed in the Building Materials Business’ Key Considerations section.

In considering business and employment diversity, the Company focuses its geographic footprint along significant transportation corridors, particularly where land is readily available for the construction of fulfillment centers and data centers. The retail sector values transportation corridors, as logistics and distribution are critical considerations for construction supporting that industry. In addition, technology companies view these areas as attractive locations for data centers.

In line with the Company’s strategic objectives, management’s overall focus is on the following items, among other things:

 

Upholding the Company’s commitment to its mission, vision and values

 

Navigating effectively through a slow-and-steady economic recovery cycle, balancing investment and cost decisions against slower-than-expected volume growth

 

 

Martin Marietta  |  Page 44


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

 

Tracking shifts in population trends as well as local, state and national economic conditions to ensure changing trends are reflected in execution against the strategic plan

 

Integrating acquired businesses efficiently to achieve maximum value

 

Allocating capital in a manner consistent with the following long-standing priorities while maintaining financial flexibility

 

  -

Acquisitions

 

  -

Organic capital investment

 

  -

Return of cash to shareholders through dividends and share repurchases

2017 Performance Highlights

Achieved Record Safety Performance

 

 

Company-wide Lost Time Incident Rate (LTIR) of 0.13, surpassing world-class LTIR of 0.20 or lower

 

 

Total Injury Incident Rate (TIIR) of 1.07, a 19% improvement compared with 2016

 

 

Nineteen sites reached 500,000 consecutive hours worked without any incident and 11 sites surpassed one million hours of incident-free work

Expanded the Business Through Execution Against Disciplined Growth Strategy

On June 26, 2017, the Company announced a definitive agreement to acquire Bluegrass Materials Company (Bluegrass) for $1.625 billion in cash. Bluegrass is the largest privately held, pure-play aggregates business in the United States and has a portfolio of 23 active sites with more than 125 years of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Company’s existing southeastern footprint and provide a new growth platform within the southern portion of the Northeast megaregion. The Company and Bluegrass are working closely and cooperatively with the Department of Justice in its review of the proposed transaction. The parties currently anticipate that the proposed acquisition will be completed in the first half of 2018. In anticipation of closing the Bluegrass acquisition, the Company successfully completed a debt offering in December 2017, which included $300 million aggregate principal amount of Floating Rate Senior Notes due 2019, $500 million aggregate principal amount of 3.500% Senior Notes due in 2027 and $600 million aggregate principal amount of 4.250% Senior Notes due in 2047, the proceeds of which will be used in part to finance the pending acquisition.

Achieved Record Financial Performance

The Company achieved record total revenues, gross profit, earnings from operations and earnings per diluted share despite externally-driven headwinds, notably the significant amount of precipitation, which was exacerbated by weather-related events, across a majority of the Company’s geographies. Importantly, inclement weather was most significant during the second and third quarters, which represents the zenith of the construction season. According to the 2017 statewide precipitation map for the six-month period from April through September, for the 123 years the National Oceanic Atmospheric Administration (NOAA) has been tracking data, most areas experienced above-average rainfall. This, coupled with government uncertainty regarding additional infrastructure investment, attendant project delays and tight labor markets, exerted downward pressure on 2017 shipment and production levels. However, the Company’s commitment to operational excellence led to achieving the following metrics (comparisons with 2016, unless otherwise noted):

 

 

Record earnings per diluted share of $11.25, inclusive of a $4.07 per diluted share benefit from the provisional assessment of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act)

 

  -

Even excluding the provisional benefits of the 2017 Tax Act, record earnings per diluted share achieved

 

 

Record net earnings attributable to Martin Marietta of $713.3 million, an increase of 68%, inclusive of a $258.1 million one-time income tax benefit from the provisional remeasurement of deferred tax assets and liabilities following enactment of the 2017 Tax Act

 

 

Record consolidated EBITDA of $1.0 billion, a 3% improvement, and a 25% EBITDA margin (as a percentage of total revenues)

 

 

Aggregates product line pricing increase of 4.5% and volume decline of 0.6%

 

 

Record Magnesia Specialties’ total revenues of $270.0 million and earnings from operations of $79.4 million

 

 

Effective management of controllable production costs, as evidenced by a 60-basis-point improvement in consolidated gross margin

 

 

Selling, general and administrative (SG&A) expenses representing 6.6% of total revenues

 

 

Martin Marietta  |  Page 45


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

Cash Flows

 

 

Operating cash flow of $657.9 million

 

 

Return of $208.9 million of cash to shareholders through share repurchases ($100.0 million) and dividends ($108.9 million)

 

 

Ratio of consolidated net debt-to-consolidated EBITDA of 1.6 times for the trailing-twelve months ended December 31, 2017, calculated as prescribed in the Company’s bank credit agreements and in compliance with the covenant maximum of 3.5 times

BUSINESS ENVIRONMENT

Building Materials Business

The Building Materials business serves customers in the construction marketplace. The business’ profitability is sensitive to national, regional and local economic conditions and cyclical swings in construction spending, which are in turn affected by fluctuations in interest rates; access to capital markets; levels of public-sector infrastructure funding; and demographic, geographic, employment and population dynamics.

The heavy-side construction business, inclusive of much of the Company’s operations, is conducted outdoors. Therefore, erratic weather patterns, precipitation and other weather related conditions, including flooding, hurricanes, snowstorms and droughts, can significantly affect production schedules, shipments, costs, efficiencies and profitability. Generally, the financial results for the first and fourth quarters are significantly lower than the second and third quarters due to winter weather. The impacts of erratic weather patterns are more fully discussed in the Building Materials Business’ Key Considerations section.

Product Lines

Aggregates are an engineered granular material consisting of crushed stone, sand and gravel of varying mineralogies, manufactured to specific sizes, grades and chemistry for use primarily in construction applications. The Company’s operations consist primarily of open pit quarries; however, the Company is the largest operator of underground aggregates mines in the United States, with 14 active underground mines located in the Mid-America Group. On average, the Company’s aggregates reserves exceed 60 years based on normalized production levels and approximate 100 years at current production rates.

LOGO

Cement is the basic binding agent used to bind water, aggregates and sand, in the production of ready mixed concrete. The Company has a strategic and leading cement position in the Texas markets, with production facilities in Midlothian, Texas, south of Dallas-Fort Worth, and Hunter, Texas, north of San Antonio. These plants produce Portland and specialty cements, have a combined annual capacity of 4.5 million tons, and operated at 75% to 80% utilization in 2017. The Midlothian plant has a permit that provides an 800,000-ton-expansion opportunity. In addition to the two production facilities, the Company operates several cement distribution terminals. Calcium carbonate in the form of limestone is the principal raw material used in the production of cement. The Company owns more than 600 million tons of limestone reserves adjacent to its cement production plants.

 

 

Martin Marietta  |  Page 46


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

Ready mixed concrete, a mixture primarily of cement, water and aggregates, is measured in cubic yards and specifically batched or produced for customers’ construction projects and then transported and poured at the project site. The aggregates used for ready mixed concrete is a washed type material with limited amounts of fines (i.e., dirt and clay). The Company owns 143 ready mix operations in Texas, Colorado, Louisiana and Arkansas. Asphalt is most commonly used in surfacing roads and parking lots and consists of liquid asphalt, the binding medium, and aggregates. Similar to ready mixed concrete, each asphalt batch is produced to customer specifications. The Company’s asphalt operations are located primarily in Colorado; additionally, paving services are offered in Colorado. Market dynamics for these product lines include a highly competitive environment and lower barriers to entry compared with aggregates and cement.

End-Use Trends

 

    According to the U.S. Geological Survey, for the nine-months ended September 30, 2017, the latest available governmental data, estimated construction aggregates consumption decreased 4% and estimated cement consumption increased 2%, both compared with the nine-months ended September 30, 2016
    Spending statistics for 2017 versus 2016, according to U.S. Census Bureau:
  - Total value of construction put in place increased 3%
  - Public-works construction spending increased 4%
  - Private nonresidential construction market spending decreased 3%
  - Private residential construction market spending increased 6%

The principal end-use markets of the Building Materials business are public infrastructure (i.e., highways; streets; roads; bridges; and schools); nonresidential construction (i.e., manufacturing and distribution facilities; industrial complexes; office buildings; large retailers and wholesalers; malls; and energy-related activity); and residential construction (i.e., subdivision development; and single- and multi-family housing). Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast, collectively, the ChemRock/Rail market.

Public infrastructure jobs can require several years to complete, while residential and non-residential construction jobs are usually completed within one year. Generally, the purchase orders the Company receives from its customers do not contain firm quantity commitments, regardless of end use market. Therefore, management does not utilize a Company backlog in managing its business.

LOGO

Public Infrastructure

The public infrastructure market accounted for approximately 40% of the Company’s aggregates product line shipments in 2017, consistent with 2016 and 2015. Government uncertainty, attendant project delays and tight labor markets have exerted disproportionate downward pressure on public construction activity and, for the past three years, as these headwinds have worsened, the Company’s shipments to this end-use market have remained below the most recent five-year average of 43% and ten-year average of 48%.

While construction spending in the public and private market sectors is affected by economic cycles, the historic level of spending on public infrastructure projects has been comparatively more stable due to predictability of funding from federal, state and local governments, with approximately half

 

 

Martin Marietta  |  Page 47


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

of the funding from federal government and half from state and local governments. However, public infrastructure activity has not yet experienced the anticipated benefits from funding provided by the Fixing America’s Surface Transportation Act (FAST Act), signed into law on December 4, 2015. The FAST Act, the first long-term transportation funding bill in nearly a decade, authorizes $305 billion over fiscal years 2016 through 2020. State and local initiatives that support infrastructure funding, including gas tax increases and other ballot initiatives, are increasing in size and number as these governments recognize the need to play an expanded role in public infrastructure funding. Specifically, in the November 2017 election, $3.7 billion of transportation funding initiatives were approved in Texas, Colorado, Georgia, South Carolina and Kansas. The pace of construction should accelerate and shipments to the public infrastructure market should return to historical levels as monies from both the federal government and state and local governments become available. A return to historical levels is also predicated as state Departments of Transportations (DOTs) and contractors address their respective labor constraints.

Nonresidential

The nonresidential construction market accounted for approximately 31% of the Company’s aggregates product line shipments in 2017. According to the U.S. Census Bureau, spending for the private nonresidential construction market increased in 2017 compared with 2016. The Dodge Momentum Index (DMI), a twelve-month leading indicator of construction spending for nonresidential building compiled by McGraw-Hill Construction and where the year 2000 serves as an index basis of 100, remained strong at a nine-year high of 153.9 in December 2017, a 21% increase over prior year. The DMI suggests nonresidential construction activity will remain healthy over the next several years. Historically, half of the Company’s nonresidential construction shipments have been used for office and retail projects, while the remainder has been used for heavy industrial and capacity-related projects, including energy-related projects. Since the latter part of 2015, low oil prices have suppressed shipments directly into shale exploration activities. In 2017, the Company shipped approximately 1.8 million tons for shale exploration compared with approximately 1.5 million tons in 2016 and 3.6 million tons in 2015. Large, energy-related projects, which were completed in 2016 and required the full suite of the Building Materials products in the West Group, contributed favorably to shipments and profitability through the life of the projects. Management expects the next large wave of energy-related projects along the Gulf Coast to bid in the latter part of 2018.

Residential

The residential construction market accounted for approximately 21% of the Company’s aggregates product line shipments in 2017. Private residential construction spending increased 12% in 2017 compared with 2016, according to the U.S. Census Bureau. The residential construction market, like the nonresidential construction market, is interest rate sensitive and typically moves in direct correlation with economic cycles. The Company’s exposure to residential construction is split between aggregates used in the construction of subdivisions (including roads, sidewalks, and storm and sewage drainage), aggregates used in new single-family home construction and aggregates used in construction of multi-family units. Construction of both subdivisions and single-family homes is more aggregates intensive than construction of multi-family units. Through an economic cycle, multi-family construction generally begins early in the cycle and then transitions to single-family construction. Therefore, the timing of new subdivision starts, as well as new single-family housing permits, are strong indicators of residential volumes. While residential housing starts were approximately 1.3 million units in 2017, they remain below the 50-year historical annual average of 1.5 million units. For the year ended December 2017, six of the Company’s key states rank in the top ten for single-family housing starts. The Company expects continued growth in the residential market.

ChemRock/Rail

Approximately 8% of the Company’s 2017 aggregates product line shipments was to the ChemRock/Rail market, which includes ballast and agricultural limestone. Ballast is an aggregates product used to stabilize railroad track beds and, increasingly, concrete rail ties are being used as a substitute for wooden ties. Ballast shipments declined in 2017 due to lower railroad activity, largely correlating with lower energy-related rail shipments. Agricultural lime, a high-calcium carbonate material, is used as a supplement in animal feed, a soil acidity neutralizer and agricultural growth enhancer. Additionally, ChemRock/Rail includes rip rap, which is used as a stabilizing material to control erosion caused by water runoff at ocean beaches, inlets, rivers and streams, and high-calcium limestone, which is used as filler in glass, plastic, paint, rubber, adhesives, grease and paper. Chemical-grade, high-calcium limestone is used as a desulfurization material in utility plants.

 

 

Martin Marietta  |  Page 48


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

Pricing Trends

Pricing for construction projects is generally based on terms committing to the availability of specified products of a stated quantity at an agreed-upon price during a definitive period. Due to infrastructure projects spanning multiple years, announced changes in prices can have a lag time before taking effect while the Company sells products under existing price agreements. Pricing escalators included in multi-year infrastructure contracts somewhat mitigate this effect. However, during periods of sharp or rapid increases in production costs, multi-year infrastructure contract pricing may provide only nominal pricing growth. Additionally, the Company may implement mid-year price increases, on a market-by-market basis, where appropriate. Pricing is determined locally and is affected by supply and demand characteristics of the local market.

In 2017, the average selling price for the aggregates product line increased 4.5%, in line with management’s expectations. Management believes 2018 aggregates product line pricing growth will be consistent with 2017 and slightly better than the Company’s 20-year annual average of 4.3%.

Cost Structure

 

    Top four cost categories, details which follow, represent 66% of the Building Materials business’ total direct production costs

 

    Health and welfare costs increased approximately 5% per year over past five years compared with the national average of 6% over same period; Company’s costs expected to increase 4% in 2018

 

    Pension expense increased from $32.9 million in 2016 to $37.6 million in 2017 (2016 amounts exclude $0.8 million of nonrecurring termination benefits related to the acquisition of TXI); pension costs are expected to approximate $41.3 million in 2018 primarily due to a lower discount rate

LOGO

Direct production costs for the Building Materials business are components of cost of sales incurred at the quarries, mines, distribution yards and facilities, cement plants, ready mixed concrete plants and asphalt plants. Cost of sales also includes the cost of resale materials, freight expenses to transport materials from a producing quarry to a distribution yard and production overhead costs.

Generally, the top seven categories of direct production costs for the Building Materials business are (1) labor and related benefits; (2) raw materials; (3) repairs and maintenance; (4) depreciation, depletion and amortization (DDA); (5) energy; (6) contract services; and (7) supplies. In 2017, these categories represented 91% of the Building Materials business’ total direct production costs.

Fixed costs are expenses that do not vary based on production or sales volume while variable costs are expenses that fluctuate with the level of production volume. Management estimates that, under normal operating capacity, approximately 40% of the Building Materials business’ direct production cost is fixed, another 27% is semi-fixed and 33% is variable. Accordingly, the Company’s operating leverage can be substantial. Production is the key driver in determining

 

 

Martin Marietta  |  Page 49


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

LOGO

the levels of variable costs, as it affects the number of hourly employees and related labor hours. Further, components of energy, supplies and repairs and maintenance costs also increase in connection with higher production volumes.

Generally, when the Company invests capital in facilities and equipment, increased capacity and productivity, along with reduced repair costs, can offset increased fixed depreciation costs. However, when aggregates demand weakens, the increased productivity and related efficiencies may not be fully realized, resulting in under absorption of fixed costs. Further, the aggregates facilities continue to operate at a level significantly below capacity, thereby, restricting the Company’s ability to capitalize $36.5 million and $35.7 million of costs at December 31, 2017 and 2016, respectively, in inventories.

The Company’s ready mixed concrete and asphalt product lines require the use of raw materials in the production of their products. Cement and liquid asphalt, or bitumen, are key raw materials in the production of ready mixed concrete and asphalt, respectively. Therefore, fluctuations in prices for these raw materials directly affect the Company’s operating results. Liquid asphalt prices in 2017 were slightly higher than in 2016, but may not always follow other energy products (e.g., oil or diesel fuel) because of complexities in the refining process which converts a barrel of oil into other fuels and petrochemical products.

The cement product line is a capital-intensive operation with high-fixed costs to run plants that operate all day, every day, with the exception of maintenance shut downs. Kiln maintenance typically requires a plant to be shut down for a period of time as repairs are made. In 2017, 2016 and 2015, the cement product line incurred kiln maintenance costs of $12.6 million, $20.9 million and $26.0 million, respectively. The 2015 expense is inclusive of maintenance costs for the California plant that was divested in fourth quarter 2015. The Company adjusts production levels in anticipation of planned maintenance shut downs.

Diesel fuel represents the single largest component of energy costs for the Building Materials business. The average cost per gallon of diesel fuel was $1.81, $1.96 and $2.05 in 2017, 2016 and 2015, respectively. Pricing in 2016 and 2015 reflects an unfavorable fixed-price agreement which expired on December 31, 2016. Changes in energy costs also affect the prices that the Company pays for related supplies, including explosives, conveyor belting and tires. Further, the Company’s contracts of affreightment for shipping products on its rail and waterborne distribution network typically include provisions for escalations or reductions in the amounts paid by the Company if the price of fuel moves outside a stated range.

Wage inflation and increases in labor costs may be somewhat mitigated by enhanced productivity in an expanding economy. Further, workforce reductions resulting from process automation and mobile fleet right-sizing have mitigated rising labor costs. During economic downturns, the Company reviews its operations and, where practical, temporarily idles certain sites. The Company is able to serve these markets with other open facilities that are in close proximity. Further, in certain markets, management can create production “super crews” that work at various locations within a district. For example, within a market, a crew may work three days per week at one quarry and the other two workdays at another quarry within that market. This has allowed the Company to responsibly manage headcount in periods of lower demand.

Rising health care costs continue to affect expenses related to labor and benefits. Over the past five years, national health care costs have increased 6% on average; costs are expected to continue rising at this rate. The Company has

 

 

Martin Marietta  |  Page 50


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

experienced net per-employee health care cost increases averaging less than 5% per year from 2013 through 2017. These lower-than-average increases were driven in large part by favorable claims experience, plan design changes and payroll contribution increases to its health care plans. In 2017, the Company’s net health and welfare plan costs per employee decreased about 3% compared with 2016 due in large part to plan changes. For 2018, health and welfare costs are expected to increase approximately 4%, slightly below general marketplace trends. While potential changes to the Affordable Care Act may affect costs in the future, any impact cannot be predicted at this time.

A lower discount rate is expected to increase the Company’s pension expense from $37.6 million in 2017 to an estimated $41.3 million in 2018 (see section Critical Accounting Policies and Estimates – Pension Expense – Selection of Assumptions).

The impact of inflation on the Company’s businesses has not been significant. Historically, the Company has achieved real pricing growth in periods of inflation based on its ability to increase its selling prices in a normal economic environment. There is a risk of long-lived asset impairment at temporarily-idled locations. The timing of increased demand will determine when these locations are fully reopened. During the time that locations are temporarily idled, the locations’ plant and equipment continue to be depreciated. When appropriate, mobile equipment is transferred and used at an open location. As the Company continues to have long-term access to the supply of aggregates reserves and useful lives of equipment are extended, these locations are not impaired. When temporarily-idled locations are reopened, it is typical for equipment repair costs to temporarily increase.

Building Materials Business’ Key Considerations

Geography is critically important as products are sourced and sold locally.

The Company’s geographic footprint is primarily in attractive markets with strong, underlying growth characteristics, including population growth and/or population density and business and economic diversity, all of which generate demand for construction and the Company’s Building Materials products. The majority of the nation’s population currently resides in 11 megaregions; the RPA believes 75% of the population will reside in these

megaregions by 2050. The Company has a significant presence in five of the megaregions: Texas Triangle, Gulf Coast, Piedmont Atlantic, Front Range and Florida. The Building Materials business’ top five sales-generating states are Texas, Colorado, North Carolina, Iowa and Georgia; cumulatively they accounted for 74% of its 2017 net sales by state of destination, four of which are discussed below as part of their respective megaregion. Iowa is discussed below as a top five sales-generating state and, while not part of a megaregion, is an attractive market that has diversified its economy over the past several years. Further, the top ten sales-generating states, which also include Florida, South Carolina, Indiana, Louisiana and Nebraska, accounted for 88% of the Building Materials business’ 2017 net sales by state of destination. As South Carolina is part of the Piedmont Atlantic megaregion and Florida is a separate megaregion, they are discussed below in their respective megaregion.

Texas Triangle and Gulf Coast

The Texas Triangle is primarily defined by the anchoring metropolises of Dallas-Fort Worth, San Antonio and Houston. The Texas Triangle’s population surged 41% in the 15-year period ending 2015, adding 5.3 million residents. Based on RPA’s America 2050 study performed in 2010, it projects the population in this megaregion will nearly double in the forty-year period ending in 2050, with 70% of the state’s population residing here. The Texas Triangle represents a diverse economy, ranging from finance, technology, transportation and goods and services sectors.

Uniquely, Houston, accounting for approximately 3% of the nation’s gross domestic product (GDP) and the fourth most populous metropolitan area, is considered part of both the Gulf Coast and the Texas Triangle megaregions. In addition to Houston, cities in the Gulf Coast megaregion include New Orleans and Baton Rouge. The Gulf Coast megaregion’s population is expected to exceed 16 million in 2025 and 23 million in 2050. The economy is driven by the energy, chemical and transportation sectors. According to the Gulf Economic Survival Team, 16% of the nation’s domestic crude oil is supplied by this megaregion, supporting 430,000 jobs and contributing more than $44 billion to the national economy.

The Texas market remains one of the strongest in the United States. According to the Bureau of Economic Analysis, at the end of 2016, the state’s GDP comprised nearly 9% of the nation’s $19.5 trillion GDP. According to the American

 

 

Martin Marietta  |  Page 51


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

LOGO

Legislative Exchange Council (ALEC), Texas ranked first in economic performance in 2017, supported by growth in GDP, employment and population. Texas ranks second in the nation in employment growth for the twelve-months ended December 2017, while Dallas-Fort Worth was the top-ranked metro area in the country. Consistent with this trend, from 2010 through 2017, the state added approximately 3.1 million people. The state’s Department of Transportation (TxDOT) let $6.2 billion in construction projects in fiscal 2017; TxDOT has a letting budget of $8.0 billion for fiscal 2018. Over the next ten years, TxDOT has committed to letting over $65 billion of projects. Funding for highway construction comes from dedicated sources, including Propositions 1 and 7, as opposed to the use of general funds. Proposition 1, which passed in 2014, takes a portion of the oil and gas severance tax revenues and allocates them to the state highway fund. Proposition 7 is estimated to provide an additional $2.0 billion of annual funding for non-toll roads beginning in fiscal 2018 and further increase after 2019. Further, on November 8, 2016, voters approved $990 million of additional statewide transportation funding, including a $720 million transportation bond in Austin. The strength of the Texas economy extends beyond infrastructure. According to Dodge Data and Analytics (Dodge), for the twelve-months ended December 2017, Texas reported single-family housing starts and permits of 127,000 units and 117,000 units, respectively, ranking first in growth for both metrics.

Piedmont Atlantic

The Piedmont Atlantic megaregion generally follows the Interstate 85/20 corridor, spanning across North Carolina, South Carolina, Georgia, Tennessee and Alabama and including four primary cities: Raleigh, Charlotte, Atlanta and Birmingham. The Piedmont Atlantic is a fast-growing mega-region; however, it is facing challenges, including increased traffic congestion and inadequate infrastructure that accompany a growing population.

North Carolina continues to demonstrate solid economic growth, exceeding the nation’s average GDP increase for the past three years. Nationally, North Carolina ranks in the top ten states for job growth for the year ended December 2017 and has also ranked in the top six states for population growth from 2010 to 2017. Private construction is showing strength, with residential housing starts and permits increasing 18% and 16%, respectively, for the year ended December 2017. The infrastructure market has steadily grown, driven in part by the 26-mile expansion of I-77 high-occupancy toll (HOT) lanes, a $655 million, multi-year project supported by the Transportation Infrastructure Finance and Innovation Act (TIFIA). This project was specifically designed to address traffic congestion around Charlotte and is expected to be substantially complete in the latter part of 2018. Further, in November 2016, North Carolina voters approved all transportation referendums, totaling $1.2 billion of additional funding.

For the past three years, according to the U.S. Census Bureau, South Carolina ranked in the top ten for population growth. Supported by residential growth, South Carolina ranked 13th in employment gains in 2017. In 2016, former Governor Haley signed S.1258, also known as Act No. 275, allowing up to $4.2 billion to be devoted for highway spending over the next 10 years. South Carolina’s 10-year DOT plan includes 1,000 miles of upgrades to rural roads and 140 miles of interstate highways. These are much-needed investments,

 

 

Martin Marietta  |  Page 52


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

as according to the a recent report issued by the American Society of Civil Engineers, the state’s infrastructure system is in need of major repair. The report further states that 16% of South Carolina’s 76,000 miles of public roads are in poor condition. To fund infrastructure needs, the state passed House Bill 3516 in June 2017, which will increase the state’s gas tax $0.02 per gallon per year for six years; this is the state’s first gas tax increase in 30 years. The house bill institutes a fee for vehicles that do not consume motor fuel, increases sales tax on vehicle purchases and charges a one-time fee for vehicles transferred from another state and registered in South Carolina. The nonresidential market should continue to benefit from the Port of Charleston almost doubling between 2011 through 2016, making it the ninth-largest port in the United States. Construction on a new $250 million intermodal facility is expected to begin in 2018.

Georgia continues to recover from the Great Recession and, for the twelve-months ended December 2017, ranks fifth in the country for employment growth. Further, population growth has ranked in the top six for the last four years. As a result, residential housing starts increased 16% for the twelve-months ended December 2017. Nonresidential construction improved 24% for the year ended December 2017, as the state continues to attract business expansion and relocation. CyrusOne, which is developing a distribution facility in Douglasville; Nestlé Purina PetCare Co., which is investing in a manufacturing facility and distribution center in Hartwell; and Irving Consumer Products, which is investing in a state-of-the-art tissue manufacturing facility in Macon-Bibb County, will collectively invest nearly $1 billion on these projects and create over 450 new jobs. In January 2016, Governor Nathan Deal announced a comprehensive infrastructure maintenance plan, which includes a $2.2 billion, 18-month project list, and a longer term 10-year plan, representing more than $10 billion in investment. Some elements of the Governor’s plan include the addition of toll lanes along the I-285 loop in Atlanta, interchange upgrades for I-20 and I-285 and additional capacity of metro sections of I-75, I-85 and GA 400. Consistent with these plans, the infrastructure construction market continues to expand and will significantly benefit from the passage of a gas tax increase and other funding mechanisms that will add approximately $1 billion, or essentially double, the state’s annual construction budget. Further, in 2016, Georgia voters approved five local sales tax increases to provide $4 billion for

road and transit projects, spanning a five- to 40-year period. Additionally, the Transportation Special-Purpose Local-Option Sales Tax (T-SPLOST) program is starting to provide benefit in the southern part of Georgia.

Front Range

Extending from the southern portion of Wyoming near Cheyenne, following Interstate 25 through Colorado into New Mexico, incorporating Santa Fe and Albuquerque, the Front Range megaregion is the nation’s fastest-growing megaregion. Projections estimate the population to exceed 10 million in 2050, nearly double the 2010 population.

Through strategic acquisitions since 2011, the Company has built a leading position to serve the Front Range, which is home to over 85% of Colorado’s population. The Colorado economy includes a diverse economic base, leading to strong employment and population growth. For the twelve-months ended December 2017, Colorado ranked 11th in employment growth. Additionally, 96% of Colorado’s population growth from 2010 to 2015 settled along the Front Range. Employment and population are each expected to increase over 45% from 2012 through 2040, driving an upward trend in vehicle miles traveled and higher demand on the state’s highway system. Colorado’s DOT expects highway project construction to increase $300 million annually over the next five years. With support from the Responsible Acceleration of Maintenance and Partnerships, or RAMP, program through fiscal 2018, the Colorado DOT established a budget of $1.6 billion for fiscal 2018. Additionally, Senate Bill 17-267, enacted during 2017, includes a component that focuses on new lease-purchase agreements that is expected to generate $2.0 billion for transportation and capital construction over four years. Further, reconstruction efforts continue from the historic 2013 flooding. Single-family housing starts increased 11% for the twelve-months ended December 2017, ranking ninth in the nation for growth.

Florida

Spanning nearly the entire state, the Florida megaregion is also one of the fastest growing. Florida is the third most populous state according to the Bureau of Economic Analysis, with a high volume of its population growth from foreign residents. In fact, in the fourth quarter 2016, the latest data available, the state’s GDP rose 3.1%, outperforming the national growth and other large states. Florida’s tourism, agriculture and aerospace

 

 

Martin Marietta  |  Page 53


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

and aviation economies, coupled with its exports and trade sector, collectively, contributed nearly half of the state’s 2014 GDP.

Florida is ranked third in the country for job growth for the twelve-months ended December 2017; Orlando and Tampa are both ranked in the top 20 for metro areas. As of the end of 2017, the state’s unemployment rate was below 4%. The state also added 2.1 million residents from 2010 to 2017. Florida has a strong DOT budget and continues to significantly invest in streets and highways. In fact, the state has a $46.6 billion five-year construction program that extends to 2021 and is expected to let $10 billion of projects in fiscal 2018. Florida is also experiencing growth in private-sector construction and posted a double-digit increase in single-family housing starts for the twelve-months ended December 2017, ranking second in the country. The nonresidential market also ranks in the top five for increased construction investment.

Iowa

The economy of Iowa has historically been stable and steady, and Iowa has been a top-five Martin Marietta state for decades. Iowa is the largest corn and pork-producing state in the nation and provides more than seven percent of America’s food supply. The Company’s agricultural lime volumes are dependent on, among other things, weather, demand for agricultural commodities, including corn and soybeans, commodity prices, farm and land values. The Iowa economy has become more diverse over the past several years, in part due to its ranking as sixth in the nation for lowest cost of doing business. The state is attractive for starting and expanding businesses due to enticing tax incentives. Further, Iowa is expected to be fossil fuel independent by 2050, making primarily wind-based energy production cost effective, and providing another driver of economic expansion. With companies including Google, Microsoft and Facebook continuing to expand operations in Iowa, non-residential construction spending is expected to benefit. The unemployment rate, 2.9%, remains one of the lowest in the nation. In 2015, Iowa increased their gas tax by $0.10 per gallon, raising an additional $515 million since enactment for state and local roads and bridges. In 2017, all 99 counties in Iowa have benefitted from the higher gas tax, with new infrastructure projects being started or existing projects expected to be completed sooner than originally estimated.

Growth markets with limited supply of indigenous stone must be served via a long-haul distribution network.

The U.S. Department of the Interior’s geological map of the United States depicts the possible sources of indigenous surface rock and illustrates its limited supply in the coastal areas of the United States from Virginia to Texas. Local crushed stone supplies must be supplemented, or in many cases wholly supplied, from inland and offshore quarries proximate to the coastal regions of the southeastern and southwestern United States. Further, certain interior United States markets may experience limited resources of construction material resulting from increasingly restrictive zoning, permitting and/ or environmental laws and regulations.

Product shipments are moved by rail and water through the Company’s long-haul distribution network. The Company’s rail network primarily serves its Texas, Florida and Gulf Coast markets while the Company’s Bahamas and Nova Scotia locations transport materials via oceangoing ships. The Company’s strategic focus includes expanding inland and offshore capacity and acquiring distribution yards and port locations to offload transported material. At December 31, 2017, the Company had 81 distribution yards.

The long-haul distribution network can diversify market risk for locations that engage in long-haul transportation of their aggregates products. Particularly where a producing quarry serves a local market and transports products via rail and/or water to be sold in other markets, the risk of a downturn in one market may be somewhat mitigated by other markets served by the location.

The Company’s increased dependence on rail shipments has made it more reliant on railroad performance issues, including track congestion, crew and power availability, the effects of adverse weather conditions and the ability to renegotiate favorable railroad shipping contracts. Further, changes in the operating strategy of rail transportation providers can create operation inefficiencies in and increased costs from the Company’s rail network.

A portion of railcars and all ships of the Company’s long-haul distribution network are obtained with short- and long-

 

 

Martin Marietta  |  Page 54


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

term leases, some with purchase options, and contracts of affreightment. The limited availability of water and rail transportation providers, coupled with limited distribution sites, can adversely affect lease rates for such services and ultimately the freight rate. The Company has not purchased ships.

The Company has long-term agreements providing dedicated shipping capacity from its Bahamas and Nova Scotia operations to its coastal ports. These contracts of affreightment are take-or-pay contracts with minimum and maximum shipping requirements. The Company’s waterborne contracts of affreightment have varying expiration dates ranging from 2023 to 2027 and generally contain renewal options. However, there can be no assurance that such contracts can be renewed upon expiration or that terms will continue without significant increases.

The multiple transportation modes that have been developed with various rail carriers and deep-water ships provide the Company with the flexibility to effectively serve customers primarily in the Southwest and Southeast coastal markets.

 

 

LOGO

Public Infrastructure, the Company’s largest end-use market, is funded through a combination of federal, state and local sources.

Public-sector construction projects are funded through a combination of federal, state and local sources. The federal highway bill provides annual funding for public-sector highway construction projects and includes spending authorizations,

which represent the maximum financial obligation that will result from the immediate or future outlays of federal funds for highway and transit programs. The federal government’s surface transportation programs are financed mostly through the receipts of highway user taxes placed in the Highway Trust Fund, which is divided into the Highway Account and the Mass Transit Account. Revenues credited to the Highway Trust Fund are primarily derived from a federal gas tax, a federal tax on certain other motor fuels and interest on the accounts’ accumulated balances. Of the currently imposed federal gas tax of $0.184 per gallon, which has been static since 1993, $0.15 is allocated to the Highway Account of the Highway Trust Fund.

Federal highway laws require Congress to annually appropriate funding levels for highways and other programs. Once the annual appropriation is passed, federal funds are distributed to each state based on formulas (apportionments) or other procedures (allocations). Apportioned and allocated funds generally must be spent on specific programs as outlined in the federal legislation. Most federal funds are available for four years. Once the federal government approves a state project, funds are committed and considered expended regardless of when the cash is actually spent by the state and reimbursed by the federal government. According to the Federal Highway Administration, funds are generally spent by the state over a period of years, with 27% in the year of funding authorization, 41% in the succeeding year, 16% in the third year and the remaining 16% in the fourth year and beyond.

The FAST Act, a five-year, $305 billion federal highway bill, reauthorizes federal highway and public transportation programs and stabilizes the Highway Trust Fund. The FAST Act retains the programs supported under its predecessor legislation, Moving Ahead for Progress in the 21st Century (MAP-21), but with some changes. Specifically, TIFIA, a U.S. Department of Transportation alternative funding mechanism,

 

 

Martin Marietta  |  Page 55


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

which under MAP-21 provided three types of federal credit assistance for nationally or regionally significant surface transportation projects, now allows more diversification of projects. TIFIA is designed to fill market gaps and leverage substantial private co-investment by providing projects with supplemental or subordinate debt which is not subject to national debt ceiling challenges or sequestration. Since inception, TIFIA has provided more than $25 billion of credit assistance to over 50 projects representing over $90 billion in infrastructure investment. Under the FAST Act, annual TIFIA funding decreases and ranges from $275 million to $300 million, but no longer requires the 20% matching funds from state DOTs. Consequently, states can advance construction projects immediately with potentially no upfront outlay of state department of transportation dollars. TIFIA requires projects to have a revenue source to pay back the credit assistance within a 30-to-40 year period. Moreover, TIFIA funds may represent up to 49% of total eligible project costs for a TIFIA-secured loan and 33% for a TIFIA standby line of credit. Therefore, the TIFIA program has the ability to significantly leverage construction dollars. Each dollar of federal funds can provide up to $10 in TIFIA credit assistance and support up to $30 in transportation infrastructure investment. Private investment in transportation projects funded through TIFIA is particularly attractive, in part due to the subordination of public investment to private. Management believes TIFIA could provide a substantial boost for state department of transportation construction programs well above what is currently budgeted. As of January 2018, TIFIA-funded projects for the Company’s top five sales-generating states approximated $25 billion.

Excluding TIFIA-approved projects, states are required to match funds at a predetermined rate in order to receive federal funds for highways. Matching levels vary depending on the type of project. If a state is unable to match its allocated federal funds, funding is forfeited and reallocated to states providing the appropriate matching funds. Although a significant portion of state highway construction programs are financed from highway user fees, significant increases in federal infrastructure funding typically require state governments to increase highway user fees to match federal spending. While states rarely forfeit federal highway funds, the possibility of forfeiture increases when states face declining tax revenues and struggle to balance budgets.

Given that most states are required to balance their budgets, reductions in revenues generally require a reduction in states’ expenditures. However, the impact of state revenue reductions on highway spending will vary depending on whether the spending comes from dedicated revenue sources, such as highway user fees, or whether portions are funded with general funds. Based on national averages, user taxes represent the largest component of highway revenues, averaging 42% in fiscal year 2015, the latest available statistic. The use of general funds as a percentage of each state’s highway revenues varies, with a national average of 4% in fiscal year 2015, the latest available statistic. Therefore, state budget spending cuts typically only affect a small percentage of a state’s highway spending.

 

 

LOGO

States continue to play an expanding role in infrastructure investment. In addition to federal appropriations, each state funds its infrastructure spending from specifically allocated amounts collected from various user taxes, typically gasoline taxes and vehicle fees. Over the past several years, states have taken on a significantly larger role in funding infrastructure investment, including initiating special-purpose

 

 

Martin Marietta  |  Page 56


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

taxes and raising gas taxes. Management believes that innovative financing at the state level, such as bond issuances, toll roads and tax initiatives, will grow at a faster rate than federal funding. State spending on infrastructure generally leads to increased growth opportunities for the Company. The level of state public-works spending is varied across the nation and dependent upon individual state economies. The degree to which the Company could be affected by a reduction or slowdown in infrastructure spending varies by state. The state economies of the Building Materials business’ five largest sales-generating states may disproportionately affect the Company’s financial performance.

Governmental appropriations and expenditures are typically less interest rate-sensitive than private-sector spending. Obligations of federal funds is a leading indicator of highway construction activity in the United States. Before a state or local department of transportation can solicit bids on an eligible construction project, it enters into an agreement with the Federal Highway Administration to obligate the federal government to pay its portion of the project cost. Federal obligations are subject to annual funding appropriations by Congress.

The need for surface transportation improvements significantly outpaces the amount of available funding. A large number of roads, highways and bridges built following the establishment of the Interstate Highway System in 1956 are now in need of major repair or reconstruction. According to The Road Information Program (TRIP), a national transportation research group, vehicle travel on United States highways increased 38% from 1990 to 2012, while new lane road mileage increased only 4% over the same period. TRIP also reports that 14% of the nation’s major roads are in poor condition and 25% of the nation’s bridges are structurally deficient or functionally obsolete. Currently, the Federal Highway Administration estimates that $170 billion is needed in annual capital investment through 2028 to significantly improve the current conditions and performance of the nation’s highways. The Company is encouraged by the recent enactment of the 2017 Tax Act and its long-term benefits for both Martin Marietta and the industry. Importantly, passage of this legislation provides positive momentum in Washington D.C. to hopefully address the shortfall in sustainable funding commensurate with the nation’s need for infrastructure investment. Any such measures will require Congressional approval. Additionally, the recent release of President Trump’s

Legislative Outline for Rebuilding Infrastructure in America provides additional momentum, increasing the likelihood that both infrastructure funding will be increased and regulatory burdens will be lightened. While state DOTs and contractors are slowly addressing their labor constraints, the Company believes that were an enhanced infrastructure bill enacted, those efforts would be more rapidly addressed. However, even in the absence of an enhanced infrastructure bill, strong customer confidence and improving sentiment leads management to believe that infrastructure activity for 2018 and beyond should benefit from the FAST Act, the 2017 Tax Act, and additional state and local infrastructure initiatives.

Transportation investments generally boost the national economy by enhancing mobility and access and by creating jobs, which is a priority of many of the government’s economic plans. According to the Federal Highway Administration, every $1 billion in federal highway investment creates approximately 28,000 jobs. The number of jobs created is dependent on the nature and aggregates intensity of the projects. Approximately half of the Building Materials business’ total revenues to the infrastructure market come from federal funding authorizations, including matching funds from the states. For each dollar spent on road, highway and bridge improvements, the Federal Highway Administration estimates an average benefit of $5.20 is recognized in the form of reduced vehicle maintenance costs, reduced delays, reduced fuel consumption, improved safety, reduced road and bridge maintenance costs and reduced emissions as a result of improved traffic flow.

In addition to highways and bridges, transportation infrastructure includes aviation, mass transit, and ports and waterways. Public-sector construction related to transportation infrastructure can be aggregates intensive.

According to the American Road and Transportation Builders Association (ARTBA), spending on airport terminals and related work was $11.7 billion and runway work was $3.6 billion during 2017; spending is forecasted to increase 14% in 2018.

Construction spending for mass transit projects, which include subways, light rail and railroads, was $20.3 billion in 2017, according to ARTBA, and is expected to increase 5% in 2018. Railroad construction continues to benefit from economic growth, which generates need for additional maintenance and improvements. According to ARTBA,

 

 

Martin Marietta  |  Page 57


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)

 

 

subway and light rail work is expected to benefit slightly from the FAST Act.

Port and waterway construction spending, according to ARTBA, was $1.8 billion in 2017 and is forecasted to be flat in 2018.

Erratic weather can significantly impact operations.

Climate change is defined as a change in global or regional climate patterns. Changes to the climate have been occurring for centuries due to minor shifts in the Earth’s orbit, ultimately changing the amount of solar energy received. More recently, however, this rate of change has accelerated and climate change is considered a leading cause of erratic weather. Production and shipment levels for the Building Materials business correlate with general construction activity, most of which occurs outdoors and, as a result, is affected by erratic weather, seasonal changes and other weather-related conditions which can significantly affect the business.

Excessive rainfall jeopardizes production, shipments and profitability in all markets served by the Company. In particular, the Company’s operations in the southeastern and Gulf Coast regions of the United States and the Bahamas are at risk for hurricane activity, most notably in August, September and October. Nationally, 2017 marked the 20th-wettest year on record, and the fifth consecutive year with above-average precipitation. The last few years have brought an unprecedented amount of precipitation to the United States and, particularly, to Texas. In fact, 2015 set a new rainfall record for Texas; the 24-month period ending September 2016 set a new two-year record for the state, with an average annual rainfall of 75 inches. Hurricane Harvey, a Category 4 storm that made landfall in Houston in August 2017, brought nearly 20 trillion gallons of precipitation. In the Southeast, Hurricane Irma, also a Category 4 storm, made landfall in Florida in September 2017 and brought excessive rainfall to the southeastern United States, notably Florida and Georgia. Additionally, in 2017, Colorado experienced its fifteenth wettest nine-months for the period January through September. In October 2016, rainfall along the eastern seaboard of the United States from Hurricane Matthew, a Category 5 hurricane, approximated 13.6 trillion gallons. Hurricane Matthew was the first major hurricane on record to make landfall in the Bahamas.

NOAA reports that since 1895, the contiguous United States has experienced an average temperature increase of 1.5°F

per century, with 2017 averaging 2.6°F above the 20th century average and marking it the third-warmest year on record, behind 2012 and 2016. In fact, 2017 marked the 21st consecutive warmer-than-average year for the contiguous United States, and five states, including North Carolina and South Carolina, had a record year. Temperature plays a significant role in the months of March and November, meaningfully affecting the Company’s first- and fourth-quarter results, respectively. Warm and/or moderate temperatures in March and November allow the construction season to start earlier and end later, respectively. In 2017, the nation experienced the ninth-warmest March on record while Colorado and Texas reported its warmest and its second-warmest March, respectively. The weather was also favorable in November 2017, as Colorado set another record and Texas reported its fifth-warmest November.

 

 

LOGO

Capital investment decisions driven by capital intensity of the Building Materials business and focus on land.

The Company’s organic capital program is designed to take advantage of construction market growth through investment in both permanent and portable facilities at the Company’s operations. Over an economic cycle, the Company typically invests organic capital at an annual level that approximates depreciation expense. At mid-cycle and through cyclical peaks, organic capital investment typically exceeds depreciation expense, as the Company supports current capacity needs and invests for future capacity growth. Conversely, at a cyclical trough, the Company can

 

 

Martin Marietta  |  Page 58


MANAGEMENT’S DISCUSSION & ANALYSIS OF FINAN