EX-13.01 3 d640896dex1301.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 2018 Annual Report and the establishment and maintenance of adequate internal control over financial reporting. The consolidated balance sheets for Martin Marietta, at December 31, 2018 and 2017, 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, 2018, 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 (NYSE) 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 internal control over financial reporting. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. 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, 2018.

Management has excluded certain elements of the internal control over financial reporting of Bluegrass Materials Company (Bluegrass) from its assessment of the Company’s internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Subsequent to the acquisition, certain elements of Bluegrass’ internal control over financial reporting and related processes were integrated into the Company’s existing systems and internal control over financial reporting. Those controls that were not integrated have been excluded from management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. The excluded elements represent controls over accounts of less than 1% of consolidated assets and 4% of consolidated total revenues as of and for the year ended December 31, 2018.

The consolidated financial statements of the Company as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018, has 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 25, 2019

     

 

Martin Marietta  |  Page 7


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the 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 (the “Company”) as of December 31, 2018 and 2017, 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, 2018, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 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, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, 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.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded certain elements of the internal control over financial reporting of Bluegrass Materials Company from its assessment of the Company’s internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Subsequent to the acquisition, certain elements of Bluegrass Materials Company’s internal control over financial reporting and related processes were integrated into the Company’s existing systems and internal control over financial reporting. Those controls that were not integrated have been excluded from management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. We have also excluded these elements of the internal control over financial reporting of Bluegrass Materials Company from our audit of the Company’s internal control over financial reporting. The excluded elements represent controls over less than 1% of consolidated assets and 4% of the consolidated total revenues.

 

Martin Marietta  |  Page 8


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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.

 

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

Raleigh, North Carolina

February 25, 2019

 

Martin Marietta  |  Page 9


 

CONSOLIDATED STATEMENTS OF EARNINGS for years ended December 31

 

  

                                             

 

(add 000, except per share)   

 

2018

         2017          2016  

Products and services revenues

   $ 3,980,351        $ 3,723,478        $ 3,578,650  

Freight revenues

     263,914            242,116            240,099  

Total revenues

     4,244,265            3,965,594            3,818,749  

Cost of revenues – products and services

     3,009,810          2,749,488          2,665,029  

Cost of revenues – freight

     267,878            244,166            241,982  

Total cost of revenues

     3,277,688            2,993,654            2,907,011  

Gross Profit

     966,577          971,940          911,738  

Selling, general and administrative expenses

     280,554          262,128          241,606  

Acquisition-related expenses, net

     13,479          8,638          909  

Other operating (income) and expenses, net

     (18,193          793            (8,043

Earnings from Operations

     690,737          700,381          677,266  

Interest expense

     137,069          91,487          81,677  

Other nonoperating income, net

     (22,413          (10,034          (11,439

Earnings before income tax expense (benefit)

     576,081          618,928          607,028  

Income tax expense (benefit)

     105,705            (94,457          181,584  

Consolidated net earnings

     470,376          713,385          425,444  

Less: Net earnings attributable to noncontrolling interests

     378          43          58  

Net Earnings Attributable to Martin Marietta

   $ 469,998          $ 713,342          $ 425,386  

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

            

– Basic attributable to common shareholders

   $ 7.46          $ 11.30          $ 6.66  

– Diluted attributable to common shareholders

   $ 7.43          $ 11.25          $ 6.63  

Weighted-Average Common Shares Outstanding

            

– Basic

     62,895            62,932            63,610  

– Diluted

     63,147            63,217            63,861  

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)   

 

2018

         2017          2016  

Consolidated Net Earnings

   $   470,376          $   713,385          $   425,444  

Other comprehensive (loss) earnings, net of tax:

            

Defined benefit pension and postretirement plans:

            

Net loss arising during period, net of tax of $(7,640), $(2,625) and $(19,734), respectively

     (22,877        (8,052        (31,620

Amortization of prior service credit, net of tax of $(493), $(547) and $(617), respectively

     (1,478        (883        (992

Amortization of actuarial loss, net of tax of $3,156, $5,271 and $4,437, respectively

     9,463          8,503          7,138  

Amount recognized in net periodic pension cost due to settlement, net of tax of $734, $8 and $44, respectively

     2,202          13          71  

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

                           471  
     (12,690        (419        (24,932

Foreign currency translation (loss) gain

     (2,052        1,140          (898

Amortization of terminated value of forward starting interest rate swap agreements into interest expense, net of tax of $178, $571 and $541, respectively

     280            872            826  
       (14,462          1,593            (25,004

Consolidated comprehensive earnings

     455,914          714,978          400,440  

Less: Comprehensive earnings attributable to noncontrolling interests

     391          53          119  

Comprehensive Earnings Attributable to Martin Marietta

   $ 455,523          $ 714,925          $ 400,321  

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)   

 

2018

         2017  

Current Assets:

       

Cash and cash equivalents

   $ 44,892        $ 1,446,364  

Accounts receivable, net

     523,276          487,240  

Inventories, net

     663,035          600,591  

Other current assets

     134,613          96,965  

Total Current Assets

     1,365,816            2,631,160  

Property, plant and equipment, net

     5,157,229          3,592,813  

Goodwill

     2,399,118          2,160,290  

Other intangibles, net

     501,282          506,349  

Other noncurrent liabilities

     127,974          101,899  

Total Assets

   $ 9,551,419          $ 8,992,511  

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

                     

Current Liabilities:

       

Accounts payable

   $ 210,808        $ 183,638  

Accrued salaries, benefits and payroll taxes

     51,434          44,255  

Pension and postretirement benefits

     9,942          13,652  

Accrued insurance and other taxes

     63,543          64,958  

Current maturities of long-term debt

     390,042          299,909  

Other current liabilities

     60,981          87,804  

Total Current Liabilities

     786,750            694,216  

Long-term debt

     2,730,439          2,727,294  

Pension, postretirement and postemployment benefits

     134,469          244,043  

Deferred income taxes, net

     705,564          410,723  

Other noncurrent liabilities

     244,785          233,758  

Total Liabilities

     4,602,007            4,310,034  

Equity:

       

Common stock ($0.01 par value; 100,000,000 shares authorized; 62,515,000 and 62,873,000 shares outstanding at December 31, 2018 and 2017, respectively)

     624          628  

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

               

Additional paid-in capital

     3,396,059          3,368,007  

Accumulated other comprehensive loss

     (143,579        (129,104

Retained earnings

     1,693,259            1,440,069  

Total Shareholders’ Equity

     4,946,363          4,679,600  

Noncontrolling interests

     3,049            2,877  

Total Equity

     4,949,412          4,682,477  

Total Liabilities and Equity

   $ 9,551,419          $ 8,992,511  

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)   

 

2018

          2017           2016  

Cash Flows from Operating Activities:

            

Consolidated net earnings

   $ 470,376        $ 713,385        $ 425,444  

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

            

Depreciation, depletion and amortization

     344,033          297,162          285,253  

Stock-based compensation expense

     29,253          30,460          20,481  

(Gain) Loss on divestitures and sales of assets

     (39,260        (19,366        410  

Deferred income taxes, net

     85,063          (239,056        67,050  

Noncash portion of asset and portfolio rationalization charge

     16,970                    

Other items, net

     (8,891        (13,437        (18,023

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

            

Accounts receivable, net

     (10,617        (29,329        (25,072

Inventories, net

     (21,984        (78,966        (47,381

Accounts payable

     20,148          (17,874        (8,116

Other assets and liabilities, net

     (179,943        14,619          (11,106

Net Cash Provided by Operating Activities

     705,148            657,598            688,940  

Cash Flows from Investing Activities:

            

Additions to property, plant and equipment

     (375,954        (410,325        (387,267

Acquisitions, net of cash acquired

     (1,642,137        (12,095        (174,522

Proceeds from divestitures and sales of assets

     69,114          35,941          6,476  

Payment of railcar construction advances

     (79,351        (43,594        (82,910

Reimbursement of railcar construction advances

     79,351          43,594          82,910  

Investments in life insurance contracts, net

     771          280          293  

Net Cash Used for Investing Activities

     (1,948,206          (386,199          (555,020

Cash Flows from Financing Activities:

            

Borrowings of long-term debt

     1,000,000          2,408,830          560,000  

Repayments of long-term debt

     (910,052        (1,065,048        (449,306

Payments of deferred acquisition consideration

     (6,707        (2,774         

Debt issuance costs

     (3,892        (2,204        (2,300

Change in bank overdraft

                       (10,235

Payments on capital lease obligations

     (3,486        (3,543        (3,364

Dividends paid

     (116,436        (108,852        (105,036

Purchase of the noncontrolling interest in the existing joint venture

     (12,800                  

Distributions to owners of noncontrolling interest

                       (400

Contributions by noncontrolling interest to joint venture

              212          44  

Repurchase of common stock

     (100,377        (99,999        (259,228

Proceeds from exercise of stock options

     7,201          10,110          27,257  

Shares withheld for employees’ income tax obligations

     (11,865        (11,805        (9,723

Net Cash (Used for) Provided by Financing Activities

     (158,414          1,124,927            (252,291

Net (Decrease) Increase in Cash and Cash Equivalents

     (1,401,472        1,396,326          (118,371

Cash and Cash Equivalents, beginning of year

     1,446,364            50,038            168,409  

Cash and Cash Equivalents, end of year

   $ 44,892          $ 1,446,364          $ 50,038  

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, 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  

Consolidated net earnings

                            469,998       469,998       378       470,376  

Other comprehensive (loss) earnings

                      (14,475)             (14,475)       13       (14,462

Dividends declared ($1.84 per common share)

                            (116,436     (116,436)             (116,436

Issuances of common stock for stock award plans

    163       1       14,244                   14,245             14,245  

Shares withheld for employees’ income tax obligations

                (11,865                 (11,865)             (11,865

Repurchases of common stock

    (521     (5)                   (100,372     (100,377)             (100,377

Stock-based compensation expense

                29,253                   29,253             29,253  

Noncontrolling interest acquired in business combination

                                        9,001       9,001  

Purchase of the noncontrolling interest in the existing joint venture

                (3,580                 (3,580)       (9,220)       (12,800

Balance at December 31, 2018

    62,515     $ 624     $ 3,396,059     $ (143,579)     $ 1,693,259     $ 4,946,363     $ 3,049     $ 4,949,412  

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 (the “Company”) is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of more than 300 quarries, mines and distribution yards to its customers in 31 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 also has a leading aggregates position. Specifically, the Company has two cement plants and four cement distribution facilities in Texas, and 140 ready mixed concrete plants and nine asphalt plants 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 and asphalt and paving product lines are reported collectively as the “Building Materials” business. As of December 31, 2018, 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, Pennsylvania, 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. In addition to these operations, the Company sells to customers in New York, Delaware, New Mexico and Mississippi. The following states accounted for 72% of the Building Materials business’ 2018 total revenues: Texas, Colorado, North Carolina, Georgia and Iowa.

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 expense (benefit), retirement and other postemployment benefits, stock-based compensation, the allocation of the purchase price to the fair values of assets acquired and liabilities assumed as part of business combinations and revenue recognition for service contracts. 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 between subsidiaries 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 control of the promised good is transferred to unaffiliated customers, typically when finished products are shipped. Revenues derived from the paving business are recognized using the percentage-of-completion method under the cost-to-cost approach. Under the cost-to-cost approach, recognized contract revenue is determined by multiplying the total estimated contract revenue by the estimated

 

 

Martin Marietta  |  Page 15


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

percentage of completion. Contract costs are recognized as incurred. The percentage of completion is determined on a contract-by-contract basis using project costs incurred to date as a percentage of total estimated project costs. The Company believes the cost-to-cost approach is appropriate, as the use of asphalt in a paving contract is relatively consistent with the performance of the related paving services. Paving contracts, notably with governmental entities, may contain performance bonuses based on quality specifications. Given the uncertainty of meeting the criteria until the performance obligation is completed, performance bonuses are recognized as revenues when and if determined to be achieved. Performance bonuses were not material to the Company’s consolidated results of operations for the years ended December 31, 2018, 2017 and 2016. Freight revenues reflect delivery arranged by the Company using a third party on behalf of the customer and are recognized consistently with the timing of the product revenues.

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

Accounts Receivable. Accounts receivable are stated at cost. The Company does not typically charge interest on customer accounts receivable. 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 accounts receivable 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 or five-year average period 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 as incurred.

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.

 

 

Martin Marietta  |  Page 16


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

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 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. If an other intangible asset is deemed to have an indefinite life, it is not amortized.

The Company’s reporting units, which represent the level at which goodwill is tested for impairment, are based on the operating 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, the Company 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 will 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 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 2018, 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.

 

 

Martin Marietta  |  Page 17


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

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 usually 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, 2018, 2017 and 2016.

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   

 

 
 

 

 
     

 

2018  

 

 

 

 

Accumulated other comprehensive loss at beginning of period

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

 

 

 

Other comprehensive loss before reclassifications, net of tax

      (22,890)        (2,052      –         (24,942)  

Amounts reclassified from accumulated other comprehensive loss, net of tax

      10,187        –         280         10,467  
   

 

 

 

Other comprehensive (loss) earnings, net of tax

      (12,703)        (2,052      280         (14,475)  
   

 

 

 

Accumulated other comprehensive loss at end of period

    $ (141,505)      $ (2,074    $ –       $ (143,579)  
   

 

 

 

Cumulative noncurrent deferred tax assets at end of period

    $ 84,207       $ –       $ –       $ 84,207   
   

 

 

 
       

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   
   

 

 

 

Reclassifications out of accumulated other comprehensive loss are as follows:

 

years ended December 31

(add 000)

   2018       2017      2016      

Affected line items in the

consolidated statements of earnings

 

Pension and postretirement benefit plans

         

Special plan termination benefit

   $     $     $ 764     

Settlement charge

     2,936       21       115     

Amortization of:

         

Prior service credit

     (1,971     (1,430     (1,609   

Actuarial loss

     12,619       13,774       11,575     
     13,584       12,365       10,845      Other nonoperating income, net

Tax effect

     (3,397     (4,732     (4,160    Income tax expense (benefit)

Total

   $ 10,187     $ 7,633     $ 6,685     

Unamortized value of terminated forward starting interest rate swap

         

Additional interest expense

   $ 458     $ 1,443     $ 1,367      Interest expense

Tax effect

     (178     (571     (541    Income tax expense (benefit)

Total

   $ 280     $ 872     $ 826     

 

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)    2018      2017      2016  

 

 

Net earnings attributable to Martin Marietta

   $  469,998      $ 713,342      $ 425,386  

Less: Distributed and undistributed earnings attributable to unvested participating securities

     806        2,029        1,775  

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

   $ 469,192      $ 711,313      $ 423,611  

Basic weighted-average common shares outstanding

     62,895        62,932        63,610  

Effect of dilutive employee and director awards

     252        285        251  

Diluted weighted-average common shares outstanding

     63,147        63,217        63,861  

New Accounting Pronouncements

Revenue from Contracts with Customers

Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which changes the evaluation and accounting for revenue recognition under contracts with customers and enhances financial statement disclosures. The Company implemented ASU 2014-09 using the modified-retrospective approach and applied the guidance only to contracts that were not completed at the date of adoption. The adoption had an immaterial impact on the Company’s financial position and results of operations but required new disclosures (see Note B).

Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments

Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides clarification or additional guidance on certain transactions and its classification on the statement of cash flows on a retrospective basis. In accordance with the adoption of ASU 2016-15, the Company reclassified the net activity related to company-owned life insurance policies to investing activities from operating activities in the consolidated statements of cash flows. The reclassifications reduced net cash provided by operating activities and net cash used for investing activities by $280,000 and $293,000 for the years ended December 31, 2017 and 2016, respectively.

Pending Accounting Pronouncements

Lease Standard

In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard, Accounting Standards Codification 842 – Leases (ASC 842), intending to improve financial reporting of leases and to provide more transparency into off-balance sheet leasing obligations. The guidance requires virtually all leases, excluding mineral interest leases, to be recorded as right-of-use assets and lease liabilities on the balance sheet and provides guidance on the recognition of lease expense and income. Effective January 1, 2019, ASC 842 requires the modified-retrospective transition approach, applying the new standard to all leases existing at the date of initial application. An entity may use either 1) ASC 842’s effective date or 2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The

 

 

Martin Marietta  |  Page 20


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Company adopted the new standard effective January 1, 2019 and used the effective date as the date of initial application.

The new standard provides a number of practical expedients for transition and policy elections for ongoing accounting. The Company elected the “package of practical expedients”, which permits the Company to not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient pertaining to the use of hindsight, which resulted in including renewal options in the lease term that were not previously included in historical lease terms under the guidance prior to ASC 842. While the adoption of ASC 842 does not impact the expense over the life of a lease, the inclusion of renewal options with fixed escalation clauses in the lease term may impact the timing of expense recognition. Additionally, the Company elected the practical expedient that allows it not to evaluate land easements that existed or expired before the adoption of ASC 842 and that were not previously accounted for as leases. The standard provides policy election options for recognition exemption for short-term leases and separation of lease and non-lease components. The Company elected the short-term lease recognition exemption and to not separate lease and non-lease components for all underlying asset classes with the exception of railcars and fleet leases.

The Company expects the adoption of ASC 842 to increase its assets and liabilities on its consolidated balance sheet in the range of $475,000,000 to $550,000,000 as of January

1, 2019 and to require additional footnote disclosures pertaining to leasing activities beginning with the quarter ending March 31, 2019.

Note B: Revenue Recognition

Performance Obligations. Performance obligations are contractual promises to transfer or provide a distinct good or service for a stated price. The Company’s product sales agreements are single-performance obligations that are satisfied at a point in time. Performance obligations within paving service agreements are satisfied over time, primarily ranging from one day to two years. For product revenues and freight revenues, customer payment terms are generally 30 days from invoice date. Customer payments for the paving operations are based on a contractual billing schedule and are due 30 days from invoice date.

Future revenues from unsatisfied performance obligations at December 31, 2018, 2017 and 2016 were $78,142,000, $66,956,000 and $74,146,000, respectively, where the remaining periods to complete these obligations ranged from two months to 22 months, one month to 23 months and one month to 33 months, respectively.

Sales Taxes. The Company is deemed to be an agent when collecting sales taxes from customers. Sales taxes collected are initially recorded as liabilities until remitted to taxing authorities and are not reflected in the consolidated statements of earnings as revenues and expenses.

Revenue by Category. The following table presents the Company’s total revenues by category for each reportable segment:

 

year ended December 31   Products
and
Services
    Freight     Total  

(add 000)

    2018  

Mid-America Group

  $ 1,133,754     $ 89,482     $ 1,223,236  

Southeast Group

    409,543       13,839       423,382  

West Group

    2,168,418       141,506       2,309,924  

Total Building Materials Business

 

 

3,711,715

 

 

 

244,827

 

 

 

3,956,542

 

Magnesia Specialties

    268,636       19,087       287,723  

Total

  $ 3,980,351     $ 263,914     $ 4,244,265  
              2017          

Mid-America Group

  $ 982,214     $ 71,112     $ 1,053,326  

Southeast Group

    348,675       13,880       362,555  

West Group

    2,139,867       139,856       2,279,723  

Total Building Materials Business

    3,470,756       224,848       3,695,604  

Magnesia Specialties

    252,722       17,268       269,990  

Total

  $ 3,723,478     $ 242,116     $ 3,965,594  
              2016          

Mid-America Group

  $ 945,193     $ 71,905     $ 1,017,098  

Southeast Group

    304,722       16,356       321,078  

West Group

    2,086,351       137,164       2,223,515  

Total Building Materials Business

    3,336,266       225,425       3,561,691  

Magnesia Specialties

    242,384       14,674       257,058  

Total

  $   3,578,650     $   240,099     $   3,818,749  
 

 

Martin Marietta  |  Page 21


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Service revenues, which solely include the paving operations located in Colorado, were $219,593,000, $245,276,000 and $216,827,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

Contract Balances. Costs in excess of billings relate to the conditional right to consideration for completed contractual performance and are contract assets on the consolidated balance sheets. Costs in excess of billings are reclassified to accounts receivable when the right to consideration becomes unconditional. Billings in excess of costs relate to customers invoiced in advance of contractual performance and are contract liabilities on the consolidated balance sheets. The following table presents information about the Company’s contract balances:

 

December 31              
(add 000)    2018      2017  

Costs in excess of billings

   $     1,975      $     1,310  

Billings in excess of costs

   $ 6,743      $ 7,204  

Revenues recognized from the beginning balance of contract liabilities for the years ended December 31, 2018 and 2017 were $6,831,000 and $8,265,000, respectively.

Retainage, which primarily relates to the paving services, represents amounts that have been billed to customers but payment withheld until final acceptance of the performance obligation by the customer. Included on the Company’s consolidated balance sheets, retainage was $7,528,000 and $9,029,000 at December 31, 2018 and 2017, respectively.

Policy Elections. When the Company arranges third party freight to deliver products to customers, the Company has elected the delivery to be a fulfillment activity rather than a separate performance obligation. Further, the Company acts as a principal in the delivery arrangements and, as required by ASU 2014-09, the related revenues and costs are presented gross and are included in the consolidated statements of earnings.

Note C: 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)

    2018  

Balance at beginning of period

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

Acquisitions

    150,552       94,774             245,326  

Goodwill allocated to assets held for sale

                (5,571     (5,571

Divestitures

          (927           (927

Balance at end of period

  $ 431,955     $ 144,193     $ 1,822,970     $ 2,399,118  
              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  

Intangible assets subject to amortization consist of the following:

 

December 31
(add 000)
   Gross
Amount
     Accumulated
Amortization
    Net
Balance
 
     2018  

Noncompetition agreements

   $ 6,314      $ (6,179   $ 135  

Customer relationships

     65,550        (25,575     39,975  

Operating permits

     458,951        (36,111     422,840  

Use rights and other

     16,745        (11,243     5,502  

Trade names

     12,800        (9,697     3,103  

Total

   $ 560,360      $ (88,805   $ 471,555  
                2017          

Noncompetition agreements

   $ 6,274      $ (6,144   $ 130  

Customer relationships

     45,955        (17,551     28,404  

Operating permits

     458,951        (26,435     432,516  

Use rights and other

     16,745        (10,176     6,569  

Trade names

     12,800        (7,947     4,853  

Total

   $   540,725      $ (68,253)     $   472,472  
 

 

Martin Marietta  |  Page 22


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  
     2018  

Operating permits

   $ 6,600      $      $ 6,600  

Use rights

     20,282               20,282  

Trade names

     280        2,565        2,845  

Total

   $ 27,162      $ 2,565      $ 29,727  
                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  

During 2018, the Company acquired $21,760,000 of intangible assets, consisting of the following:

 

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

Subject to amortization:

   

Customer relationships

  $ 20,620       12 years  

Noncompletion agreements

    40       10 years  

Total subject to amortization

    20,660       12 years  

Not subject to amortization:

   

Use rights

    1,100       N/A  

Total

  $   21,760    

Total amortization expense for intangible assets for the years ended December 31, 2018, 2017 and 2016 was $13,911,000, $14,178,000 and $13,922,000, respectively.

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

 

(add 000)  

2019

   $ 13,203  

2020

     13,168  

2021

     12,462  

2022

     11,036  

2023

     10,592  

Thereafter

     411,094  

Total

   $     471,555  

Note D: Business Combinations

On April 27, 2018, the Company completed its acquisition of all of the equity interests in Bluegrass Materials Company (Bluegrass), the largest privately-held, pure-play aggregates company in the United States, for $1,617,357,000 in cash. Bluegrass’ operations included 22 active sites with more than 125 years of reserves, collectively, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Company’s existing southeastern footprint in its Mid-America and Southeast Groups and provide a new growth platform within Maryland and Kentucky. The Company reached an agreement with the U.S. Department of Justice (DOJ), approved by the federal district court for the District of Columbia, which resolved all competition issues with respect to the acquisition. Under the terms of the agreement with the DOJ, Martin Marietta divested its heritage Forsyth aggregates quarry, north of Atlanta, Georgia, and the legacy Bluegrass Beaver Creek aggregates quarry in western Maryland. In connection with the sale of its Forsyth quarry, the Company recognized a pretax gain of $14,785,000, which is included in acquisition-related expenses, net, in the consolidated statements of earnings and comprehensive earnings. There was no gain or loss on the Beaver Creek divestiture.

The Bluegrass acquisition was a stock transaction wherein the Company acquired 100% of the voting interest of the owners. The Company acquired cash, accounts receivable; inventories; property, plant and equipment, which primarily consists of mineral reserves; intangible assets; prepaid and other assets; and assumed accounts payable; accrued liabilities and deferred tax liabilities, net. The Company did not assume any of Bluegrass’ outstanding debt.

The Company determined fair values of the assets acquired and liabilities assumed. Although initial accounting for the business combination has been recorded, these amounts are subject to change during the measurement period which extends no longer than one year from the consummation date based on additional reviews, such as completion of deferred tax estimates based on the determination of the historic tax basis in assets acquired. Specific accounts subject to ongoing purchase accounting adjustments include goodwill and deferred income tax liabilities, net. Therefore, the measurement period remains open as of December 31, 2018. The following is a summary of the preliminary estimated fair values of the assets acquired and the liabilities assumed:

 

 

Martin Marietta  |  Page 23


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

(add 000)  

Assets:

  

  Cash and cash equivalents

   $ 1,159  

  Receivables

     25,479  

  Inventory

     46,635  

  Other current assets

     1,029  

  Property, plant and equipment

     1,519,289  

  Intangible assets, other than goodwill

     20,150  

  Goodwill

     244,615  

Total Assets

     1,858,356  

Liabilities:

  

  Accounts payable and accrued expenses

     17,978  

  Deferred income tax liabilities, net

     214,020  

  Noncontrolling interest

     9,001  

  Total Liabilities

     240,999  

Total Consideration

   $   1,617,357  

Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed and reflects projected operating synergies from the transaction, including expected overhead savings. None of the goodwill generated by the transaction will be deductible for income tax purposes.

Total revenues and earnings from operations attributable to acquired operations included in the consolidated statement of earnings for the year ended December 31, 2018 were $172,015,000 and $32,364,000, respectively.

Acquisition-related expenses, primarily related to Bluegrass, were $28,264,000 and $8,638,000 for the years ended December 31, 2018 and 2017, respectively.

Unaudited Pro Forma Financial Information

The unaudited pro forma financial information summarizes the combined results of operations for the Company and Bluegrass as though the companies were combined as of January 1, 2017. Financial information for periods prior to the April 27, 2018 acquisition date included in the pro forma earnings does not reflect any cost savings or associated costs to achieve such savings from operating efficiencies or synergies that result from the combination. Consistent with the assumed acquisition date of January 1, 2017, the pro forma financial results for the year ended December 31, 2017 include acquisition-related expenses of $28,088,000, the $14,785,000 gain on the required divestiture of assets and the one-time $18,738,000 increase in cost of sales for the sale of acquired inventory marked up to fair value as part of acquisition accounting.

The pro forma financial information does do not purport to project the future financial position or operating results of the combined company. The pro forma financial information as

presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2017.

 

year ended December 31

(add 000)

     2018        2017  

Total revenues

   $  4,299,673      $  4,178,627  

Net earnings attributable to

     

Martin Marietta

   $ 489,526      $ 691,719  

Diluted earnings per share

   $ 7.75      $ 10.94  

On August 31, 2018, the Company purchased the remaining noncontrolling interest in a consolidated joint venture where the controlling interest was acquired as part of the Bluegrass acquisition.

Note E: Accounts Receivable, Net

 

December 31

(add 000)

     2018       2017  

Customer receivables

   $ 514,094     $ 480,073  

Other current receivables

     12,535       9,557  
     526,629       489,630  

Less: allowances

     (3,353     (2,390

Total

   $   523,276     $   487,240  

Of the total accounts receivable, net, balances, $2,478,000 and $2,819,000 at December 31, 2018 and 2017, respectively, were due from unconsolidated affiliates.

Note F: Inventories, Net

 

December 31

(add 000)

     2018       2017  

Finished products

   $ 615,719     $ 552,999  

Products in process and raw materials

     66,920       62,761  

Supplies and expendable parts

     139,566       128,792  
     822,205       744,552  

Less: allowances

     (159,170     (143,961

Total

   $   663,035     $   600,591  

Note G: Property, Plant and Equipment, Net

 

December 31

(add 000)

     2018       2017  

Land and land improvements

   $ 1,089,675     $ 974,622  

Mineral reserves and interests

     2,506,817       1,162,289  

Buildings

     162,098       154,564  

Machinery and equipment

     4,357,705       4,006,619  

Construction in progress

     178,668       199,973  
     8,294,963       6,498,067  

Less: accumulated depreciation, depletion and amortization

     (3,137,734     (2,905,254

Total

   $   5,157,229     $   3,592,813  
 

 

Martin Marietta  |  Page 24


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Included in these amounts are the gross asset value and accumulated amortization for machinery and equipment recorded under capital leases at December 31 as follows:

 

(add 000)

     2018       2017  

Machinery and equipment under capital leases

   $    24,931     $    23,919  

Less: accumulated amortization

     (14,524     (11,243

Total

   $ 10,407     $ 12,676  

Depreciation, depletion and amortization expense related to property, plant and equipment was $326,099,000, $279,808,000 and $268,935,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Depreciation, depletion and amortization expense includes amortization of machinery and equipment under capital leases.

Interest expense of $3,017,000, $3,616,000 and $3,543,000 was capitalized during 2018, 2017 and 2016, respectively.

At December 31, 2018 and 2017, $56,235,000 and $57,665,000, respectively, of the Building Materials business’ net property, plant and equipment were located in foreign countries, namely the Bahamas and Canada.

Note H: Long-Term Debt

 

December 31

(add 000)

     2018       2017  

4.25% Senior Notes, due 2024

   $ 396,398     $ 395,814  

7% Debentures, due 2025

     124,272       124,180  

3.450% Senior Notes, due 2027

     296,939       296,628  

3.500% Senior Notes, due 2027

     494,765       494,352  

6.25% Senior Notes, due 2037

     228,094       228,033  

4.250% Senior Notes, due 2047

     591,541       591,688  

Floating Rate Senior Notes, due 2019, interest rate of 3.29% and 2.13% at December 31, 2018 and 2017, respectively

     299,260       298,102  

Floating Rate Senior Notes, due 2020, interest rate of 3.30% and 2.10% at December 31, 2018 and 2017, respectively

     298,956       298,227  

6.60% Senior Notes, due 2018

           299,871  

Trade Receivable Facility, interest rate of 3.07% at December 31, 2018

     390,000        

Other notes

     256       308  

Total

     3,120,481       3,027,203  

Less: current maturities

     (390,042     (299,909

Long-term debt

   $   2,730,439     $   2,727,294  

The Company’s 4.25% Senior Notes due 2024, 7% Debentures due 2025, 3.450% Senior Notes due 2027, 3.500% Senior Notes due 2027, 6.25% Senior Notes due 2037, 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.

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 “3.45% Senior Notes”). The 3.45% 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. 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 3.50% Senior Notes due 2027 (the “2027 3.50% Fixed Rate Notes”) and $600,000,000 aggregate principal amount of 4.25% Senior Notes due 2047 (the “2047 Fixed Rate Notes”). The net proceeds of the offering were used to finance, in part, the Bluegrass acquisition and to repay the $300,000,000 6.60% Senior Notes that matured April 15, 2018. The Company may not redeem the 2019 Floating Rate Notes prior to their stated maturity date of December 20, 2019.

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 2019 Floating Rate Senior Notes and the 2020 Floating Rate

 

 

Martin Marietta  |  Page 25


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Senior Notes 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 Senior Notes are as follows:

 

     Principal
Amount
(add 000)
  Effective
Interest
Rate
  Maturity
Date

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 Note

    $ 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

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 O), 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. The Company was in compliance with the Ratio at December 31, 2018.

On December 20, 2018, the Company extended its Revolving Facility by one year. The Revolving Facility expires on December 5, 2023, 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, 2018 and 2017, the Company had $2,301,000 of outstanding letters of credit issued under the Revolving Facility and $697,699,000 available for borrowing 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 $400,000,000 trade receivable securitization facility (the “Trade Receivable Facility”). On September 25, 2018, the Company extended the maturity to September 25, 2019. 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. 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, 2018, and thereafter are:

 

(add 000)

        

2019

   $ 390,042  

2020

     299,015  

2021

     65  

2022

     90  

2023

     299,260  

Thereafter

     2,132,009  

Total

   $     3,120,481  

The 2019 Floating Rate Notes mature December 20, 2019. The Company has classified these obligations as noncurrent long-term debt on the consolidated balance sheets as of

 

 

Martin Marietta  |  Page 26


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

December 31, 2018 as it has the ability and intent to refinance the notes on a long-term basis. For the debt maturity schedule, the 2019 Floating Rate Notes are included in 2023.

The Company has a $5,000,000 short-term line of credit. No amounts were outstanding under this line of credit at December 31, 2018 or 2017.

Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. For the years ended December 31, 2018, 2017 and 2016, the Company recognized $458,000, $1,443,000 and $1,367,000, respectively, as additional interest expense.

Note I: Financial Instruments

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

Temporary cash investments are placed primarily in money market funds, money market demand deposit accounts or offshore time 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, Georgia and Iowa. The estimated fair values of accounts receivable approximate their carrying amounts.

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.

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 $3,120,481,000 and $3,012,224,000, respectively, at December 31, 2018 and $3,027,203,000 and $3,144,902,000, respectively, at December 31, 2017.

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 J: Income Taxes

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

 

years ended December 31

(add 000)

     2018       2017       2016  

Federal income taxes:

      

Current

   $ 15,285     $ 129,236     $ 97,975  

Deferred

     69,599       (239,304     68,899  

Total federal income taxes

     84,884       (110,068     166,874  

State income taxes:

      

Current

     5,986       14,843       15,189  

Deferred

     14,134       (882     (1,149

Total state income taxes

     20,120       13,961       14,040  

Foreign income taxes:

      

Current

     (1,354     1,175       1,064  

Deferred

     2,055       475       (394

Total foreign income taxes

     701       1,650       670  

Income tax expense (benefit)

   $   105,705     $   (94,457)     $   181,584  

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 included provisions that lowered the federal statutory corporate income tax rate from 35% to 21% beginning in 2018, imposed a one-time transition tax on mandatory deemed repatriation of undistributed net earnings and changed how foreign earnings are subject to U.S. tax. 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), which allowed companies to record provisional amounts during a measurement period of up to one year from enactment where the necessary information was not available to complete the accounting for certain income tax effects of the 2017 Tax Act.

The Company recognized, on a provisional basis, a net tax benefit of $258,103,000 related to the 2017 Tax Act for the remeasurement of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. In accordance with the provisions of SAB 118, the Company completed the accounting for the impact of the 2017 Tax Act during the year ended December 31, 2018, and as a result recognized income tax expense of $1,147,000 for the transition tax on

 

 

Martin Marietta  |  Page 27


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

mandatory deemed repatriation of undistributed foreign earnings; income tax expense of $1,481,000 for the write off of deferred tax assets that will not be realized due to changes in the deductibility of executive compensation; and an income tax benefit of $21,514,000 primarily related to the accelerated deductions for pension funding, inventory and insurance prepayments that were claimed on the Company’s 2017 income tax returns.

Effective January 1, 2018, global intangible low-taxed income (GILTI) earned by controlled foreign corporations must be included in the income of the U.S. shareholder. Under U.S. GAAP, an accounting policy choice is required to either (1) treat taxes due on future U.S. inclusions related to GILTI as a current period expense when incurred or (2) factor such amounts into a company’s measurement of its deferred taxes. The Company has elected to treat GILTI as a current period expense.

For the years ended December 31, 2018 and 2016, the benefit related to the utilization of federal net operating loss (NOL) carryforwards, reflected in current tax expense, was $5,794,000 and $11,852,000, 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 years ended December 31, 2018, 2017 and 2016, foreign pretax earnings were $5,718,000, $10,566,000 and $3,865,000, respectively.

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

     2018       2017       2016  

Statutory income tax rate

     21.0     35.0     35.0

(Reduction) increase resulting from:

 

   

Impact from 2017 Tax Act

     (3.3     (41.7      

Effect of statutory depletion

     (3.4     (5.6     (5.4

State income taxes, net of federal tax benefit

     2.8       1.5       1.5  

Stock based compensation

     (0.5     (1.0     (0.1

Domestic production deduction

           (2.2     (2.0

Other items

     1.7       (1.3     0.9  

Effective income tax rate

     18.3     (15.3 %)      29.9

The change in the effective income tax rate in 2017 and the lower effective income tax rate in 2018, as 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 Company was entitled to receive a 9% tax deduction related to income from domestic (i.e., United States) production activities in 2017 and 2016. The deduction reduced income tax expense and increased consolidated net earnings by $15,461,000, or $0.25 per diluted share, in 2017 and $13,583,000, or $0.21 per diluted share, in 2016. The domestic production deduction was eliminated by the 2017 Tax Act and will not generate a tax benefit in 2018 and beyond.

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

 

     Deferred  
December 31    Assets (Liabilities)  
(add 000)    2018     2017  

Deferred tax assets related to:

    

Employee benefits

   $     $ 16,059  

Inventories

     52,618       56,242  

Valuation and other reserves

     22,359       22,989  

Net operating loss carryforwards

     10,990       11,780  

Accumulated other comprehensive loss

     84,207       80,116  

Other items, net

     3,052       3,963  

Gross deferred tax assets

       173,226         191,149  

Valuation allowance on deferred tax assets

     (8,604     (10,349

Total net deferred tax assets

     164,622       180,800  

Deferred tax liabilities related to:

    

Property, plant and equipment

     (478,329     (407,400

Partnerships and joint ventures

     (204,315     (15,617

Goodwill and other intangibles

     (170,538     (168,506

Employee benefits

     (17,004      

Total deferred tax liabilities

     (870,186     (591,523

Deferred income taxes, net

   $ (705,564   $ (410,723

The Company had $3,219,000 of domestic federal NOL carryforwards at December 31, 2018. The Company had domestic state NOL carryforwards of $168,060,000 and $197,916,000 at December 31, 2018 and 2017, respectively. These carryforwards have various expiration dates through 2037. At December 31, 2018 and 2017, deferred tax assets associated with these carryforwards were $10,990,000 and $11,780,000, respectively, net of the federal benefit of the state deduction, for which valuation allowances of $8,576,000 and $10,085,000, respectively, were recorded. The Company also had domestic tax credit carryforwards of $993,000 and $1,342,000 at December 31, 2018 and 2017, respectively,

 

 

Martin Marietta  |  Page 28


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

which expire in 2036. At December 31, 2018 and 2017, deferred tax assets associated with these carryforwards were $784,000 and $1,060,000, respectively, net of the federal benefit of the state deduction, for which valuation allowances of $28,000 and $264,000, respectively, were recorded.

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 for partnerships and joint ventures relate to the difference between the tax basis in partnerships and joint ventures when compared to the basis for financial reporting purposes. The increase in 2018 was a result of the Bluegrass acquisition, as this business is a partnership for income tax 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 change in deferred taxes for employee benefits was primarily driven by the additional pension funding in 2018 for the 2017 plan year.

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 or basis differences. The Company believes that the tax liability that would be incurred upon repatriation is immaterial at December 31, 2018.

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

years ended December 31

(add 000)

   2018     2017     2016  

Unrecognized tax benefits at beginning of year

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

Gross increases – tax positions in prior years

     944       1,396       2,401  

Gross decreases – tax positions in prior years

           (672     (1,924

Gross increases – tax positions in current year

     1,802       4,961       4,650  

Gross decreases – tax positions in current year

     (1,013     (946     (2,047

Lapse of statute of limitations

           (4,179      

Unrecognized tax benefits at end of year

   $ 24,100     $ 22,367     $ 21,807  

Amount that, if recognized, would favorably impact the effective tax rate

   $ 12,820     $ 10,399     $ 11,603  

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 accrual is not expected to materially change in the next twelve months.

For the year ended December 31, 2017, $3,922,000 was reversed into income upon the statute of limitations expiration for the 2010 through 2013 tax years.

The Company’s tax years subject to federal, state or foreign examinations are 2011 through 2018.

Note K: 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.

 

 

Martin Marietta  |  Page 29


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

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)

   2018     2017     2016  

Service cost

   $ 31,624     $ 26,805     $ 22,167  

Interest cost

     33,209       36,101       35,879  

Expected return on assets

     (46,011     (39,759     (37,699

Amortization of:

      

Prior service cost

     104       311       350  

Actuarial loss

     12,830       14,138       12,074  

Transition asset

     (1     (1     (1

Settlement charge

     2,936       21       124  

Termination benefit charge

                 764  

Net periodic benefit cost

   $ 34,691     $ 37,616     $ 33,658  

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 calculated by 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)

   2018     2017     2016  

Actuarial loss

   $ 32,214     $ 13,343     $ 52,028  

Net prior service cost

     3              

Amortization of:

      

Prior service cost

     (104     (311     (350

Actuarial loss

     (12,830     (14,138     (12,074

Transition asset

     1       1       1  

Special plan termination benefits

                 (764

Settlement charge

     (2,936     (21     (124

Total

   $ 16,348     $ (1,126   $ 38,717  

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

 

December 31   2018     2017  
(add 000)   Gross     Net of tax     Gross     Net of tax  

Prior service cost

  $ 14     $ 9     $ 115     $ 71  

Actuarial loss

    233,688       146,588       217,240       134,066  

Transition asset

    (5     (3     (6     (4

Total

  $   233,697     $   146,594     $   217,349     $   134,133  

The prior service cost, actuarial loss and transition asset expected to be recognized in net periodic benefit cost during 2019 are $8,000 (net of deferred taxes of $2,000), $15,727,000 (net of deferred taxes of $3,893,000) and $1,000, respectively. These amounts are included in accumulated other comprehensive loss at December 31, 2018.

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

 

years ended December 31

(add 000)

     2018       2017  

Net projected benefit obligation at beginning of year

   $ 879,335     $ 831,849  

Service cost

     31,624       26,805  

Interest cost

     33,209       36,101  

Actuarial (gain) loss

     (54,621     56,675  

Plan amendment

     3        

Gross benefits paid

     (41,654     (72,095

Net projected benefit obligation at end of year

   $   847,896     $   879,335  
 

 

Martin Marietta  |  Page 30


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

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)

     2018       2017  

Change in plan assets:

    

Fair value of plan assets at beginning of year

   $ 638,106     $ 596,207  

Actual return on plan assets, net

     (40,823     83,091  

Employer contributions

     162,281       30,903  

Gross benefits paid

     (41,654     (72,095

Fair value of plan assets at end of year

   $ 717,910     $ 638,106  

December 31

(add 000)

     2018       2017  

Funded status of the plan at end of year

   $ (129,986   $ (241,229

Accrued benefit cost

   $ (129,986   $ (241,229

December 31

(add 000)

     2018       2017  

Amounts recognized on consolidated balance sheets consist of:

    

Current liability

   $ (8,992   $ (11,092

Noncurrent liability

     (120,994     (230,137

Net amount recognized at end of year

   $ (129,986   $ (241,229

The accumulated benefit obligation for all defined benefit pension plans was $771,921,000 and $792,912,000 at December 31, 2018 and 2017, 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)

     2018        2017  

Projected benefit obligation

   $  98,729      $  879,335  

Accumulated benefit obligation

   $ 85,548      $ 792,912  

Fair value of plan assets

   $ 560      $ 638,106  

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

 

       2018       2017  

Discount rate

     4.38     3.76

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:

 

      2018      2017      2016  

Discount rate

     3.76%        4.29%        4.67%  

Rate of increase in future compensation levels

     4.50%        4.50%        4.50%  

Expected long-term rate of return on assets

     6.75%        6.75%        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 2018 and 2017, 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-2018 and MP-2017 for the years 2018 and 2017, respectively. The change in mortality improvement scale in 2018 did not have a material impact on the projected benefit obligation.

The target allocation for 2018 and the actual pension plan asset allocation by asset class are as follows:

 

     Percentage of Plan Assets  
     2018      December 31  
     Target                

Asset Class

     Allocation        2018        2017  

Equity securities

     56%        57%        57%  

Debt securities

     30%        32%        29%  

Hedge funds

     4%        6%        7%  

Real estate

     10%        5%        7%  

Total

     100%        100%        100%  

The Company’s investment strategy is for approximately 45% of equity securities, excluding hedge funds and real estate, 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.

 

 

Martin Marietta  |  Page 31


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

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

 

    Fair Value Measurement              

December 31

(add 000)

 

Quoted

Prices in
Active
Markets

for
Identical
Assets
(Level 1)

    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
   

Net Asset

Value

   

Total

Fair

Value

 
    2018  

Equity securities1:

 

     

  Mid-sized to large cap

  $     $     $     $ 196,475     $ 196,475  

  Small cap, international and emerging growth funds

                      210,371       210,371  

Debt securities1:

 

     

  Core fixed income

                      228,194       228,194  

Real estate

                      35,553       35,553  

Hedge funds

                  44,453       44,453  

Cash equivalents

    2,864                         2,864  

Total

  $ 2,864     $     $     $ 715,046     $ 717,910  
              2017                  

Equity securities1:

 

     

  Mid-sized to large cap

  $     $     $     $ 177,497     $ 177,497  

  Small cap, international and emerging growth funds

                      186,272       186,272  

Debt securities1:

 

     

  Core fixed income

                      182,225       182,225  

Real estate

                      46,467       46,467  

Hedge funds

                      45,604       45,604  

Cash equivalents

    41                         41  

Total

  $ 41     $     $     $  638,065     $  638,106  

 

1 

These investments are common collective investment trusts valued using the net asset value (NAV) unit price provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund.

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.

In 2018 and 2017, the Company made combined pension plan and SERP contributions of $162,281,000 and $30,903,000, respectively. The Company currently estimates that it will contribute $32,022,000 to its pension plans in 2019.

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)

        

2019

   $ 40,835  

2020

   $ 42,908  

2021

   $ 44,237  

2022

   $ 45,848  

2023

   $ 47,170  

Years 2024 - 2028

   $   260,117  

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

 

 

Martin Marietta  |  Page 32


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

years ended December 31

      

(add 000)

     2018       2017       2016  

Service cost

   $ 77     $ 80     $ 85  

Interest cost

           519             727             863  

Amortization of:

      

  Prior service credit

     (2,074     (1,741     (1,959

  Actuarial gain

     (211     (364     (499

  Settlement credit

                 (9

Total net periodic benefit credit

   $ (1,689   $ (1,298   $ (1,519

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)

     2018       2017       2016  

Actuarial (gain) loss

   $ (1,700   $ 1,236     $ 686  

Net prior service credit

           (3,902     (1,326

Settlement credit

                 9  

Amortization of:

      

  Prior service credit

     2,074       1,741       1,959  

  Actuarial gain

     211       364       499  

Total

   $ 585     $ (561   $ 1,827  

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

 

December 31

   2018    2017
(add 000)    Gross    Net of tax    Gross    Net of tax

Prior service credit

   $ (3,747)    $ (2,388)    $(6,314)    $ (3,899)

Actuarial gain

   (4,238)    (2,701)    (2,256)    (1,393)

Total

   $ (7,985)    $ (5,089)    $(8,570)    $ (5,292)

The prior service credit and actuarial gain expected to be recognized in net periodic benefit cost during 2019 is $762,000 (net of deferred taxes of $189,000) and $473,000 (net of deferred taxes of $117,000), respectively, and are included in accumulated other comprehensive loss at December 31, 2018.

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

years ended December 31

    

(add 000)

     2018       2017  

Change in benefit obligation:

    

Net benefit obligation at beginning of year

   $ 15,347     $ 20,591  

Service cost

     77       80  

Interest cost

     519       727  

Participants’ contributions

     312       3,421  

Actuarial (gain) loss

     (1,700     1,236  

Gross benefits paid

     (1,262     (6,806

Plan amendments

           (3,902

Net benefit obligation at end of year

   $   13,293     $   15,347  

The postretirement health care plans’ 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)

     2018       2017  

Fair value of plan assets at beginning of year

   $     $  

Employer contributions

     950       3,385  

Participants’ contributions

     312       3,421  

Gross benefits paid

     (1,262     (6,806

Fair value of plan assets at end of year

   $     $  

December 31

    

(add 000)

     2018       2017  

Funded status of the plan at end of year

   $ (13,293   $ (15,347

Accrued benefit cost

   $ (13,293   $ (15,347

December 31

    

(add 000)

     2018       2017  

Amounts recognized on consolidated balance sheets consist of:

    

Current liability

   $ (950   $ (2,560

Noncurrent liability

     (12,343     (12,787

Net amount recognized at end of year

   $ (13,293   $ (15,347

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

 

       2018       2017  

Discount rate

     4.15     3.47

Weighted-average assumptions used to determine net postretirement benefit credit for the years ended December 31 are:

 

       2018       2017       2016  

Discount rate

     3.47     3.78     4.25

For 2018 and 2017, the Company estimated the remaining lives of participants in the postretirement benefit 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

 

 

Martin Marietta  |  Page 33


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

participants. The Company used mortality improvement scales MP-2018 and MP-2017 for the years 2018 and 2017, respectively. The change in mortality improvement scale in 2018 did not have a material impact on the projected benefit obligation.

Assumed health care cost trend rates at December 31 are:

 

       2018        2017  

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

     2023        2022  

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

   $ 25      $ (22

Postretirement benefit obligation

   $   640      $ (575

The Company estimates that it will contribute $950,000 to its postretirement health care plans in 2019.

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)

        

2019

   $ 950  

2020

   $ 1,492  

2021

   $ 1,419  

2022

   $ 1,344  

2023

   $ 1,254  

Years 2024 - 2028

   $   5,809  

Defined Contribution Plan. The Company maintains a defined contribution plan that covers substantially all employees. This plan, qualified under Section 401(a) of the Internal Revenue Code, is a retirement savings and investment plan for the Company’s salaried and hourly employees. Under certain provisions of the plan, the Company, at established rates, matches employees’ eligible contributions. The Company’s matching obligations were $16,545,000 in 2018, $14,893,000 in 2017 and $13,235,000 in 2016.

Note L: Stock-Based Compensation

On May 19, 2016, the Company’s shareholders approved 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 N).

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. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of those criteria. 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 non-employee members of the Board of Directors vest immediately.

The fair value of stock-based award grants is amortized to expense over the vesting period. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Awards granted to nonemployee members of the Board of Directors are expensed 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 34


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

The following table summarizes information for restricted stock awards and incentive compensation stock awards for 2018:

 

     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, 2018

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

Awarded

     64,352     $ 211.03          37,138     $ 212.12        18,180     $ 212.12  

Distributed

     (88,674   $ 159.04          (20,219   $ 126.01        (20,992   $ 138.54  

Forfeited

     (12,371   $ 211.63          (4,979   $ 182.90        (322   $ 184.74  

December 31, 2018

     278,147     $ 158.29          151,939     $   174.74        35,376     $   206.55  

 

The weighted-average grant-date fair value of service-based restricted stock awards granted during 2018, 2017 and 2016 was $211.03, $213.76 and $128.48, respectively. The weighted-average grant-date fair value of performance-based restricted stock awards granted during 2018, 2017 and 2016 was $212.12, $207.73 and $124.41, respectively. The weighted-average grant-date fair value of incentive compensation stock awards granted during 2018, 2017 and 2016 was $212.12, $208.68 and $124.41, respectively.

The aggregate intrinsic values for unvested restricted stock awards and unvested incentive compensation stock awards at December 31, 2018 were $73,919,000 and $234,000, respectively, and were based on the closing price of the Company’s common stock at December 31, 2018, which was $171.87. The aggregate intrinsic values of restricted stock awards distributed during the years ended December 31, 2018, 2017 and 2016 were $22,985,000, $15,771,000 and $9,738,000, respectively. The aggregate intrinsic values of incentive compensation stock awards distributed during the years ended December 31, 2018, 2017 and 2016 were $1,662,000, $2,601,000 and $1,941,000, 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 in 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.

The following table includes summary information for stock options as of December 31, 2018:

 

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

Outstanding at January 1, 2018

    301,958     $ 91.44    

Exercised

    (89,557   $ 81.06    

Terminated

    (2,011   $ 83.32    

Outstanding at December 31, 2018

    210,390     $ 95.93       3.6  

Exercisable at December 31, 2018

    197,241     $ 92.02       3.4  

The aggregate intrinsic values of options exercised during the years ended December 31, 2018, 2017 and 2016 were $12,395,000, $13,247,000 and $22,571,000, 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, 2018 were $15,977,000 and $15,750,000, respectively, and were based on the closing price of the Company’s common stock at December 31, 2018, which was $171.87. The excess tax benefits for stock options exercised during the years ended December 31, 2018, 2017 and 2016 were $1,741,000, $3,483,000 and $4,238,000, respectively.

At December 31, 2018, there are approximately 792,000 awards available for grant under the Plans. In 2016, the

 

 

Martin Marietta  |  Page 35


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Company’s shareholders approved the issuance of an additional 800,000 shares of common stock under the Plans. As part of approving the additional 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, 2018 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, 2018, 42,025 shares have been issued under this plan. No awards have been granted under this plan since 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 3,105, 2,132 and 3,699 shares of the Company’s common stock under this plan during 2018, 2017 and 2016, respectively.

The following table summarizes stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016, unrecognized compensation cost for nonvested awards at December 31, 2018 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:

 

       

2018

  $ 242     $ 27,650     $ 729     $ 632     $ 29,253  

2017

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

2016

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

Unrecognized compensation cost at December 31, 2018:

 

    $ 50     $ 21,992     $ 495     $     $ 22,537  

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

 

      0.4 years       1.6 years       1.6 years                

The following presents expected stock-based compensation expense in future periods for outstanding awards as of December 31, 2018:

 

(add 000)

        

2019

   $ 16,191  

2020

     5,843  

2021

     409  

2022

     94  

Total

   $   22,537  

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

Note M: Leases

Total lease expense for operating leases was $122,545,000, $90,731,000 and $85,945,000 for the years ended December 31, 2018, 2017 and 2016, 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 $52,482,000, $51,827,000 and $55,257,000 for the years ended December 31, 2018, 2017 and 2016, respectively. The Company also has capital lease obligations for machinery and equipment.

Future minimum lease and royalty commitments for all non-cancelable agreements and capital lease obligations as of December 31, 2018 are as follows:

 

     Capital     Operating      Royalty  
(add 000)    Leases     Leases      Commitments  

2019

   $ 3,718     $ 105,955      $ 14,614  

2020

     2,695       70,478        11,364  

2021

     1,735       60,382        10,335  

2022

     1,004       57,531        9,545  

2023

     713       56,511        8,109  

Thereafter

     3,893       318,147        65,981  

Total

     13,758     $ 669,004      $ 119,948  

Less: imputed interest

     (2,879     

Present value of minimum lease payments

     10,879       

Less: current capital lease obligations

     (3,249     

Long-term capital lease obligations

   $ 7,630       

Of the total future minimum commitments, $172,877,000 relates to the Company’s contracts of affreightment.

 

 

Martin Marietta  |  Page 36


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

Note N: 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, 2018, approximately 1,819,000 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 521,140, 457,742 and 1,587,987 shares of common stock during 2018, 2017 and 2016, respectively. At December 31, 2018, 14,147,751 shares of common stock were remaining under the Company’s repurchase authorization.

Note O: 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 2018, 2017 and 2016 were $8,015,000, $8,682,000 and $8,823,000, respectively, and are included in Other operating income and expenses, net, in the consolidated statements of earnings.

The following shows the changes in the asset retirement obligations:

 

years ended December 31

    

(add 000)

     2018       2017  

Balance at beginning of year

   $ 109,653     $ 101,106  

Accretion expense

     5,074       4,768  

Liabilities incurred and liabilities assumed in business combinations

     4,692       7,940  

Liabilities settled

     (2,821     (309

Revisions in estimated cash flows

     5,206       (3,852

Balance at end of year

   $   121,804     $   109,653  

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.

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, 2018 and 2017, reserves of $48,256,000 and $48,061,000, respectively, were recorded for all such insurance claims. The Company records the reserves based on an actuarial-determined analysis, which calculates development factors that are applied to total case reserves within the insurance programs. 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 insurance 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, 2018, the Company was contingently liable for $36,081,000 in letters of credit, of which $2,301,000 were issued under the Company’s Revolving Facility.

Surety Bonds. In the normal course of business, at December 31, 2018, the Company was contingently liable for $375,561,000 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

 

 

Martin Marietta  |  Page 37


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

mining permits guaranteeing the Company’s own performance. Five of these bonds total $77,603,000, or 21%, 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.

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 $12,710,000 was outstanding as of December 31, 2018. 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, 2022.

Purchase Commitments. The Company had purchase commitments for property, plant and equipment of $118,664,000 as of December 31, 2018. The Company also had other purchase obligations related to energy and service contracts of $106,360,000 as of December 31, 2018. The Company’s contractual purchase commitments as of December 31, 2018 are as follows:

 

(add 000)        

2019

   $   181,768    

2020

     14,177    

2021

     6,264    

2022

     3,689    

2023

     1,931    

Thereafter

     17,195    

Total

   $   225,024    

Capital expenditures in 2018, 2017 and 2016 that were purchase commitments as of the prior year end were $79,345,000, $83,748,000 and $62,927,000, 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 June 2022.

Note P: 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 total revenues less cost of revenues; selling, general and administrative expenses; acquisition-related expenses, net; other operating income and expenses, net; and exclude interest expense; other nonoperating income, net; and income tax expense (benefit). Corporate loss from operations primarily includes 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.

The following tables display selected financial data for the Company’s reportable segments. The acquired Bluegrass operations are located in the Mid-America Group and Southeast Group. Total revenues, as well as the consolidated statements of earnings and comprehensive earnings, exclude intersegment revenues which represent sales from one segment to another segment, which are eliminated. Prior-year information has been reclassified to conform to current year revenue presentation.

 

 

Martin Marietta  |  Page 38


NOTES TO FINANCIAL STATEMENTS (continued)

 

 

years ended December 31

(add 000)

 

 

   
Total revenues   2018     2017     2016  

Mid-America Group

  $  1,223,236     $ 1,053,326     $ 1,017,098  

Southeast Group

    423,382       362,555       321,078  

West Group

    2,309,924       2,279,723       2,223,515  

Total Building
Materials Business

 

 

3,956,542

 

    3,695,604       3,561,691  

Magnesia Specialties

    287,723       269,990       257,058  

Total

  $ 4,244,265     $ 3,965,594     $   3,818,749  
Gross profit (loss)         

Mid-America Group

  $ 366,918     $ 335,394     $ 306,560  

Southeast Group

    77,193       74,642       57,286  

West Group

    416,212       465,596       466,790  

Total Building
Materials Business

    860,323       875,632       830,636  

Magnesia Specialties

    98,682       89,398       89,603  

Corporate

    7,572       6,910       (8,501

Total

  $ 966,577     $ 971,940     $ 911,738  
Selling, general and administrative expenses  

Mid-America Group

  $ 55,775     $ 53,937     $ 52,712  

Southeast Group

    18,727       17,144       17,245  

West Group

    107,613       102,650       95,631  

Total Building
Materials Business

    182,115       173,731       165,588  

Magnesia Specialties

    9,999       9,537       9,617  

Corporate

    88,440       78,860       66,401  

Total

  $ 280,554     $ 262,128     $ 241,606  
Earnings (Loss) from operations  

Mid-America Group

  $ 319,139     $ 284,789     $ 258,422  

Southeast Group

    75,840       61,238       41,653  

West Group

    295,801       360,544       379,417  

Total Building
Materials Business

    690,780       706,571       679,492  

Magnesia Specialties

    88,063       79,431       79,306  

Corporate

    (88,106     (85,621     (81,532

Total

  $ 690,737     $ 700,381     $ 677,266  

 

Earnings from operations for the West Group for 2018 reflect
asset and portfolio rationalization charges of $18,838,000.

 

years ended December 31

(add 000)

  2018     2017     2016  
Depreciation, depletion and amortization  

Mid-America Group

  $ 93,639     $ 69,691     $ 64,295  

Southeast Group

    41,214       30,780       30,590  

West Group

    180,870       169,853       164,653  

Total Building
Materials Business

    315,723       270,324       259,538  

Magnesia Specialties

    10,413       10,070       10,354  

Corporate

    17,897       16,768       15,361  

Total

  $ 344,033     $ 297,162     $ 285,253  

December 31

(add 000)

 

 

     
Assets employed    2018      2017      2016  

Mid-America Group

   $ 2,788,454      $ 1,532,867      $   1,406,526  

Southeast Group

     1,299,469        616,344        594,967  

West Group

     4,989,639        5,014,231        4,904,018  

Total Building
Materials Business

     9,077,562        7,163,442        6,905,511  

Magnesia Specialties

     156,106        152,257        150,969  

Corporate

     317,751        1,676,812        244,425  

Total

   $ 9,551,419      $   8,992,511      $ 7,300,905  
Total property additions, including the impact of acquisitions  

Mid-America Group

   $ 1,157,073      $ 139,505      $ 152,014  

Southeast Group

     603,078        34,636        30,588  

West Group

     148,164        240,793        338,795  

Total Building
Materials Business

     1,908,315        414,934        521,397  

Magnesia Specialties

     12,450        11,129        8,944  

Corporate

     4,838        12,558        10,430  

Total

   $ 1,925,603      $ 438,621      $ 540,771  
Property additions through acquisitions  

Mid-America Group

   $ 980,236      $ 60      $ 1,524  

Southeast Group

     561,503                

West Group

     1,421        2,420        132,112  

Total Building
Materials Business

     1,543,160        2,480        133,636  

Magnesia Specialties

                    

Corporate

                    

Total

   $   1,543,160      $ 2,480      $ 133,636  

Note Q: Revenues and Gross Profit

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 the West Group. The following tables, which are reconciled to consolidated amounts, provide total revenues and gross profit by line of business: Building Materials (further divided by product line) and Magnesia Specialties. Interproduct revenues 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    2018     2017     2016  

Building Materials Business:

 

   

Products and services:

      

Aggregates

   $   2,355,673     $   2,134,927     $   2,058,687  

Cement

     387,830       371,233       364,139  

Ready Mixed Concrete

     963,770       936,037       902,678  

Asphalt and Paving

     268,679       292,571       257,873  

Less: Interproduct revenues

     (264,237     (264,012     (247,111

  Products and services

     3,711,715       3,470,756       3,336,266  

  Freight

     244,827       224,848       225,425  

Total Building
Materials Business

     3,956,542       3,695,604       3,561,691  

Magnesia Specialties:

      

Products and services

     268,636       252,722       242,384  

Freight

     19,087       17,268       14,674  

 Total Magnesia
Specialties

     287,723       269,990       257,058  

Consolidated total revenues

   $ 4,244,265     $ 3,965,594     $ 3,818,749  
Gross profit (loss)    2018     2017     2016  

Building Materials Business:

 

   

Products and services:

 

   

Aggregates

   $ 606,759     $ 599,670     $ 556,131  

Cement

     126,213       117,021       119,894  

Ready Mixed Concrete

     74,175       91,646       99,085  

Asphalt and Paving

     52,917       64,693       53,025  

Products and services

     860,064       873,030       828,135  

Freight

     259       2,602       2,501  

Total Building
Materials Business

     860,323       875,632       830,636  

Magnesia Specialties:

      

Products and services

     102,905       94,050       93,987  

Freight

     (4,223     (4,652     (4,384

Total Magnesia
Specialties

     98,682       89,398       89,603  

Corporate

     7,572       6,910       (8,501

Consolidated gross profit

   $ 966,577     $ 971,940     $ 911,738  
                          

Domestic and foreign total revenues are as follows:

 

years ended December 31                
(add 000)    2018      2017      2016  

Domestic

   $   4,166,339      $   3,901,323      $   3,761,651  

Foreign

     77,926        64,271        57,098  

Consolidated total revenues

   $ 4,244,265      $ 3,965,594      $ 3,818,749  

Note R: Supplemental Cash Flow Information

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

 

years ended December 31

(add 000)

  2018     2017     2016  

Other current and noncurrent assets

  $ (34,252   $ (19,424   $ 9,171  

Accrued salaries, benefits and payroll taxes

    12,186       136       16,942  

Accrued insurance and other taxes

    (1,416     4,866       (2,688

Accrued income taxes

    (10,336     (11,044     (12,523

Accrued pension, postretirement and postemployment benefits

    (133,153     1,980       (15,955

Other current and noncurrent liabilities

    (12,972     38,105       (6,053

Change in other assets and liabilities, net

  $   (179,943)     $   14,619     $   (11,106)  

Noncash investing and financing activities are as follows:

 

years ended December 31

(add 000)

   2018      2017      2016  

Accrued liabilities for purchases of property, plant and equipment

   $   66,985      $   61,644      $   38,566  

Acquisition of assets through capital lease

   $ 1,148      $ 811      $ 1,399  

Acquisition of assets through asset exchange

   $      $ 2,476      $  

Sale of asset to settle liability

   $      $ 900      $  

Supplemental disclosures of cash flow information are as follows:

 

years ended December 31

(add 000)

   2018      2017      2016  

Cash paid for interest

   $   137,239      $ 78,902      $ 73,664  

Cash paid for income taxes

   $ 28,860      $   155,771      $   124,342  
 

 

Martin Marietta  |  Page 40


NOTES TO FINANCIAL STATEMENTS

 

 

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

Other operating income and expenses, net, are comprised generally of gains and losses on the sale of assets; asset and portfolio rationalization charges; 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 income of $18,193,000 in 2018, an expense of $793,000 in 2017 and income of $8,043,000 in 2016. The 2018 amount reflects $18,838,000 of asset and portfolio rationalization charge, offset by $7,677,000 in net gains on legal settlements and $25,271,000 in gains on the sale of assets, primarily excess land. The 2017 amount reflects $19,366,000 of gains on the sale of assets, primarily excess land, offset by $12,668,000 of nonrecurring repair costs related to certain of the Company’s leased railcars and $10,813,000 of executive retirement expense.

The asset and portfolio rationalization charge relates to the Company’s Southwest ready mixed concrete operations reported in the West Group reportable segment. This charge reflects the Company’s evaluation of the recoverability of certain long-lived assets, including property, plant and equipment and intangible assets, for underperforming operations in this business and a reduction in workforce. Of the total charge, $16,970,000 is noncash and $1,868,000 will be settled in cash.

 

 

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 more than 300 quarries, mines and distribution yards to customers in 31 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 five states accounted for 72% of the Building Materials business total revenues in 2018: Texas, Colorado, North Carolina, Georgia and Iowa.

The Building Materials business is a mature, cyclical business, dependent on activity within the construction marketplace. As of December 31, 2018, the nation’s current economic expansion, which started in June 2009, has lasted

 

 

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, Pennsylvania, 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)

 

 

114 months. By comparison, the average trough-to-peak expansionary cycle since 1938 was 60 months and, as of May 2018, the current cycle became the second-longest economic recovery since the Great Depression. During this current economic expansion, however, governmental uncertainty, labor shortages, logistical challenges 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 level of recovery varies within the Company’s geographic footprint. Specifically, Maryland, North Carolina, Georgia and Florida, key states in the Mid-America and Southeast Groups, are approximately 20% to 25% 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 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.

The Company, by purposeful design, will continue to be an aggregates-led business that focuses on markets with strong, underlying growth fundamentals where it can sustain or achieve a leading market position. Driven by this intentional approach, the Company has leading positions in 90% of its markets. In 2018, the aggregates product line represented 61% 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 exhibit a) population growth and/or population density, both of which are drivers of heavy-side building materials consumption; b) business and employment diversity, drivers of greater economic stability; and c) 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. As evidence of the successful execution of SOAR, the Company’s leading positions in the Front Range and Texas Triangle mega-regions and its enhanced position in the Piedmont Atlantic, primarily the Atlanta area, are the results of acquisitions since

2011. Additionally, the 2018 acquisition of Bluegrass Materials Company (Bluegrass) provided the Company with a new growth platform within the southern portion of the Northeast megaregion. The Company has a legacy presence in the southeastern portion of the Great Lakes megaregion, encompassing operations in Indiana and Ohio. 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.

Additionally, the Company considers a state’s financial position in determining the opportunities and attractiveness of areas for expansion or development. In this assessment, a state’s financial health rating, issued by S&P Global

 

 

Martin Marietta  |  Page 44


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

 

 

Ratings and where AAA is the highest score, is reviewed. The Company’s top ten revenue-generating states have been assigned a financial health rating of AA or AAA. The Company also reviews the state’s ingenuity to securing additional infrastructure sourcing.

In line with the Company’s strategic objectives, management’s overall focus includes the following items:

 

 

Upholding the Company’s commitment to its Mission, Vision and Values

 

 

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

 

 

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 maximize the return on the investment

 

 

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 meaningful dividends and share repurchases

2018 Performance Highlights

Achieved Record Heritage Safety Performance:

 

 

Company-wide Lost Time Incident Rate (LTIR) of 0.20, the world-class LTIR threshold, for the second year in a row

 

 

Total Injury Incident Rate (TIIR) of 1.13

Expanded the Business Through Execution of Its Disciplined Growth Strategy:

On April 27, 2018, the Company acquired Bluegrass, the largest privately held, pure-play aggregates business in the United States. With a portfolio of 22 active sites, the acquired operations provide more than 125 years of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. The Company has surpassed its $15 million run rate synergy target.

Achieved Record Financial Performance:

The Company achieved record total revenues despite externally-driven headwinds and record amounts of precipitation, which was exacerbated by weather-related events that occurred across

a majority of the Company’s leading geographies. Importantly, inclement weather was most significant during the second and third quarters, which represents the height of the construction season. According to the 2018 statewide precipitation map for the six-month period from April through September, for the 124 years the National Oceanic Atmospheric Administration (NOAA) has been tracking data, much of the states along the eastern seaboard experienced record breaking or near-record breaking precipitation. Among those were North Carolina, Florida, Maryland, Virginia and West Virginia. Though not along the coast, Tennessee and Iowa reported near-record precipitation during these six months, citing 2018 as the 8th wettest and 4th wettest period, respectively. This, coupled with government uncertainty regarding additional infrastructure investment, attendant project delays, tight labor markets and third-party logistical challenges, exerted downward pressure on 2018 shipment and production levels. However, the Company’s commitment to operational excellence helped it achieve the following metrics (comparisons with 2017, unless otherwise noted):

 

 

Earnings per diluted share of $7.43

 

 

Net earnings attributable to Martin Marietta of $470.0 million

 

 

Record consolidated EBITDA of $1.05 billion, a 5% improvement, and a 25% margin as a percentage of total revenues

 

 

Aggregates product line pricing increase of 1.9% and volume growth of 8.3%

 

  -

Heritage aggregates product line pricing improvement of 3.0% and volume relatively flat

 

 

Record Magnesia Specialties’ total revenues of $287.7 million and earnings from operations of $88.1 million

 

 

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

 

 

Operating cash flow of $705.1 million

Continued Disciplined Execution Against Capital Allocation Priorities:

 

 

Resume share repurchases, purchasing 521,000 shares for $100.4 million

 

 

Dividend increase of 9% in August 2018, resulting in annual dividends paid of $116.4 million

 

 

Ratio of consolidated net debt-to-consolidated EBITDA to 2.76 times for the trailing-twelve months ended December 31, 2018, calculated as prescribed in the Company’s bank credit agreements despite completing the debt-financed $1.625 billion acquisition of Bluegrass

 

 

Martin Marietta  |  Page 45


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

 

 

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 levels of public-sector infrastructure funding; interest rates; access to capital markets; 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 subject to the impacts of winter weather, while the second and third quarters are subject to the impacts of heavy precipitation. 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 also 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 75 years based on normalized production levels and approximate 100 years at current production rates.

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 market, 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 2018. The Midlothian plant has a permit that provides an 800,000-ton-expansion opportunity. In addition to the two production facilities, the Company operates four cement distribution terminals. Calcium carbonate in the form of limestone is the principal raw material used in the production of cement.

LOGO

The Company owns more than 600 million tons of limestone reserves adjacent to its cement production plants.

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 material with limited amounts of fines (i.e., dirt and clay). The Company operates 140 ready mix plants in Texas, Colorado, Louisiana and Arkansas. Asphalt is most commonly used in surfacing roads and parking lots and consists of liquid asphalt, or bitumen, 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 downstream product lines include a highly competitive environment and lower barriers to entry compared with aggregates and cement.

 

 

Martin Marietta  |  Page 46


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

 

 

End-Use Trends

 

    According to the U.S. Geological Survey, for the nine months ended September 30, 2018, the latest available governmental data, estimated construction aggregates consumption and cement consumption increased 3% compared with the nine months ended September 30, 2017
    Spending statistics for the eleven months ended November 2018 versus the eleven months ended November 2017, the latest available data, according to U.S. Census Bureau:
  -

Total value of construction put in place increased 5%

  -

Public construction spending increased 7%

  -

Private nonresidential construction market spending increased 4%

  -

Private residential construction market spending increased 4%

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; 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 comprising the ChemRock/Rail market.

Public infrastructure jobs can require several years to complete, while residential and nonresidential 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.

Public Infrastructure

The public infrastructure market accounted for 39% of the Company’s aggregates product line shipments in 2018. Contractor capacity issues and logistics disruptions have exerted disproportionate downward pressure on public construction activity, resulting in the Company’s shipments to this end-use market remaining below the most recent five-year average of 41% and ten-year average of 46%.

LOGO

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 of the funding from federal government and half from state and local governments. The Fixing America’s Surface Transportation Act (FAST Act), signed into law on December 4, 2015, was the first long-term transportation funding bill in nearly a decade and authorized $305 billion over fiscal years 2016 through 2020. Included with FAST Act funding is $300 million available for loans issued under Transportation Infrastructure Finance and Innovation Act (TIFIA). However, to date, public infrastructure activity has not yet experienced the anticipated benefits from FAST Act funding. While some contractors are reporting longer lag times between contract awards and project commencement, public construction projects, once awarded, are seen through to completion. Thus, delays from weather or other factors typically serve to

 

 

Martin Marietta  |  Page 47


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

 

 

extend the duration of the construction cycle. State and local initiatives that support infrastructure funding, including gas tax increases and other ballot initiatives in recent years, are increasing in size and number as these governments recognize the need to play an expanded role in public infrastructure funding. Nationally, 78% of nearly 1,700 ballot initiatives since the 2009 elections were approved by voters. Importantly, in November 2018, $26.8 billion of transportation funding initiatives were approved in Florida, Texas, Colorado, Georgia, North Carolina and South Carolina. 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 awarded. A return to the higher historical shipment volumes should be facilitated by state Departments of Transportations (DOTs) and contractors as they address their respective labor constraints.

Nonresidential

The nonresidential construction market accounted for 33% of the Company’s aggregates product line shipments in 2018. According to the U.S. Census Bureau, spending for the private nonresidential construction market increased 3.5%, or $13.9 billion, for the eleven months ended November 2018 compared with 2017. 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, was 151.9 in December 2018 compared with 153.9 in December 2017. 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, reduced oil prices have suppressed shipments directly into shale exploration activities. 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.

Residential

The residential construction market accounted for 22% of the Company’s aggregates product line shipments in 2018. Private residential construction spending increased 4% for the eleven months ended November 2018 compared with

2017, 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, utilities 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 of 1.3 million units for the twelve months ended November 2018 were flat compared with the comparable prior-year period, they remain below the 50-year historical annual average of 1.5 million units. For the twelve months ended November 2018, eight of the Company’s key states ranked in the top fifteen states for total housing permits. The Company expects continued growth in the residential market driven by favorable demographics, job growth, land availability and efficient permitting.

ChemRock/Rail

The remaining 6% of the Company’s 2018 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. 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 embankments, 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. Ballast shipments declined in 2018 due to lower maintenance spending by Class I railroads.

 

 

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 2018, the average selling price for the aggregates product line increased 1.9%, where heritage aggregates pricing increased 3.0%, in line with management’s expectations. Management believes 2019 aggregates product line pricing growth will be in the mid-single digits.

Cost Structure

 

 

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

 

    Health and welfare costs increased approximately 8% per year over past five years compared with the national average of 6% over same period; Company’s costs expected to increase 3% in 2019

 

    Pension expense decreased to $34.7 million in 2018 from $37.6 million in 2017; pension costs are expected to approximate $36.9 million in 2019

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

LOGO

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) depreciation, depletion and amortization (DDA); (4) repairs and maintenance; (5) energy; (6) contract services; and (7) supplies. In 2018, these categories represented 91% of the Building Materials business’ total direct production costs.

Variable costs are expenses that fluctuate with the level of production volume while fixed costs are expenses that do not vary based on production or sales volume. Accordingly, the Company’s operating leverage can be substantial. Production is the key driver in determining 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

 

 

Martin Marietta  |  Page 49


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

 

 

LOGO

reduced repair costs, can offset increased fixed depreciation costs. However, with muted aggregates demand, 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 $44.5 million and $36.5 million of costs at December 31, 2018 and 2017, 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 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 were higher in 2018 versus 2017, but may not always proportionately follow changes in the prices of 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 shutdowns. Kiln and finishing mill maintenance typically requires a plant to be shut down for a period of time as repairs are made. In 2018, 2017 and 2016, the cement product line incurred

plant maintenance outage costs of $17.3 million, $14.0 million and $22.9 million, respectively. The Company adjusts production levels in anticipation of planned maintenance shutdowns.

Diesel fuel represents the single largest component of energy costs for the Building Materials business. The average cost per gallon of diesel fuel was $2.29, $1.81 and $1.96 in 2018, 2017 and 2016, respectively. Pricing in 2016 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 on a rotating basis 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.

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 extend the useful lives of equipment, these locations are not impaired. When temporarily-idled locations are reopened, it is typical for equipment repair costs to, in the short term, increase.

 

 

Martin Marietta  |  Page 50


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

 

 

Rising health care costs continue to affect total labor costs. Over the past five years, national health care costs have increased approximately 6% on average, and are expected to increase at this rate in 2019. This expected cost increase is compounded for all employers by uncertainty relating to unpredictable high-cost claims. The Company’s per employee health care cost increased 8% on average per year from 2014 through 2018, driven primarily by increased high-cost claims activity in 2018. For 2019, the Company’s health

 

LOGO

and welfare costs are expected to increase slightly below general marketplace trends. While potential changes to the Affordable Care Act (including the 40% excise tax on high-cost plans effective in 2022) may affect the Company’s cost in the future, any impact cannot be predicted at this time.

Despite a higher discount rate, the Company’s pension expense is expected to increase from $34.7 million in 2018 to an estimated $36.9 million in 2019 (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 pricing growth in periods of inflation based on its ability to increase its selling prices in a normal economic environment.

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, both 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 estimates 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, Georgia and Iowa; cumulatively they accounted for 72% of its 2018 total revenues 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, Maryland and Nebraska, accounted for 85% of the Building Materials business’ 2018 total revenues 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 ended 2015, adding 5.3 million residents, and continues to experience population growth. Based on RPA’s America 2050 study performed in 2010, it projects the population in this megaregion

 

 

Martin Marietta  |  Page 51


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

 

 

will nearly double in the forty-year period ending in 2050, with 70% of the state’s population residing there. The Texas Triangle represents a diverse economy, including the finance, technology, transportation and goods and services sectors.

Uniquely, Houston, which has consistently accounted for approximately 3% of the nation’s gross domestic product (GDP) for the past eleven years and has been ranked in the top five most populous metropolitan areas since 2010, 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, Louisiana. 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 2017, the state’s GDP comprised nearly 9% of the nation’s $19.5 trillion GDP. According to the American Legislative Exchange Council (ALEC), Texas ranked first in economic performance in 2017, supported by growth in GDP, employment and population. Texas ranks fifth in the nation in employment growth for the twelve months ended November 2018, while Dallas/Fort Worth was the second-ranked metropolitan area in the country for the same period. Consistent with this trend, from 2010 through 2018, the state added approximately 3.5 million people to its population.

The state’s Department of Transportation (TxDOT) let $7.3 billion in construction projects in fiscal 2018 and has a letting budget of $9.6 billion for fiscal 2019. As announced in 2017, TxDOT has committed to letting over $65 billion of projects over the ten-year period ending 2027. 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 increasing after 2019. Through fiscal 2018, Propositions 1 and 7 provided $5.4 billion and $2.5 billion, respectively, to the state highway fund. Further, on November 8, 2016, voters approved $990 million of additional statewide transportation

funding, including a $720 million transportation bond in Austin. All 14 ballot measures introduced and voted upon on November 6, 2018 were approved and are estimated to provide $1.2 billion of additional infrastructure funding. The strength of the Texas economy extends beyond infrastructure. Technology giant, Alphabet Inc., parent company of Google, announced in 2018 that it purchased 375 acres of land in Midlothian, Texas, for its next data center. Additionally, Apple announced it will invest $10 billion over the next five years in its data centers, including its new 133-acre campus in Austin that will have the capacity to hold 15,000 employees. Texas ranked second, behind Florida, in total housing permits and experienced a 7% increase for the twelve months ended November 2018. The Houston metropolitan area led the nation for total housing starts for the year ended December 31, 2018, driven partly due to rebuilding after the destruction brought by Hurricane Harvey.

Piedmont Atlantic

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