Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-12744
MARTIN MARIETTA MATERIALS, INC.
(Exact name of registrant as specified in its charter)
| North Carolina | 56-1848578 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 2710 Wycliff Road, Raleigh, North Carolina | 27607-3033 | |
| (Address of principal executive offices) | (Zip Code) |
(919) 781-4550
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Name of each exchange on which registered | |
Common Stock (par value $.01 per share) (including rights attached thereto)
|
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
As of June 30, 2006, the last business day of the registrant’s most recently completed second
fiscal quarter, the aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant was $3,335,765,324 based on the closing sale price as reported on the New York
Stock Exchange.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock on
the latest practicable date.
| Class | Outstanding at February 16, 2007 | |
| Common Stock, $.01 par value per share | 45,054,304 shares |
DOCUMENTS INCORPORATED BY REFERENCE
| Document | Parts Into Which Incorporated | |
Annual Report to Shareholders for the Fiscal
Year Ended December 31, 2006 (Annual Report)
|
Parts I, II, and IV | |
Proxy Statement for the Annual Meeting of
Shareholders to be held May 22, 2007 (Proxy
Statement)
|
Part III |
Table of Contents
TABLE OF CONTENTS
2
Table of Contents
3
Table of Contents
PART I
ITEM 1. BUSINESS
General
Martin Marietta Materials, Inc. (the “Company”) is the United States’ second largest producer
of aggregates for the construction industry, including infrastructure, commercial, agricultural,
and residential. The Company also has a Specialty Products segment that manufactures and markets
magnesia-based chemical products used in industrial, agricultural, and environmental applications,
dolomitic lime sold primarily to the steel industry, and structural composite products. In 2006,
the Company’s Aggregates business accounted for 92% of the Company’s total net sales, and the
Company’s Specialty Products segment accounted for 8% of the Company’s total net sales.
The Company was formed in 1993 as a North Carolina corporation to serve as successor to the
operations of the materials group of the organization that is now Lockheed Martin Corporation. An
initial public offering of a portion of the Company’s Common Stock was completed in 1994, followed
by a tax-free exchange transaction in 1996 that resulted in 100% of the Company’s Common Stock
being publicly traded.
Initially, the Company’s aggregates operations were predominantly in the Southeast, with
additional operations in the Midwest. In 1995, the Company started its geographic expansion with
the purchase of an aggregates business that included an extensive waterborne distribution system
along the East and Gulf Coasts and the Mississippi River. Smaller acquisitions that year,
including the acquisition of the Company’s granite operations on the Strait of Canso in Nova
Scotia, complemented the Company’s new coastal distribution network.
Subsequent acquisitions in 1997 and 1998 expanded the Company’s Aggregates business in the
middle of the country and added a leading producer of aggregates products in Texas, which provided
the Company with access to an extensive rail network in Texas. These two transactions positioned
the Company for numerous additional expansion acquisitions in Ohio, Indiana, and the southwestern
regions of the United States, with the Company completing 29 smaller acquisitions between 1997 and
1999, which allowed the Company to enhance and expand its presence in the aggregates marketplace.
In 1998, the Company made an initial investment in an aggregates business that would later
serve as the Company’s platform for further expansion in the southwestern and western United
States. In 2001, the Company completed the purchase of all of the remaining interests of this
business, which increased its ability to use rail as a mode of transportation.
Effective January 1, 2005, the Company formed a joint venture with Hunt Midwest Enterprises to
operate substantially all of the aggregates facilities of both companies in Kansas City and
surrounding areas. The joint venture was formed by the parties contributing a total of 15 active
quarry operations with production of approximately 7.5 million tons annually.
4
Table of Contents
Between 2001 and 2006 the Company sold a number of nonstrategic operations, including
aggregates, asphalt, ready mixed concrete, trucking, and road paving operations of its Aggregates
business and the refractories business of its Magnesia Specialties business. In some of its
divestitures, the Company concurrently entered into supply agreements to provide aggregates at
market rates to certain of these divested businesses. The Company will continue to evaluate
opportunities to divest nonstrategic assets during 2007 in an effort to redeploy capital for other
opportunities.
Business Segment Information
The Company operates in four reportable business segments: the Mideast Group, Southeast
Group, and West Group, comprising the Aggregates business, and the Specialty Products segment. The
Specialty Products segment includes the Magnesia Specialties business and the structural composites
product line. Information concerning the Company’s total revenues, net sales, earnings from
operations, assets employed, and certain additional information attributable to each reportable
business segment for each year in the three-year period ended December 31, 2006 is included in
“Note O: Business Segments” of the “Notes to Financial Statements” on pages 37-39 of the Company’s
2006 Annual Report to Shareholders (the “2006 Annual Report”), which information is incorporated
herein by reference.
Aggregates Business
The Aggregates business mines, processes and sells granite, limestone, sand, gravel, and other
aggregate products for use in all sectors of the public infrastructure, commercial and residential
construction industries as well as miscellaneous uses such as agriculture, railroad ballast and
chemical uses. The Aggregates business also includes the operation of its other construction
materials businesses. These businesses, located primarily in the West Group, were acquired through
continued selective vertical integration by the Company, and include asphalt, ready mixed concrete,
and road paving operations.
The Company is the United States’ second largest producer of aggregates. In 2006, the
Company’s Aggregates business shipped 198.5 million tons of aggregates primarily to customers in 31
states, Canada, the Bahamas, and the Caribbean Islands, generating net sales and earnings from
operations of $1.9 billion and $400.3 million, respectively.
The Aggregates business markets its products primarily to the construction industry, with
approximately 42% of its shipments made to contractors in connection with highway and other public
infrastructure projects and the balance of its shipments made primarily to contractors in
connection with commercial and residential construction projects. As a result of dependence upon
the construction industry, the profitability of aggregates producers is sensitive to national,
regional, and local economic conditions, and particularly to cyclical swings in construction
spending, which is affected by fluctuations in interest rates, demographic and population shifts,
and changes in the level of infrastructure spending funded by the public sector. The Company’s
Aggregates business covers a wide geographic area, with aggregates, asphalt products, and ready
mixed concrete sold and shipped from a network of approximately 307 quarries, underground mines,
distribution facilities, and plants in 28 states, Canada, and the Bahamas. The Company’s five
largest revenue-generating states (North Carolina, Texas, Georgia, Iowa, and South Carolina)
account for approximately 58% of total 2006 net sales for the Aggregates business by state of
destination. The Company’s business is accordingly
5
Table of Contents
affected by the economies in these regions and has been adversely affected in part by recessions
and weaknesses in these economies from time to time.
The Company’s Aggregates business is also highly seasonal, due primarily to the effect of
weather conditions on construction activity within its markets. The operations of the Aggregates
business that are concentrated in the northern United States and Canada typically experience more
severe winter weather conditions than operations in the southeastern and southwestern regions of
the United States. Excessive rainfall can also jeopardize shipments, production, and
profitability. Due to these factors, the Company’s second and third quarters are the strongest,
with the first quarter generally reflecting the weakest results. Results in any quarter are not
necessarily indicative of the Company’s annual results. Similarly, the operations of the
Aggregates business in the southeastern and Gulf Coast regions of the United States and the Bahamas
are at risk for hurricane activity and have experienced weather-related losses in recent years.
During 2005, aggregates shipments in the Company’s southeastern and Gulf Coast markets were
adversely affected by Hurricanes Katrina and Rita and several other storms during the 2005
record-setting hurricane season.
Natural aggregates sources can be found in relatively homogeneous deposits in certain areas of
the United States. As a general rule, truck shipments from an individual quarry are limited
because the cost of transporting processed aggregates to customers is high in relation to the price
of the product itself. As described below, the Company’s distribution system mainly uses trucks,
but also has access to a river barge and ocean vessel network where the per mile unit cost of
transporting aggregates is much lower. In addition, acquisitions have enabled the Company to
extend its customer base through increased access to rail transportation. Proximity of quarry
facilities to customers or to long-haul transportation corridors is an important factor in
competition for aggregates business.
A growing percentage of the Company’s aggregates shipments are being moved by rail or water
through a distribution yard network. In 1994, 93% of the Company’s aggregates shipments were moved
by truck, the rest by rail. In contrast, in 2006, the Company’s aggregates shipments moved 73% by
truck, 16% by rail, and 11% by water. The majority of the rail and water movements occur in the
Southeast Group and the West Group. The Company has an extensive network of aggregates quarries and
distribution centers along the Mississippi River system throughout the central and southern United
States and in the Bahamas and Canada, as well as distribution centers along the Gulf of Mexico and
Atlantic coasts. In recent years, the Company has brought additional capacity on line at its
Bahamas and Nova Scotia locations to transport materials via oceangoing ship. Further, in 2006,
the Company completed the second largest capital project in its history, a highly-automated plant
and barge loadout system at its Three Rivers facility in Kentucky. This new plant, which is
capable of producing more than 8 million tons per year for shipment to 14 states along the Ohio and
Mississippi River network, greatly expands the Company’s long-haul distribution network.
In addition, the Company’s acquisitions and capital projects have expanded its ability to ship
material by rail, as discussed in more detail below. The Company has added additional capacity in a
number of locations that can now accommodate larger unit train movements. These expansion projects
have enhanced the Company’s long-haul distribution network. The Company’s process improvement
program has also improved operational effectiveness through plant automation, mobile fleet
modernization, right-sizing, and other cost control improvements. Accordingly, the Company has
enhanced its reach through its ability to provide cost-effective coverage of coastal markets on the
east and gulf coasts, as well as geographic areas that can be accessed economically by the
Company’s
6
Table of Contents
expanded distribution system. This distribution network moves aggregates materials from domestic
and offshore sources, via rail and water, to markets where aggregates supply is limited.
As the Company continues to move more aggregates by rail and water, embedded freight costs
have consequently reduced gross margins. This typically occurs where the Company transports
aggregates from a production location to a distribution location by rail or water, and the customer
pays a selling price that includes a freight component. Margins are negatively affected because
the Company typically does not charge the customer a profit associated with the transportation
component of the selling price. Moreover, the Company’s expansion of its rail-based distribution
network, coupled with the extensive use of rail service in the Southeast and West Groups, increase
the Company’s dependence on and exposure to railroad performance, including track congestion, crew
availability, and power availability, and the ability to renegotiate favorable railroad shipping
contracts. The waterborne distribution network, primarily located within the Southeast Group, also
increases the Company’s exposure to certain risks, including the ability to negotiate favorable
shipping contracts, demurrage costs, fuel costs, barge or ship availability, and weather
disruptions. The Company has entered into long-term agreements with shipping companies to provide
ships to transport the Company’s aggregates to various coastal ports.
In 2005, and to a lesser extent in 2006, the Company experienced rail transportation shortages
in Texas and parts of the Southeast Group. These shortages were caused by the downsizing in
personnel and equipment by certain railroads during the economic downturn in the early part of this
decade. Further, in response to these issues, rail transportation providers focused on increasing
the number of cars per unit train under transportation contracts and are generally requiring
customers, through the freight rate structure, to accommodate larger unit train movements. A unit
train is a freight train moving large tonnages of a single bulk product between two points without
intermediate yarding and switching. In 2006, the Company brought a new plant online on a greensite
at its North Troy operation in Oklahoma, which is capable of producing 5 million tons per year and
handling multiple 90-car unit trains. Certain of the Company’s sales yards in the southwestern
region of the United States have the system capabilities to meet the unit train requirements.
During 2005 and 2006, the Company made capital improvements to a number of its sales yards in this
region in order to better accommodate unit train unloadings. Further, in 2005, the Company
addressed certain of its railcar needs for future shipments by leasing 780 railcars under two
master lease agreements.
In 2005, following Hurricanes Katrina and Rita, the Company experienced delays and shortages
relating to its transportation of barges along the Mississippi River system. As the Gulf Coast
started to recover, the Company’s barge traffic improved. However, in 2006 the Company experienced
delays in shipping materials through Lock 52 on the Ohio River, as scheduled repair and maintenance
activities were performed. These delays reduced the water traffic able to pass through Lock 52,
resulted in shipping delays for material shipped by barge through the lock during this time. While
the delays have ended and normal water traffic has resumed, another two-week planned outage is
currently scheduled for August 2007.
During 2006, the Company continued to experience shortages of barges from time to time. Barge
availability has become an issue as the rate of barges being retired is exceeding the rate at which
new barges are being constructed. Shipyards that build barges are operating at capacity, and the
lead time for new barges is approximately 18 months. In 2007, the Corporation will accept delivery
of 50 new barges.
7
Table of Contents
The Company’s management expects the multiple transportation modes that have been developed
with various rail carriers and via barges and deepwater ships should provide the Company with the
flexibility to effectively serve customers in the southeastern and southwestern regions of the
United States.
The construction aggregates industry has been in a consolidating mode. The Company’s
management expects this trend to continue but at a slower rate as the number of suitable
acquisition targets in high growth markets decline. The Company’s Board of Directors and
management continue to review and monitor the Company’s strategic long-term plans, which include
assessing business combinations and arrangements with other companies engaged in similar
businesses, increasing market share in the Company’s core businesses, and pursuing new
opportunities related to the Company’s existing markets.
The Company became more vertically integrated with an acquisition in 1998 and subsequent
acquisitions, particularly in the West Group, pursuant to which the Company acquired asphalt, ready
mixed concrete, paving construction, trucking, and other businesses, which complement the Company’s
aggregates business. These vertically integrated operations accounted for approximately 5% of
revenues of the Aggregates business in 2006. These operations have lower gross margins than
aggregates products, and are affected by volatile factors, including fuel costs, operating
efficiencies, and weather, to an even greater extent than the Company’s aggregates operations. The
road paving and trucking businesses were acquired as supplemental operations that were part of
larger acquisitions. As such, they do not represent core businesses of the Company. The results
of these operations are currently insignificant to the Company as a whole. Over the last few years
the Company has disposed of some of these operations. The Company continues to review carefully
the acquired vertically integrated operations to determine if they represent opportunities to
divest underperforming assets in an effort to redeploy capital for other opportunities.
Environmental and zoning regulations have made it increasingly difficult for the aggregates
industry to expand existing quarries and to develop new quarry operations. Although it cannot be
predicted what policies will be adopted in the future by federal, state, and local governmental
bodies regarding these matters, the Company anticipates that future restrictions will likely make
zoning and permitting more difficult, thereby potentially enhancing the value of the Company’s
existing mineral reserves.
Management believes the Aggregates business’ raw materials, or aggregates reserves, are
sufficient to permit production at present operational levels for the foreseeable future. The
Company does not anticipate any material difficulty in obtaining the raw materials that it uses for
current production in its Aggregates business. The Company’s aggregates reserves on the average
exceed 50 years of production, based on current levels of activity. However, certain locations may
be subject to more limited reserves and may not be able to expand. Moreover, as noted above,
environmental and zoning regulations will likely make it harder for the Company to expand its
existing quarries or develop new quarry operations.
8
Table of Contents
The Company generally sells products in its Aggregates business upon receipt of orders or
requests from customers. Accordingly, there is no significant order backlog. The Company
generally maintains inventories of aggregate products in sufficient quantities to meet the
requirements of customers.
Less than 2% of the revenues from the Aggregates business are from foreign jurisdictions,
principally Canada and the Bahamas, with revenues from customers in foreign countries totaling
$25.0 million, $16.4 million, and $15.4 million during 2006, 2005, and 2004, respectively.
Specialty Products Business
Magnesia Specialties Business. The Company manufactures and markets, through its Magnesia
Specialties business, magnesia-based chemical products for industrial, agricultural, and
environmental applications, and dolomitic lime for use primarily in the steel industry. These
chemical products have varying uses, including flame retardants, wastewater treatment, pulp and
paper production, and other environmental applications. In 2006, 65% of Magnesia Specialties’ net
sales were attributable to chemical products, 33% to lime, and 2% to stone.
Given the high fixed costs associated with operating this business, low capacity utilization
negatively affects its results of operations. A significant portion of the costs related to the
production of magnesia-based products and dolomitic lime is of a fixed or semi-fixed nature. In
addition, the production of certain magnesia chemical products and lime products requires natural
gas, coal, and petroleum coke to fuel kilns. Price fluctuations of these fuels affect the
profitability of this business.
In 2006, approximately 75% of the lime produced was sold to third-party customers, while the
remaining 25% was used internally as a raw material in making the business’ chemical products.
Dolomitic lime products sold to external customers are used primarily by the steel industry.
Accordingly, a portion of the profitability of the Magnesia Specialties business is dependent on
steel production capacity utilization and the related marketplace. Magnesia Specialties’ products
used in the steel industry accounted for approximately 43% of the net sales of the business in
2006, attributable primarily to the sale of dolomitic lime products. However, Magnesia
Specialties’ management has shifted the strategic focus of its magnesia-based business to specialty
chemicals that can be produced at volume levels that support efficient operations. Accordingly,
that business is not as dependent on the steel industry as is the dolomitic lime portion of the
Magnesia Specialties business.
The principal raw materials used in Magnesia Specialties’ products are dolomitic limestone and
alkali-rich brine. Management believes that its reserves of dolomitic limestone and brine are
sufficient to permit production at the current operational levels for the foreseeable future.
After the brine is used in the production process, the Magnesia Specialties business must
dispose of the processed brine. In the past, the business did this by reinjecting the processed
brine back into its underground brine reserve network around its facility in Manistee, Michigan.
The business has also sold a portion of this processed brine to third parties. In 2003, Magnesia
Specialties entered into a long-term processed brine supply agreement with The Dow Chemical Company
(“Dow”) pursuant to which Dow purchases processed brine from Magnesia Specialties, at market rates,
for use in Dow’s production of calcium chloride products. Magnesia Specialties also entered into a
9
Table of Contents
venture with Dow to construct, own, and operate a processed brine supply pipeline between the
Magnesia Specialties facility in Manistee, Michigan, and Dow’s facility in Ludington, Michigan.
Construction of the pipeline was completed in 2003, and Dow began purchasing processed brine from
Magnesia Specialties through the pipeline.
Magnesia Specialties generally delivers its products upon receipt of orders or requests from
customers. Accordingly, there is no significant order backlog. Inventory for Magnesia
Specialties’ products is generally maintained in sufficient quantities to meet rapid delivery
requirements of customers.
Approximately 12% of the revenues of the Magnesia Specialties business are from foreign
jurisdictions, principally Canada, Mexico, Europe, South America, and the Pacific Rim, but no
single country accounts for 10% or more of the revenues of the business. Revenues from customers
in foreign countries totaled $17.0 million, $19.6 million, and $16.1 million in 2006, 2005, and
2004, respectively. As a result of these foreign market sales, the financial results of the
Magnesia Specialties business could be affected by foreign currency exchange rates or weak economic
conditions in the foreign markets. To mitigate the short-term effects of currency exchange rates,
the Magnesia Specialties business principally uses the U.S. dollar as the functional currency in
foreign transactions.
Structural Composite Products Line. The Company, through its wholly-owned subsidiary, Martin
Marietta Composites (“MMC”), develops structural composite products. Pursuant to various
agreements, MMC has rights to commercialize certain proprietary technologies related to flat panel
applications. One of the agreements gives MMC the opportunity to pursue the use of certain
fiber-reinforced polymer composites technologies for products where corrosion resistance and high
strength-to-weight ratios are important factors, such as bridge decks, marine applications, and
other structures and applications. MMC continued its research and product development activities
during 2006 on these structural composites technologies and initiated or continued the
manufacturing and marketing of selected products.
In 2006, MMC narrowed the focus within several market sectors for its composite products:
military, transportation, and infrastructure. Military products consist of ballistic and blast
panels. Transportation products include commercial trucks and rail cars. Infrastructure products
include bridge decks. MMC is currently focusing its efforts on homeland security, military
applications and panel products. To date, MMC has completed 30 successful installations of bridge
decks in 13 states and 2 foreign countries utilizing these composite materials technologies. In
2006 MMC stopped using its license for the manufacture of composite truck trailers and wrote off
its investment in this product application of its structural composites business. MMC also
downsized the management group and the hourly workforce associated with the structural composite
product line. In 2007, the remaining components of the structural composites product line have
specific quarterly benchmarks to achieve to determine its viability. MMC will continue to
evaluate a variety of military and commercial uses for composite materials. There can be no
assurance that these technologies will become profitable.
Patents and Trademarks
As of February 16, 2007, the Company owns, has the right to use, or has pending applications
for approximately 129 patents pending or granted by the United States and various countries and
approximately 59 trademarks related to business. The Company believes that its rights under its
10
Table of Contents
existing patents, patent applications, and trademarks are of value to its operations, but no one
patent or trademark or group of patents or trademarks is material to the conduct of the Company’s
business as a whole.
Customers
No material part of the business of any segment of the Company is dependent upon a single
customer or upon a few customers, the loss of any one of which would have a material adverse effect
on the segment. The Company’s products are sold principally to commercial customers in private
industry. Although large amounts of construction materials are used in public works projects,
relatively insignificant sales are made directly to federal, state, county, or municipal
governments, or agencies thereof.
Competition
Because of the impact of transportation costs on the aggregates industry, competition in the
Aggregates business tends to be limited to producers in proximity to each of the Company’s
production facilities. Although all of the Company’s locations experience competition, the Company
believes that it is generally a leading producer in the areas it serves. Competition is based
primarily on quarry or distribution location and price, but quality of aggregates and level of
customer service are also factors.
The Company is the second largest producer of aggregates in the United States based on tons
shipped. There are over 3,900 companies in the United States that produce aggregates. The largest
five producers account for approximately 26% of the total market. The Company, in its Aggregates
business, competes with a number of other large and small producers. The Company believes that its
ability to transport materials by ocean vessels, river barges, and rail have enhanced the Company’s
ability to compete in the aggregates business. Some of the Company’s competitors in the aggregates
industry have greater financial resources than the Company.
The Magnesia Specialties business of the Company’s Specialty Products segment competes with
various companies in different geographic and product areas principally on the basis of quality,
price, and technical support for its products. The Magnesia Specialties business also competes for
sales to customers located outside the United States, with revenues from foreign jurisdictions
accounting for approximately 12% of revenues for the Magnesia Specialties business in 2006,
principally in Canada, Mexico, Europe, South America, and the Pacific Rim. Certain of the
Company’s competitors in the Magnesia Specialties business have greater financial resources than
the Company.
The structural composites product line of the Company’s Specialty Products segment competes
with various companies in different geographic and product areas principally on the basis of
technological advances, quality, price, and technical support. The structural composites product
line competes for sales to customers located outside the United States. Certain of the Company’s
competitors in the structural composites product line have greater financial resources than the
Company.
11
Table of Contents
Research and Development
The Company conducts research and development activities principally for its Magnesia
Specialties business, at its plant in Manistee, Michigan, and for its structural composites product
line, at its headquarters in Raleigh, North Carolina, and its plant in Sparta, North Carolina. In
general, the Company’s research and development efforts in 2006 were directed to applied
technological development for the use of its chemicals products and for its proprietary
technologies, including composite materials. The Company spent approximately $0.7 million in 2006,
$0.7 million in 2005, and $0.9 million in 2004 on research and development activities.
Environmental and Governmental Regulations
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 substances 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 records an accrual for environmental remediation liabilities in the period in
which it is probable that a liability has been incurred and the amounts can be reasonably
estimated. Such accruals are adjusted as further information develops or circumstances change.
The accruals 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.
The Company regularly monitors and reviews its operations, procedures, and policies for
compliance with existing laws and regulations, changes in interpretations of existing laws and
enforcement policies, new laws that are adopted, and new laws that the Company anticipates will be
adopted that could affect its operations. The Company has a full time staff of environmental
engineers and managers that perform these responsibilities. The direct costs of ongoing
environmental compliance were approximately $8.5 million in 2006 and approximately $3.5 million in
2005 and are related to the Company’s environmental staff and ongoing monitoring costs for various
matters (including those matters disclosed in this Annual Report on Form 10-K). Capitalized costs
related to environmental control facilities were approximately $6.4 million in 2006 and are
expected to be approximately $2 million in each of 2007 and 2008. The Company’s capital
expenditures for environmental matters were not material to its results of operations or financial
condition in 2006 and 2005. However, our expenditures for environmental matters generally have
increased over time and are likely to increase in the future. Despite our compliance efforts, risk
of environmental liability is inherent in the operation of the Company’s businesses, as it is with
other companies engaged in similar businesses, and there can be no assurance that environmental
liabilities will not have a material adverse effect on the Company in the future.
Many of the requirements of the environmental laws are satisfied by procedures that the
Company adopts as best business practices in the ordinary course of its operations. For example,
plant equipment that is used to crush aggregates products may, as an ordinary course of operations,
have an attached water spray bar that is used to clean the stone. The water spray bar also
suffices as a dust
12
Table of Contents
control mechanism that complies with applicable environmental laws. The Company does not
break out the portion of the cost, depreciation, and other financial information relating to the
water spray bar that is only attributable to environmental purposes, as it would be derived from an
arbitrary allocation methodology. The incremental portion of such operating costs that is
attributable to environmental compliance rather than best operating practices is impractical to
quantify. Accordingly, the Company expenses costs in that category when incurred as operating
expenses.
The environmental accruals recorded by the Company are based on internal studies of the
required remediation costs and estimates of potential costs that arise from time to time under
federal, state, and/or local environmental protection laws. Many of these laws and the regulations
promulgated under them are complex, and are subject to challenges and new interpretations by
regulators and the courts from time to time. In addition, new laws are adopted from time to time.
It is often difficult to accurately and fully quantify the costs to comply with new rules until it
is determined the type of operations to which they will apply and the manner in which they will be
implemented is more accurately defined. This process often takes years to finalize and changes
significantly from the time the rules are proposed to the time they are final. The Company
typically has several appropriate alternatives available to satisfy compliance requirements, which
could range from nominal costs to some alternatives that may be satisfied in conjunction with
equipment replacement or expansion that also benefits operating efficiencies or capacities and
carry significantly higher costs.
Management believes that its current accrual for environmental costs is reasonable, although
those amounts may increase or decrease depending on the impact of applicable rules as they are
finalized from time to time and changes in facts and circumstances. The Company believes that any
additional costs for ongoing environmental compliance would not have a material adverse effect on
the Company’s obligations or financial condition.
With respect to reclamation costs effective January 1, 2003, the Company adopted Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“FAS 143”).
See “Note N: Commitments and Contingencies” of the “Notes to Financial Statements” on pages 36 and
37 of the 2006 Annual Report. Under FAS 143, future reclamation costs are estimated using
statutory reclamation requirements and management’s experience and knowledge in the industry, and
are discounted to their present value using a credit-adjusted, risk-free rate of interest. The
future reclamation costs are not offset by potential recoveries. The Company is generally required
by state or local laws or pursuant to the terms of an applicable lease to reclaim quarry sites
after use. The Company performs activities on an ongoing basis that may reduce the ultimate
reclamation obligation. These activities are performed as an integral part of the normal quarrying
process. For example, the perimeter and interior walls of an open pit quarry are sloped and
benched as they are developed to prevent erosion and provide stabilization. This sloping and
benching meets dual objectives — safety regulations required by the Mine Safety and Health
Administration for ongoing operations and final reclamation requirements. Therefore, these types
of activities are included in normal operating costs and are not a part of the asset retirement
obligation. Historically, the Company has not incurred substantial reclamation costs in connection
with the closing of quarries. Reclaimed quarry sites owned by the Company are available for sale,
typically for commercial development or use as reservoirs.
The Company believes that its operations and facilities, both owned or leased, are in
substantial compliance with applicable laws and regulations and that any noncompliance is not
likely to have a material adverse effect on the Company’s operations or financial condition. See
“Legal Proceedings”
13
Table of Contents
on pages
27 and 28 of this Form 10-K and “Note N: Commitments and Contingencies” of the “Notes to
Financial Statements” on pages 36 and 37 and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Environmental Regulation and Litigation” on pages 59 and 60
of the 2006 Annual Report. However, future events, such as changes in or modified interpretations
of existing laws and regulations or enforcement policies, or further investigation or evaluation of
the potential health hazards of certain products or business activities, may give rise to
additional compliance and other costs that could have a material adverse effect on the Company.
In general, quarry and mining facilities must comply with air quality, water quality, and
noise regulations, zoning and special use permitting requirements, applicable mining regulations,
and federal health and safety requirements. As new quarry and mining sites are located and
acquired, the Company works closely with local authorities during the zoning and permitting
processes to design new quarries and mines in such a way as to minimize disturbances. The Company
frequently acquires large tracts of land so that quarry, mine, and production facilities can be
situated substantial distances from surrounding property owners. Also, in certain markets the
Company’s ability to transport material by rail and ship allows it to locate its facilities further
away from residential areas. The Company has established policies designed to minimize
disturbances to surrounding property owners from its operations.
As is the case with other companies in the same industry, some of the Company’s products
contain varying amounts of crystalline silica, a common mineral also known as quartz. Excessive,
prolonged inhalation of very small-sized particles of crystalline silica has been associated with
lung diseases, including silicosis, and several scientific organizations and some states, such as
California, have reported that crystalline silica can cause lung cancer. The Mine Safety and
Health Administration and the Occupational Safety and Health Administration have established
occupational thresholds for crystalline silica exposure as respirable dust. The Company monitors
occupational exposures at its facilities and implements dust control procedures and/or makes
available appropriate respiratory protective equipment to maintain the occupational exposures at or
below the appropriate levels. The Company, through safety information sheets and other means, also
communicates what it believes to be appropriate warnings and cautions its employees and customers
about the risks associated with excessive, prolonged inhalation of mineral dust in general and
crystalline silica in particular.
The Clean Air Act Amendments of 1990 required the U.S. Environmental Protection Agency (the
“EPA”) to develop regulations for a broad spectrum of industrial sectors that emit hazardous air
pollutants, including lime manufacturing. The new standards to be established would require plants
in the targeted industries to install feasible control equipment for certain hazardous air
pollutants, thereby significantly reducing air emissions. The Company and other lime manufacturers
through the National Lime Association (“NLA”), the leading industry trade association, worked with
the EPA to define test protocols, better define the scope of the standards, determine the existence
and feasibility of various technologies, and develop realistic emission limitations and continuous
emissions monitoring/reporting requirements for the lime industry. The EPA received comments on
its proposed technology-based standards for the industry in November 2000, and a proposed rule for
the national emission standards for lime manufacturing plants was released on December 20, 2002.
The proposed rules favorably addressed many of the issues raised by NLA in the negotiation process.
NLA and the Company submitted comments on the proposed rules in February 2003. The EPA published
the final rule in the Federal Register on January 5, 2004, and facilities must be in compliance
within three years after the date of publication. The Company successfully achieved
14
Table of Contents
compliance with the new technology-based standard by the January 5, 2007, deadline. The costs
associated to comply with the new regulations did not have a material adverse effect on the
financial condition or results of the operations of the Company or of its Magnesia Specialties
business.
In February 1998, the Georgia Department of Natural Resources (“GDNR”) determined that both
the Company and the Georgia Department of Transportation (“GDOT”) are responsible parties for
investigation and remediation at the Company’s Camak Quarry in Thomson, Georgia, due to the
discovery of trichloroethene (“TCE”) above its naturally occurring background concentration in a
drinking water well on site. The Company provided the GDNR with information indicating that the
source of the release was either from an asphalt plant and associated GDOT testing laboratory that
was on the site in the early 1970’s or from a maintenance shop that was operated on the property in
the 1940’s and 1950’s before the Company purchased the property. The Company entered into a
Consent Order with GDNR to conduct an environmental assessment of the site and file a report of the
findings. The Company and GDOT signed an agreement to share evenly the costs of the assessment
work. The assessment report was completed and filed. Based upon the results of the assessment
report, GDOT withdrew from the cost sharing agreement and has indicated it will not share in any
future remediation costs. The Company submitted a corrective action plan to GDNR for approval on
December 9, 2002. GDNR requested additional information which was duly submitted. GDNR approved
the plan on June 28, 2005, and the Company is implementing it. The Company is funding the entire
cost of future investigations and remediation which will occur over several years. Management
believes any costs incurred by the Company associated with the site will not have a material
adverse effect on the Company’s operations or its financial condition.
In December 1998, the GDNR determined that the Company, the GDOT, and two former asphalt plant
operators are responsible parties for investigation and remediation of groundwater contamination at
the Company’s Ruby Quarry in Macon, Georgia. The Company was designated by virtue of its ownership
of the property. GDOT was designated because it operated a testing laboratory at the site. The
two other parties were designated because both entities operated asphalt plants at the site. The
groundwater contamination was discovered when the Company’s tenant vacated the premises and
environmental testing was conducted. The Company and GDOT signed an agreement to share the costs
of the assessment work. The report of the assessment work was filed with the GDNR. GDOT entered
into a Consent Order with GDNR agreeing to conduct additional testing and any necessary remediation
at the site. On May 21, 2001, GDNR issued separate Administrative Orders against the Company and
other responsible parties to require all parties to participate with GDOT to undertake additional
testing and any necessary remediation. The Company and GDOT submitted a corrective action plan to
GDNR for approval on May 20, 2002. GDNR requested additional information in connection with its
consideration of the submitted plan and subsequently approved the plan on July 19, 2004. GDOT
filed an amendment to the plan, which was approved on June 28, 2005. GDOT has been proceeding with
remediation activities which will occur over a number of years. Under Georgia law, responsible
parties are jointly and severally liable, and therefore, the Company is potentially liable for the
full cost of funding any necessary remediation. Management believes any costs incurred by the
Company associated with the site will not have a material adverse effect on the Company’s
operations or its financial condition.
In the vicinity of and beneath the Magnesia Specialties facility in Manistee, Michigan,
facility, there is an underground plume of material originating from adjacent property which
formerly was used by Packaging Corporation of America (“PCA”) as a part of its operations.
Magnesia Specialties
15
Table of Contents
believes the plume consists of paper mill waste. On September 8, 1983, the PCA plume and
property were listed on the National Priorities List (“NPL”) under the authority of the
Comprehensive Environmental Response, Compensation and Liability Act (the “Superfund” statute).
The PCA plume is subject to a Record of Decision issued by the U.S. Environmental Protection Agency
(“EPA”) on May 2, 1994, pursuant to which PCA’s successor, Pactiv Corporation (“Pactiv”), is
required to conduct annual monitoring. The EPA has not required remediation of the groundwater
contamination. On January 10, 2002, the Michigan Department of Environmental Quality (“MDEQ”)
issued Notice of Demand letters to Magnesia Specialties, PCA and Pactiv indicating that it believes
that Magnesia Specialties’ chloride contamination is commingling with the PCA plume which
originates upgradient from the Magnesia Specialties property. The MDEQ is concerned about possible
effects of these plumes, and designated Magnesia Specialties, PCA and Pactiv as parties responsible
for investigation and remediation under Michigan state law. The MDEQ held separate meetings with
Magnesia Specialties, PCA, and Pactiv to discuss remediation and reimbursement for past
investigation costs totaling approximately $700,000. Magnesia Specialties entered into an
Administrative Order with the MDEQ to pay for a portion of MDEQ’s past investigation costs and
thereby limit its liability for past costs in the amount of $20,000. Michigan law provides that
responsible parties are jointly and severally liable, and, therefore, Magnesia Specialties is
potentially liable for the full cost of funding future investigative activities and any necessary
remediation. Michigan law also provides a procedure whereby liability may be apportioned among
responsible parties if it is capable of division. The Company believes that the liability most
likely will be apportioned and that any such costs attributed to Magnesia Specialties’ brine
contamination will not have a material adverse effect on the Company’s operations or its financial
condition, but can give no assurance that the liability will be apportioned or that the compliance
costs will not have a material adverse effect on the financial condition or results of the
operations of the Magnesia Specialties business.
Employees
As of February 16, 2007, the Company has approximately 5,500 employees, of which 4,070 are
hourly employees and 1,430 are salaried employees. Included among these employees are 762 hourly
employees represented by labor unions (13.8% of the Company’s employees). Of such amount, 13.7% of
the Company’s Aggregates business’s hourly employees are members of a labor union, while 99% of the
Specialty Products segment’s hourly employees are represented by labor unions. The Company’s
principal union contracts cover employees of the Magnesia Specialties business at the Manistee,
Michigan, magnesia-based chemicals plant and the Woodville, Ohio, lime plant. The Manistee
collective bargaining agreement expires in August 2007. The Woodville collective bargaining
agreement expires in June 2010. While management does not expect any significant issues in
renewing the Manistee labor union agreement, there can be no assurance that a successor agreement
will be reached at the Manistee location this year.
Available Information
The Company maintains an Internet address at www.martinmarietta.com. The Company makes
available free of charge through its Internet web site its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports, if any, filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports and any
amendments are accessed via the Company’s web site through a link with the Electronic Data
Gathering, Analysis, and Retrieval (“EDGAR”) system maintained by the Securities and Exchange
Commission (the
16
Table of Contents
“SEC”) at www.sec.gov. Accordingly, the Company’s referenced reports and any amendments are made
available as soon as reasonably practicable after the Company electronically files such material
with, or furnishes it to, the SEC, once EDGAR places such material in its database.
The Company has adopted a Code of Ethics and Standards of Conduct that applies to all of its
directors, officers, and employees. The Company’s code of ethics is available on the Company’s web
site at www.martinmarietta.com. The Company intends to disclose on its Internet web site any
waivers of or amendments to its code of ethics as it applies to its directors and executive
officers.
The Company has adopted a set of Corporate Governance Guidelines to address issues of
fundamental importance relating to the corporate governance of the Company, including director
qualifications and responsibilities, responsibilities of key board committees, director
compensation, and similar issues. Each of the Audit Committee, the Management Development and
Compensation Committee, and the Nominating and Corporate Governance Committee of the Board of
Directors of the Company has adopted a written charter addressing various issues of importance
relating to each committee, including the committee’s purposes and responsibilities, an annual
performance evaluation of each committee, and similar issues. These Corporate Governance
Guidelines, and the charters of each of these committees, are available on the Company’s web site
at www.martinmarietta.com.
The Company will make paper copies of its filings with the SEC, its Code of Ethics and
Standards of Conduct, its Corporate Governance Guidelines, and the charters of its key committees,
available to its shareholders free of charge upon request by writing to: Martin Marietta
Materials, Inc., Attn: Corporate Secretary, 2710 Wycliff Road, Raleigh, North Carolina 27607-3033.
The Company’s Chief Executive Officer and Chief Financial Officer are required to file with
the SEC each quarter and each year certifications regarding the quality of the Company’s public
disclosure of its financial condition. The annual certifications are included as Exhibits to this
Annual Report on Form 10-K. The Company’s Chief Executive Officer is also required to certify to
the New York Stock Exchange each year that he is not aware of any violation by the Company of the
New York Stock Exchange corporate governance listing standards. The filing of these certifications
with the SEC and with the New York Stock Exchange is also disclosed in the Company’s 2006 Annual
Report.
ITEM 1A. RISK FACTORS AND FORWARD-LOOKING STATEMENTS
An investment in our common stock or debt securities involves risks and uncertainties. You
should consider the following factors carefully, in addition to the other information contained in
this Form 10-K, before deciding to purchase or otherwise trade our securities.
This Form 10-K and other written reports and oral statements made from time to time by the
Company contain statements which, to the extent they are not recitations of historical fact,
constitute forward-looking statements within the meaning of federal securities law. Investors are
cautioned that all forward-looking statements involve risks and uncertainties, and are based on
assumptions that the Company believes in good faith are reasonable, but which may be materially
different from actual results. Investors can identify these statements by the fact that they do
not relate only to historic or current facts. The words “may,” “wills,” “could,” “should,”
“anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “outlook,” “plan,” “project,” “scheduled,” and similar expressions
in connection with future events or future operating or financial performance are intended to
identify
17
Table of Contents
forward-looking statements. Any or all of the Company’s forward-looking statements in
this Form 10-K and in other publications may turn out to be wrong.
Statements and assumptions on future revenues, income and cash flows, performance, economic
trends, the outcome of litigation, regulatory compliance, and environmental remediation cost
estimates are examples of forward-looking statements. Numerous factors, including potentially the
risk factors described in this section, could affect our forward-looking statements and actual
performance.
Factors that the Company currently believes could cause its actual results to differ
materially from those in the forward-looking statements include, but are not limited to, those set
out below. In addition to the risk factors described below, we urge you to read our Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our 2006 Annual Report
to Shareholders.
Our aggregates business is cyclical and depends on activity within the construction industry.
We sell most of our aggregate products to the construction industry, so our results depend on
the strength of the construction industry. Since our business depends on construction spending,
which can be cyclical, our profits are sensitive to national, regional, and local economic
conditions. Construction spending is affected by economic conditions, changes in interest rates,
demographic and population shifts, and changes in construction spending by federal, state, and
local governments. If economic conditions change, a recession in the construction industry may
occur and affect the demand for our aggregate products. Construction spending can also be
disrupted by terrorist activity and armed conflicts.
While our aggregate operations cover a wide geographic area, our earnings depend on the
strength of the local economies in which we operate because of the high cost to transport our
products relative to their price. If economic conditions and construction spending decline
significantly in one or more areas, particularly in our top five revenue-generating states of North
Carolina, Texas, Georgia, Iowa and South Carolina, our profitability will decrease.
Within the construction industry, we sell our aggregate products for use in both commercial
construction and residential construction. While the outlook for commercial construction is
positive in many markets, residential construction declined in 2006 and is expected to decline
further in 2007. Approximately 20% of our aggregates shipments in 2006 were to the residential
construction market. While we believe the downturn in residential construction will moderate
during the latter part of 2007, we cannot be sure of the existence or timing of any moderation.
Our aggregate products are used in public infrastructure projects, which include the
construction, maintenance, and improvement of highways, bridges, schools, prisons, and similar
projects. So our business is dependent on the level of federal, state, and local spending on these
projects. We cannot be assured of the existence, amount, and timing of appropriations for spending
on these projects. For example, while the current federal highway law passed in 2005 provides
funding of $286.4 billion for highway, transit, and highway safety programs through September 30,
2009, Congress must pass an appropriations bill each year to approve spending these funds. We
cannot be
assured that Congress will pass an appropriations bill each year to approve funding at the level
authorized in the federal highway law. Similarly, each state funds its infrastructure spending
from
18
Table of Contents
specially allocated amounts collected from various taxes, typically gasoline taxes and vehicle
fees, along with voter-approved bond programs. Shortages in state tax revenues can reduce the
amounts spent on state infrastructure projects, even below amounts awarded under legislative bills.
Delays in state infrastructure spending can hurt our business. For example, we expect delays in
infrastructure spending in North Carolina and South Carolina will continue in 2007, which will
limit our business growth in those states until the level and timing of spending improves.
Our aggregates business is seasonal and subject to the weather.
Since the construction aggregates business is conducted outdoors, seasonal changes and
other weather conditions affect our business. Adverse weather conditions, including hurricanes and
tropical storms, cold weather, snow, and heavy or sustained rainfall, reduce construction activity
and the demand for our products. Adverse weather conditions also increase our costs and reduce our
production output as a result of power loss, needed plant and equipment repairs, time required to
remove water from flooded operations, and similar events. The construction aggregates business
production and shipment levels follow activity in the construction industry, which typically occur
in the spring, summer and fall. Because of the weather’s effect on the construction industry’s
activity, the aggregates business production and shipment levels vary by quarter. The second and
third quarters are generally the most profitable and the first quarter is generally the least
profitable.
Our aggregates business depends on the availability of aggregate reserves or deposits and our
ability to mine them economically.
Our challenge is to find aggregate deposits that we can mine economically, with appropriate
permits, near either growing markets or long-haul transportation corridors that economically serve
growing markets. As communities have grown, they have taken up attractive quarrying locations and
have imposed restrictions on mining. We try to meet this challenge by identifying and permitting
sites prior to economic expansion, buying more land around our existing quarries to increase our
mineral reserves, developing underground mines, and developing a distribution network that
transports aggregates products by various transportation methods, including rail and water, that
allows us to transport our products longer distances than would normally be considered economical.
Our aggregates business is a capital-intensive business.
The property and machinery needed to produce our products are very expensive. Therefore, we
must have access to large amounts of cash to operate our businesses. We believe we have adequate
cash to run our businesses. Because significant portions of our operating costs are fixed in
nature, our financial results are sensitive to production volume changes.
Our businesses face many competitors.
Our businesses have many competitors, some of whom are bigger and have more resources than we
do. Some of our competitors also operate on a worldwide basis. Our results are affected by the
number of competitors in a market, the production capacity that a particular market can
accommodate, the pricing practices of other competitors, and the entry of new competitors in a
market.
We also face competition for some of our products from alternative products. For example, our
19
Table of Contents
magnesia specialties business may compete with other chemical products that could be used instead
of our magnesia-based products.
Our future growth may depend in part on acquiring other businesses in our industry.
We expect to continue to grow, in part, by buying other businesses. While the pace of
acquisitions has slowed considerably over the last few years, we will continue to look for
strategic businesses to acquire. In the past, we have made acquisitions to strengthen our existing
locations, expand our operations, and enter new geographic markets. We will continue to make
selective acquisitions, joint ventures, or other business arrangements we believe will help our
company. However, the continued success of our acquisition program will depend on our ability to
find and buy other attractive businesses at a reasonable price and our ability to integrate
acquired businesses into our existing operations. We cannot assume there will continue to be
attractive acquisition opportunities for sale at reasonable prices that we can successfully
integrate into our operations.
We may decide to pay all or part of the purchase price of any future acquisition with shares
of our common stock. We may also use our stock to make strategic investments in other companies to
complement and expand our operations. If we use our common stock in this way, the ownership
interests of our shareholders will be diluted and the price of our stock could fall. We operate
our businesses with the objective of maximizing the long-term shareholder return.
We acquired 62 companies from 1995 through 2002. Some of these acquisitions were more easily
integrated into our existing operations and have performed as well or better than we expected,
while others have not. We have sold underperforming and other non-strategic assets, particularly
lower margin businesses like our asphalt plants in Houston, Texas, and our road paving businesses
in Shreveport, Louisiana, and Texarkana, Arkansas.
Short supplies and high costs of fuel and energy affect our businesses.
Our businesses require a continued supply of diesel fuel, natural gas, coal, petroleum coke
and other energy. The financial results of these businesses have been affected at times by the
short supply or high costs of these fuels and energy. While we can contract for some fuels and
sources of energy, significant increases in costs or reduced availability of these items have and
may in the future reduce our financial results.
Changes in legal requirements and governmental policies concerning zoning, land use, the
environment, and other areas of the law, and litigation relating to these matters, affect our
businesses. Our operations expose us to the risk of material environmental liabilities.
Many federal, state, and local laws and regulations relating to zoning, land use, the
environment, health, safety, and other regulatory matters govern our operations. We take great
pride in our operations and try to remain in strict compliance at all times with all applicable
laws and regulations. Despite our extensive compliance efforts, risk of liabilities, particularly
environmental liabilities, is inherent in the operation of our businesses, as it is with our
competitors. We cannot assume that these liabilities will not negatively affect us in the future.
20
Table of Contents
We are also subject to future events, including changes in existing laws or regulations or
enforcement policies, or further investigation or evaluation of the potential health hazards of
some of our products or business activities, which may result in additional compliance and other
costs. We could be forced to invest in preventive or remedial action, like pollution control
facilities, which could be substantial.
Our operations are subject to manufacturing, operating, and handling risks associated with the
products we produce and the products we use in our operations, including the related storage and
transportation of raw materials, products, hazardous substances, and wastes. We are exposed to
hazards including storage tank leaks, explosions, discharges or releases of hazardous substances,
exposure to dust, and the operation of mobile equipment and manufacturing machinery.
These risks can subject us to potentially significant liabilities relating to personal injury
or death, or property damage, and may result in civil or criminal penalties, which could hurt our
productivity or profitability. For example, from time to time we investigate and remediate
environmental contamination relating to our prior or current operations, as well as operations we
have acquired from others, and in some cases we have been or could be named as a defendant in
litigation brought by governmental agencies or private parties.
We are involved from time to time in litigation and claims arising from our operations. While
we do not believe the outcome of pending or threatened litigation will have a material adverse
effect on our operations or our financial condition, we cannot assume that an adverse outcome in a
pending or future legal action would not negatively affect us.
Labor disputes could disrupt operations of our businesses.
Labor unions represent 13.7% of the hourly employees of our aggregates business and 99% of the
hourly employees of our specialty products business. Our collective bargaining agreements for
employees of our magnesia specialties business at the Woodville, Ohio lime plant and the Manistee,
Michigan magnesia chemicals plant expire in June 2010 and August 2007, respectively. While we do
not expect any significant issues in renewing the Manistee labor union agreement, we cannot be sure
a new agreement will be reached at the Manistee location this year.
Disputes with our trade unions, or the inability to renew our labor agreements, could lead to
strikes or other actions that could disrupt our businesses, raise costs, and reduce revenues and
earnings from the affected locations. We believe we have good relations with all of our employees,
including our unionized employees.
Delays or interruptions in shipping products of our businesses could affect our operations.
Transportation logistics play an important role in allowing us to supply products to our
customers, whether by truck, rail, barge, or ship. Any significant delays, disruptions, or the
non-availability of our transportation support system could negatively affect our operations. For
example, in 2005 and partially in 2006, we experienced rail transportation shortages in Texas and
parts of the southeastern region of the United States. In 2005, following Hurricanes Katrina and
Rita, we experienced significant barge transportation problems along the Mississippi River system.
In 2006, we experienced delays in shipping our materials through Lock 52 on the Ohio River while
scheduled
21
Table of Contents
repair and maintenance activities were performed. While the delays have ended, and normal water
traffic has resumed, another two-week planned outage is currently scheduled for August 2007.
Water levels can also affect our ability to transport our products. High water levels limit
the number of barges we can transport and can require that we use additional horsepower to tow
barges. Low water levels can reduce the amount of material we can transport in each barge.
The availability of rail cars and barges can also affect our ability to transport our
products. Rail cars and barges can be used to transport many different types of products. If
owners sell or lease rail cars and barges for use in other industries, we may not have enough rail
cars and barges to transport our products. Barges have become particularly scarce, since barges
are being retired faster than new barges are being built. Shipyards that build barges are
operating at capacity, so the lead time to buy or lease a new barge can extend many months. In
2005, we leased 780 additional rail cars. In 2006, we contracted to buy 50 new barges that will be
delivered in 2007.
We have long-term agreements with shipping companies to provide ships to transport our
aggregate products from our Bahamas and Nova Scotia operations to various coastal ports. These
contracts have varying expiration dates ranging from 2008 to 2017 and generally contain renewal
options. Our inability to renew these agreements or enter into new ones with other shipping
companies could affect our ability to transport our products.
Our earnings are affected by the application of accounting standards and our critical accounting
policies, which involve subjective judgments and estimates by our management. Our estimates and
assumptions could be wrong.
The accounting standards we use in preparing our financial statements are often complex and
require that we make significant estimates and assumptions in interpreting and applying those
standards. We make critical estimates and assumptions involving accounting matters including our
stock-based compensation, our goodwill impairment testing, our expenses and cash requirements for
our pension plans, our estimated income taxes, and how we account for our property, plant and
equipment, and inventory. These estimates and assumptions involve matters that are inherently
uncertain and require our subjective and complex judgments. If we used different estimates and
assumptions or used different ways to determine these estimates, our financial results could
differ.
While we believe our estimates and assumptions are appropriate, we could be wrong.
Accordingly, our financial results could be different, either higher or lower. We urge you to read
about our critical accounting policies in our Management’s Discussion and Analysis of Financial
Condition and Results of Operations in our 2006 Annual Report to Shareholders.
The adoption of new accounting standards may affect our financial results.
The accounting standards we apply in preparing our financial statements are reviewed by
regulatory bodies and are changed from time to time. New or revised accounting standards could
change our financial results either positively or negatively. For example, beginning in 2006, we
were required under new accounting standards to expense the fair value of stock options we award
our management and key employees as part of their compensation. This resulted in a reduction of
our earnings and made comparisons between financial periods more difficult. We urge you to read
about
22
Table of Contents
our accounting policies and changes in our accounting policies in Note A of our 2006 financial
statements.
We depend on the recruitment and retention of qualified personnel, and our failure to attract and
retain such personnel could affect our business.
Our success depends to a significant degree upon the continued services of our key personnel
and executive officers. Our prospects depend upon our ability to attract and retain qualified
personnel for our operations. Competition for personnel is intense, and we may not be successful
in attracting or retaining qualified personnel, which could negatively affect our business.
Our magnesia specialties business depends in part on the steel industry and the supply of
reasonably priced fuels.
Our magnesia specialties business sells some of its products to companies in the steel
industry. While we have reduced this risk over the last few years, this business is still
dependent, in part, on the strength of the highly-cyclical steel industry. The magnesia
specialties business also requires significant amounts of natural gas, coal, and petroleum coke,
and financial results are negatively affected by high fuel prices or shortages.
Our structural composites product line has not generated any profits since its inception.
Our structural composites product line faces many challenges before it becomes break-even or
generates a profit. For 2007, we have set specific quarterly benchmarks for the structural
composites product line to achieve in order for us to determine its viability. We cannot ensure the
future profitability of this product line.
Market expectations for our financial performance are high.
We believe that the price of our stock reflects the recent advantageous shift in industry
pricing trends whereby there is increased demand for aggregates along with scarcity of supply in
high-growth areas, which has resulted in prices that are higher than historic levels. If we are
wrong about this change in pricing trends, then other market dynamics such as lower volumes, delays
in infrastructure spending, declines in residential construction, and higher costs could result in
lower pricing and lower earnings. If this happens, the market price of our stock could drop
sharply. The price of our stock may also reflect market expectations regarding further
consolidation of the aggregates industry.
Our articles of incorporation, bylaws, and shareholder rights plan and North Carolina law may
inhibit a change in control that you may favor.
Our articles of incorporation and bylaws, shareholder rights plan, and North Carolina law contain
provisions that may delay, deter or inhibit a future acquisition of us not approved by our board of
directors. This could occur even if our shareholders are offered an attractive value for their
shares or if many or even a majority of our shareholders believe the takeover is in their best
interest. These provisions are intended to encourage any person interested in acquiring us to
negotiate with and obtain the approval of our board of directors in connection with the
transaction. Provisions that could delay, deter, or inhibit a future acquisition include the
following:
23
Table of Contents
| n | a classified board of directors; | ||
| n | the requirement that our shareholders may only remove directors for cause; | ||
| n | specified requirements for calling special meetings of shareholders; and | ||
| n | the ability of our board of directors to consider the interests of various constituencies, including our employees, customers, and creditors and the local community. |
In addition, we have in place a shareholder rights plan that will trigger a dilutive issuance of
common stock upon substantial purchases of our common stock by a third party that are not approved
by the board of directors.
* * * * * * * * * * * * * *
Investors are also cautioned that it is not possible to predict or identify all such factors.
Consequently, the reader should not consider any such list to be a complete statement of all
potential risks or uncertainties. Other factors besides those listed may also adversely affect the
Company and may be material to the Company. The forward-looking statements in this document are
intended to be subject to the safe harbor protection provided by Sections 27A and 21E. These
forward-looking statements are made as of the date hereof based on management’s current
expectations, and the Company does not undertake an obligation to update such statements, whether
as a result of new information, future events, or otherwise.
For a discussion identifying some important factors that could cause actual results to vary
materially from those anticipated in the forward-looking statements, see the Company’s Securities
and Exchange Commission filings, including, but not limited to, the discussion under the heading
“Risk Factors and Forward-Looking Statements” on pages 17-24 of this Form 10-K, the discussion of
“Competition” on page 11 of this Annual Report on Form 10-K, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” on pages 40-81 of the 2006 Annual Report and
“Note A: Accounting Policies” and “Note N: Commitments and Contingencies” of the “Notes to
Financial Statements” on pages 17-24 and pages 36 and 37, respectively, of the Audited Consolidated
Financial Statements included in the 2006 Annual Report.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Aggregates Business
As of December 31, 2006, the Company processed or shipped aggregates from 294 quarries,
underground mines, and distribution yards in 28 states and in Canada and the Bahamas, of which 103
are located on land owned by the Company free of major encumbrances, 59 are on land owned in part
and leased in part, 128 are on leased land, and 4 are on facilities neither owned nor leased, where
raw
materials are removed under an agreement. The Company’s aggregates reserves on the average exceed
24
Table of Contents
50 years of production, based on current levels of activity. However, certain locations may be
subject to more limited reserves and may not be able to expand. In addition, as of December 31,
2006, the Company processed and shipped ready mixed concrete and/or asphalt products from 13
properties in 3 states, of which 11 are located on land owned by the Company free of major
encumbrances and 2 are on leased land.
The Company uses various drilling methods, depending on the type of aggregate, to estimate
aggregates reserves that are economically mineable. The extent of drilling varies and depends on
whether the location is a potential new site (greensite), an existing location, or a potential
acquisition. More extensive drilling is performed for potential greensites and acquisitions, and
in rare cases the Company may rely on existing geological data or results of prior drilling by
third parties. Subsequent to drilling, selected core samples are tested for soundness, abrasion
resistance, and other physical properties relevant to the aggregates industry. If the reserves
meet the Company’s standards and are economically mineable, then they are either leased or
purchased.
The Company estimates proven and probable reserves based on the results of drilling. Proven
reserves are reserves of deposits designated using closely spaced drill data, and based on that
data the reserves are believed to be relatively homogenous. Proven reserves have a certainty of
85% to 90%. Probable reserves are reserves that are inferred utilizing fewer drill holes and/or
assumptions about the economically mineable reserves based on local geology or drill results from
adjacent properties. The degree of certainty for probable reserves is 70% to 75%. In determining
the amount of reserves, the Company’s policy is to not include calculations that exceed certain
depths, so for deposits, such as granite, that typically continue to depths well below the ground,
there may be additional deposits that are not included in the reserve calculations. The Company
also deducts reserves not available due to property boundaries, set-backs, and plant
configurations, as deemed appropriate when estimating reserves. For additional information on the
Company’s assessment of reserves, see “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Other Financial Information — Application of Critical Accounting
Policies — Property, Plant and Equipment” on pages 73 and 74 of the 2006 Annual Report for
discussion of reserves evaluation by the Company.
Set forth in the tables below are the Company’s estimates of reserves of recoverable
aggregates of suitable quality for economic extraction, shown on a state-by-state basis, and the
Company’s total annual production for the last 3 years, along with the Company’s estimate of years
of production available, shown on a segment-by-segment basis. The number of producing quarries
shown on the table include underground mines. The Company’s reserve estimates for the last 2 years
are shown for comparison purposes on a state-by-state basis. The changes in reserve estimates at a
particular state level from year to year reflect the tonnages of reserves on locations that have
been opened or closed during the year, whether by acquisition, disposition, or otherwise;
production and sales in the normal course of business; additional reserve estimates or refinements
of the Company’s existing reserve estimates; opening of additional reserves at existing locations;
the depletion of reserves at existing locations; and other factors. The Company evaluates its
reserve estimates primarily on a Company-wide, or segment-by-segment basis, and does not believe
comparisons of changes in reserve estimates on a state-by-state basis from year to year are
particularly meaningful.
25
Table of Contents
| Percentage of aggregate | aggregate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| reserves located at an | reserves on land | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of | Tonnage of Reserves for | Tonnage of Reserves for | existing quarry, and reserves | that has not been | Percent of reserves | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Producing | each general type of | each general type of | Change in Tonnage | not located at an existing | zoned for | owned and percent | ||||||||||||||||||||||||||||||||||||||||||||||||||
| State | Quarries | aggregate at 12/31/05 | aggregate at 12/31/06 | from 2005 | quarry. | quarrying. | leased | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Add 000) | (Add 000) | (Add 000) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2006 | Hard Rock | S & G | Hard Rock | S & G | Hard Rock | S & G | At Quarry | Not at Quarry | Owned | Leased | ||||||||||||||||||||||||||||||||||||||||||||||
Alabama |
7 | 50,479 | 12,080 | 46,778 | 12,113 | (3,701 | ) | 33 | 100 | % | 0 | % | 0 | % | 42 | % | 58 | % | ||||||||||||||||||||||||||||||||||||||
Arkansas |
3 | 307,927 | 0 | 278,548 | 0 | (29,379 | ) | 0 | 73 | % | 27 | % | 0 | % | 25 | % | 75 | % | ||||||||||||||||||||||||||||||||||||||
California |
1 | 35,755 | 0 | 23,993 | 0 | (11,762 | ) | 0 | 100 | % | 0 | % | 0 | % | 30 | % | 70 | % | ||||||||||||||||||||||||||||||||||||||
Florida |
2 | 132,062 | 0 | 122,769 | 0 | (9,293 | ) | 0 | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||
Georgia |
9 | 724,395 | 0 | 690,960 | 0 | (33,435 | ) | 0 | 84 | % | 16 | % | 0 | % | 62 | % | 38 | % | ||||||||||||||||||||||||||||||||||||||
Illinois |
3 | 1,293,814 | 0 | 1,290,204 | 0 | (3,610 | ) | 0 | 72 | % | 28 | % | 0 | % | 9 | % | 91 | % | ||||||||||||||||||||||||||||||||||||||
Indiana |
11 | 552,463 | 56,030 | 514,724 | 48,566 | (37,739 | ) | (7,464 | ) | 90 | % | 10 | % | 15 | % | 43 | % | 57 | % | |||||||||||||||||||||||||||||||||||||
Iowa |
28 | 724,867 | 45,982 | 706,501 | 44,825 | (18,366 | ) | (1,157 | ) | 99 | % | 1 | % | 1 | % | 13 | % | 87 | % | |||||||||||||||||||||||||||||||||||||
Kansas |
12 | 211,683 | 0 | 227,023 | 0 | 15,340 | 0 | 100 | % | 0 | % | 0 | % | 35 | % | 65 | % | |||||||||||||||||||||||||||||||||||||||
Kentucky |
3 | 626,403 | 0 | 577,767 | 46,255 | (48,636 | ) | 46,255 | 100 | % | 0 | % | 0 | % | 15 | % | 85 | % | ||||||||||||||||||||||||||||||||||||||
Louisiana |
1 | 0 | 2,500 | 0 | 1,536 | 0 | (964 | ) | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||
Maryland |
2 | 100,575 | 0 | 98,862 | 0 | (1,713 | ) | 0 | 100 | % | 0 | % | 0 | % | 100 | % | 0 | % | ||||||||||||||||||||||||||||||||||||||
Minnesota |
2 | 367,532 | 0 | 365,195 | 0 | (2,337 | ) | 0 | 100 | % | 0 | % | 0 | % | 84 | % | 16 | % | ||||||||||||||||||||||||||||||||||||||
Mississippi |
2 | 0 | 32,139 | 0 | 31,492 | 0 | (647 | ) | 100 | % | 0 | % | 0 | % | 100 | % | 0 | % | ||||||||||||||||||||||||||||||||||||||
Missouri |
9 | 517,313 | 0 | 581,551 | 0 | 64,238 | 0 | 78 | % | 12 | % | 0 | % | 40 | % | 60 | % | |||||||||||||||||||||||||||||||||||||||
Nebraska |
3 | 95,070 | 0 | 89,840 | 0 | (5,230 | ) | 0 | 100 | % | 0 | % | 0 | % | 24 | % | 76 | % | ||||||||||||||||||||||||||||||||||||||
Nevada |
3 | 17,307 | 0 | 167,624 | 0 | 150,317 | 0 | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % | |||||||||||||||||||||||||||||||||||||||
North Carolina |
40 | 2,445,628 | 2,000 | 2,697,214 | 0 | 251,586 | (2,000 | ) | 86 | % | 14 | % | 3 | % | 68 | % | 32 | % | ||||||||||||||||||||||||||||||||||||||
Ohio |
14 | 185,367 | 217,666 | 128,396 | 209,171 | (56,971 | ) | (8,495 | ) | 72 | % | 28 | % | 3 | % | 97 | % | 3 | % | |||||||||||||||||||||||||||||||||||||
Oklahoma |
9 | 540,841 | 5,685 | 586,939 | 5,067 | 46,098 | (618 | ) | 100 | % | — | 0 | % | 45 | % | 55 | % | |||||||||||||||||||||||||||||||||||||||
South Carolina |
5 | 332,799 | 0 | 405,452 | 0 | 72,653 | 0 | 100 | % | 0 | % | 19 | % | 76 | % | 24 | % | |||||||||||||||||||||||||||||||||||||||
Tennessee |
1 | 0 | 14,760 | 0 | 14,284 | 0 | (476 | ) | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||
Texas |
13 | 1,566,461 | 194,286 | 1,036,996 | 107,802 | (529,465 | ) | (86,484 | ) | 63 | % | 37 | % | 33 | % | 60 | % | 40 | % | |||||||||||||||||||||||||||||||||||||
Virginia |
4 | 365,594 | 0 | 401,910 | 0 | 36,316 | 0 | 84 | % | 16 | % | 1 | % | 69 | % | 311 | % | |||||||||||||||||||||||||||||||||||||||
Washington |
3 | 34,232 | 0 | 30,588 | 0 | (3,644 | ) | 0 | 85 | % | 15 | % | 0 | % | 7 | % | 93 | % | ||||||||||||||||||||||||||||||||||||||
West Virginia |
2 | 101,139 | 0 | 97,500 | 0 | (3,639 | ) | 0 | 100 | % | 0 | % | 0 | % | 20 | % | 80 | % | ||||||||||||||||||||||||||||||||||||||
Wisconsin |
1 | 4,296 | 0 | 3,678 | 0 | (618 | ) | 0 | 100 | % | 0 | % | 0 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||||
Wyoming |
1 | 101,317 | 0 | 98,970 | 0 | (2,347 | ) | 0 | 100 | % | 0 | % | 0 | % | 0 | % | 100 | % | ||||||||||||||||||||||||||||||||||||||
U. S. Total |
194 | 11,435,319 | 583,128 | 11,269,982 | 521,111 | (165,337 | ) | (62,017 | ) | 9 | % | 48 | % | 52 | % | |||||||||||||||||||||||||||||||||||||||||
Non-U. S. |
2 | 943,947 | 0 | 933,568 | 0 | (10,379 | ) | 0 | 100 | % | 0 | % | 0 | % | 97 | % | 3 | % | ||||||||||||||||||||||||||||||||||||||
Grand Total |
196 | 12,379,266 | 583,128 | 12,203,550 | 521,111 | (175,716 | ) | (62,017 | ) | 80 | % | 20 | % | 8 | % | 52 | % | 48 | % | |||||||||||||||||||||||||||||||||||||
26
Table of Contents
| Total Annual Production (in tons) (add 000) | Number of years of production | |||||||||||||||
| For year ended December 31 | available at December 31, 2006 | |||||||||||||||
| Reportable Segment | 2006 | 2005 | 2004 | |||||||||||||
Mideast Group |
62,005 | 64,792 | 62,297 | 67.7 | ||||||||||||
Southeast Group |
56,663 | 56,612 | 55,931 | 73.6 | ||||||||||||
West Group |
76,648 | 78,203 | 68,635 | 56.8 | ||||||||||||
Total Aggregates
Business |
195,316 | 199,607 | 186,863 | 65.1 | ||||||||||||
Specialty Products Business
The Magnesia Specialties business currently operates major manufacturing facilities in
Manistee, Michigan, and Woodville, Ohio, and a smaller processing plant in Bridgeport, Connecticut.
All of these facilities are owned.
The Company leases a 185,000 square foot facility in Sparta, North Carolina, which serves as
the assembly and manufacturing hub for the structural composites product line of Martin Marietta
Composites.
Other Properties
The Company’s principal corporate office, which it owns, is located in Raleigh, North
Carolina. The Company owns and leases various administrative offices for its four reportable
business segments.
The Company’s principal properties, which are of varying ages and are of different
construction types, are believed to be generally in good condition, are generally well maintained,
and are generally suitable and adequate for the purposes for which they are used. During 2006, the
principal properties were believed to be utilized at average productive capacities of approximately
80% and were capable of supporting a higher level of market demand.
ITEM 3. LEGAL PROCEEDINGS
From time to time claims of various types are asserted against the Company arising out of its
operations in the normal course of business, including claims relating to land use and permits,
safety, health, and environmental matters (such as noise abatement, blasting, vibrations, air
emissions, and water discharges). Such matters are subject to many uncertainties, and it is not
possible to determine the probable outcome of, or the amount of liability, if any, from, these
matters. In the opinion of management of the Company (which opinion is based in part upon
consideration of the opinion of
27
Table of Contents
counsel), it is unlikely that the outcome of these claims will have a material adverse effect on
the Company’s operations or its financial condition. However, there can be no assurance that an
adverse outcome in any of such litigation would not have a material adverse effect on the Company
or its operating segments.
The Company was not required to pay any penalties in 2006 for failure to disclose certain
“reportable transactions” under Section 6707A of the Internal Revenue Code.
See also “Note N: Commitments and Contingencies” of the “Notes to Financial Statements” on
pages 36 and 37 of the 2006 Annual Report and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Environmental Regulation and Litigation” on pages 59 and 60
of the 2006 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2006.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive officers of Martin
Marietta Materials, Inc. as of February 16, 2007:
| Year Assumed | Other Positions and Other Business | |||||||
| Name | Age | Present Position | Present Position | Experience Within the Last Five Years | ||||
Stephen P. Zelnak, Jr. |
62 | Chairman of the Board of Directors; | 1997 | President (1993-2006) | ||||
| Chief Executive Officer; | 1993 | |||||||
| President of Aggregates Business; | 1993 | |||||||
| Chairman of Magnesia | 2005 | |||||||
| Specialties Business | ||||||||
C. Howard Nye |
44 | President and Chief Operating Officer | 2006 | Executive Vice President, Hanson Aggregates North America (2003-2006); President, Hanson Aggregates East (2000-2003)* | ||||
Daniel G. Shephard |
48 | Executive Vice President; | 2005 | Vice President-Business Development | ||||
| Chief Executive Officer | 2005 | and Capital Planning (2002-2005); | ||||||
| of Magnesia Specialties | Senior Vice President (2004-2005); | |||||||
| Business | Regional Vice President and General | |||||||
| Manager-MidAmerica Region (2003-2005); | ||||||||
| President of Magnesia Specialties Business | ||||||||
| (1999-2005); | ||||||||
| Vice President-Marketing (2002-2004); | ||||||||
| Vice President and Treasurer (2000-2002) | ||||||||
Philip J. Sipling |
59 | Executive Vice President; | 1997 | Chairman of Magnesia Specialties | ||||
| Executive Vice President of | 1993 | Business (1997-2005) | ||||||
| Aggregates Business | ||||||||
Bruce A. Vaio |
46 | President – Martin Marietta | 2006 | President – Southwest Division (1998-2006) | ||||
| Materials West; | Senior Vice President (2002-2005) | |||||||
| Executive Vice President | 2005 |
28
Table of Contents
| Year Assumed | Other Positions and Other Business | |||||||
| Name | Age | Present Position | Present Position | Experience Within the Last Five Years | ||||
Roselyn R. Bar |
48 | Senior Vice President; | 2005 | Vice President (2001-2005) | ||||
| General Counsel; | 2001 | |||||||
| Corporate Secretary | 1997 | |||||||
Anne H. Lloyd |
45 | Treasurer; | 2006 | Vice President and Controller (1998-2005); | ||||
| Senior Vice President and | 2005 | Chief Accounting Officer (1999-2006) | ||||||
| Chief Financial Officer | ||||||||
Donald M. Moe |
61 | Senior Vice President; | 2001 | Vice President (1999-2001); | ||||
| Senior Vice President of | 1999 | President-Mideast Division of | ||||||
| Aggregates Business | Aggregates Business (1996-2006) | |||||||
Jonathan T. Stewart |
58 | Senior Vice President, | 2001 | |||||
| Human Resources |
| * | Prior to his employment with the Company in 2006, Mr. Nye was Executive Vice President of Hanson Aggregates North America, | |
| producer of construction aggregates, since 2003. Prior to that, Mr. Nye was President of Hanson Aggregates East from 2000 to 2003 with operating responsibility over 150 facilities in 12 states with annual revenues of more than $500 million. | ||
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information, Holders, and Dividends
The Company’s Common Stock, $.01 par value, is traded on the New York Stock Exchange (Symbol:
MLM). Information concerning stock prices and dividends paid is included under the caption
“Quarterly Performance (Unaudited)” on page 82 of the 2006 Annual Report, and that information is
incorporated herein by reference. There were approximately 935 holders of record of the Company’s
Common Stock as of February 16, 2007.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required in response to this subsection of Item 5 is included in Part III,
under the heading “Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters,” on page 32 of this Form 10-K.
29
Table of Contents
Issuer Purchases of Equity Securities
| Total Number of | Maximum Number | |||||||||||||||
| Shares Purchased as | of Shares that May | |||||||||||||||
| Part of Publicly | Yet be Purchased | |||||||||||||||
| Total Number of Shares | Average Price | Announced Plans or | Under the Plans or | |||||||||||||
| Period | Purchased | Paid per Share | Programs(1) | Programs | ||||||||||||
October 1, 2006 –
October 31, 2006 |
0 | $ | — | 0 | 4,830,998 | |||||||||||
November 1, 2006 –
November 30, 2006 |
120,000 | $ | 95.86 | 120,000 | 4,710,998 | |||||||||||
December 1, 2006 –
December 31, 2006 |
480,000 | $ | 101.65 | 480,000 | 4,230,998 | |||||||||||
Total |
600,000 | $ | 100.49 | 600,000 | 4,230,998 | |||||||||||
| (1) | The Company’s initial stock repurchase program, which authorized the repurchase of 2.5 million shares of common stock, was announced in a press release dated May 6, 1994, and has been updated as appropriate. The program does not have an expiration date. The Company announced in a press release dated February 22, 2006 that its Board of Directors had authorized the repurchase of an additional 5 million shares of common stock. |
ITEM 6. SELECTED FINANCIAL DATA
The information required in response to this Item 6 is included under the caption “Five Year
Summary” on page 83 of the 2006 Annual Report, and that information is incorporated herein by
reference.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information required in response to this Item 7 is included under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages
40-81 of the 2006 Annual Report, and that information is incorporated herein by reference, except
that the information contained under the caption “Management’s Discussion and Analysis of Financial
Condition and Results of Operations-Outlook 2007” on pages 62 and 63 of the 2006 Annual Report is
not incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required in response to this Item 7A is included under the caption
“Management’s Discussion and Analysis of Financial Condition and Results of Operations-Quantitative
and Qualitative Disclosures About Market Risk” on pages 79 and 80 of the 2006 Annual Report, and
that information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
30
Table of Contents
The information required in response to this Item 8 is included under the caption
“Consolidated Statements of Earnings,” “Consolidated Balance Sheets,” “Consolidated Statements of
Cash Flows,” “Consolidated Statements of Shareholders’ Equity,” “Notes to Financial Statements,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and
“Quarterly Performance (Unaudited)” on pages 13-81 of the 2006 Annual Report, and that information is
incorporated herein by reference.
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2006, an evaluation was performed under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures and the Company’s internal control over financial reporting.
Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the
Company’s disclosure controls and procedures were effective in ensuring that all material
information required to be disclosed is made known to them in a timely manner as of December 31,
2006 and further concluded that the Company’s internal control over financial reporting was
effective in providing reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company’s financial statements for external purposes in accordance with
generally accepted accounting principles as of December 31, 2006.
The Company’s management, including the CEO and CFO, does not expect that the Company’s
control system will prevent all error and all fraud. A control system, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the control. The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions. Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
The Company’s management has issued its annual report on the Company’s internal control over
financial reporting, which included management’s assessment that the Company’s internal control
over financial reporting was effective at December 31, 2006. The Company’s independent registered
31
Table of Contents
public accounting firm has issued an attestation report agreeing with management’s assessment that
the Company’s internal control over financial reporting was effective at December 31, 2006.
Management’s report on the Company’s internal controls and the related attestation report of the
Company’s independent registered public accounting firm appear on pages 10 and 11 of the 2006
Annual Report, and those reports are hereby incorporated by reference in this Form 10-K. See also
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal
Control and Accounting and Reporting Risk” on page 62 of the 2006 Annual Report.
Included among the Exhibits to this Annual Report on Form 10-K are forms of “Certifications”
of the Company’s CEO and CFO as required in accordance with Section 302 of the Sarbanes-Oxley Act
of 2002 (the “Section 302 Certification”). The Section 302 Certifications refer to this evaluation
of the Company’s disclosure policies and procedures and internal control over financial reporting.
The information in this section should be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors of the Company, the Audit Committee of the Board of
Directors, and the Audit Committee financial expert serving on the Audit Committee, all as required
in response to this Item 10, is included under the captions “Corporate Governance Matters” and
“Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy
statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A within
120 days after the close of the Company’s fiscal year ended December 31, 2006 (the “2007 Proxy
Statement”), and that information is hereby incorporated by reference in this Form 10-K.
Information concerning executive officers of the Company required in response to this Item 10 is
included in Part I, under the heading “Executive Officers
of the Registrant,” on pages 28 and 29 of
this Form 10-K. The information concerning the Company’s code of ethics required in response to
this Item 10 is included in Part I, under the heading
“Available Information,” on pages 16 and 17
of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is included under the captions “Executive
Compensation,” “Compensation Discussion and Analysis,” “Corporate Governance Matters,” “Management
Development and Compensation Committee Report,” and “Compensation Committee Interlocks and Insider
Participation” in the Company’s 2006 Proxy Statement, and that information, except for the
information required by Items 402(k) and (l) of Regulation S-K, is hereby incorporated by reference
in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
32
Table of Contents
The information required in response to this Item 12 is included under the captions “General
Information,” “Security Ownership of Certain Beneficial Owners and Management,” and “Securities
Authorized for Issuance Under Equity Compensation Plans” in the Company’s 2007 Proxy Statement, and
that information is hereby incorporated by reference in this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item 13 is included under the captions
“Compensation Committee Interlocks and Insider Participation in Compensation Decisions” and
“Corporate Governance Matters” in the Company’s 2007 Proxy Statement, and that information is
hereby incorporated by reference in this Form 10-K.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this Item 14 is included under the caption
“Independent Auditors” in the Company’s 2007 Proxy Statement, and that information is hereby
incorporated by reference in this Form 10-K.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) List of financial statements filed as part of this Form 10-K.
The following consolidated financial statements of Martin Marietta Materials, Inc. and
consolidated subsidiaries, included in the 2006 Annual Report, are incorporated by reference
into Item 8 on page 30 of this Form 10-K. Page numbers refer to the 2006 Annual Report:
| Page | ||||
Consolidated Statements of Earnings—
for years ended December 31, 2006, 2005, and 2004 |
13 | |||
Consolidated Balance Sheets—
at December 31, 2006 and 2005 |
14 | |||
Consolidated Statements of Cash Flows—
for years ended December 31, 2006, 2005, and 2004 |
15 | |||
Consolidated Statements of Shareholders’ Equity—
Balance at December 31, 2006, 2005 and 2004 |
16 | |||
Notes to Financial Statements— |
17-39 | |||
33
Table of Contents
(2) List of financial statement schedules filed as part of this Form 10-K
The following financial statement schedule of Martin Marietta Materials, Inc. and
consolidated subsidiaries is included in Item 15(c). The page numbers refer to this Form
10-K.
Schedule II — Valuation and Qualifying Accounts |
38 |
All other schedules have been omitted because they are not applicable, not required, or the
information has been otherwise supplied in the financial statements or notes to the
financial statements.
The report of the Company’s independent registered public accounting firm with respect to
the above-referenced financial statements appears on page 12 of the 2006 Annual Report, and
that report is hereby incorporated by reference in this Form 10-K. The report on the
financial statement schedule and the consent of the Company’s independent registered public
accounting firm are attached as Exhibit 23.01 to this Form 10-K.
(3) Exhibits
The
list of Exhibits on the accompanying Index of Exhibits on pages 34-37 of this Form 10-K
is hereby incorporated by reference. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit is indicated by asterisks.
(b) Index of Exhibits
| Exhibit | ||
| No. | ||
| 3.01 | —Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibits 3.1 and 3.2 to the Martin
Marietta Materials, Inc. Current Report on Form 8-K, filed on
October 25, 1996) (Commission File No. 1-12744) |
|
| 3.02 | —Articles of Amendment with Respect to the Junior Participating
Class B Preferred Stock of the Company, dated as of October 19,
2006 (incorporated by reference to Exhibit 3.1 to the Martin
Marietta Materials, Inc. Current Report on Form 8-K, filed on
October 19, 2006) (Commission File No. 1-12744) |
|
| 3.03 | —Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.01 to the
Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on November 20, 2006) (Commission File No. 1-12744) |
|
| 4.01 | —Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Martin
Marietta Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31,
2003) (Commission File No. 1-12744) |
|
| 4.02 | —Articles 2 and 8 of the Company’s Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit
4.02 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1996)
(Commission File No. 1-12744) |
|
| 4.03 | —Article I of the
Company’s Restated
Bylaws, as amended
(incorporated by
reference to
Exhibit 4.03 to the
Martin Marietta
Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (Commission File No. 1-12744) |
|
| 4.04 | —Indenture dated as of December 1, 1995 between Martin Marietta Materials, Inc. and First
Union National Bank of North Carolina (incorporated by reference to Exhibit 4(a) to the Martin
Marietta Materials, Inc. registration statement on Form S-3 (SEC Registration No. 33-99082)) |
34
Table of Contents
| Exhibit | ||
| No. | ||
| 4.05 | —Form of Martin Marietta Materials, Inc. 7% Debenture due 2025 (incorporated by reference to
Exhibit 4(a)(i) to the Martin Marietta Materials, Inc. registration statement on Form S-3 (SEC
Registration No. 33-99082)) |
|
| 4.06 | —Form of Martin Marietta Materials, Inc. 6.9% Notes due 2007 (incorporated by reference to
Exhibit 4(a)(i) to the Martin Marietta Materials, Inc. registration statement on Form S-3 (SEC
Registration No. 33-99082)) |
|
| 4.08 | —Indenture dated as of December 7, 1998 between Martin Marietta Materials, Inc. and First
Union National Bank (incorporated by reference to Exhibit 4.08 to the Martin Marietta
Materials, Inc. registration statement on Form S-4 (SEC Registration No. 333-71793)) |
|
| 4.09 | —Form of Martin Marietta Materials, Inc. 5.875% Note due December 1, 2008 (incorporated by
reference to Exhibit 4.09 to the Martin Marietta Materials, Inc. registration statement on
Form S-4 (SEC Registration No. 333-71793)) |
|
| 4.10 | —Form of Martin Marietta Materials, Inc. 6.875% Note due April 1, 2011 (incorporated by
reference to Exhibit 4.12 to the Martin Marietta Materials, Inc. registration statement on
Form S-4 (SEC Registration No. 333-61454)) |
|
| 10.01 | —Rights Agreement, dated as of September 27, 2006, by and between Martin Marietta
Materials, Inc. and American Stock Transfer & Trust Company, as Rights Agent, which includes
the Form of Articles of Amendment With Respect to the Junior Participating Class B Preferred
Stock of Martin Marietta Materials, Inc., as Exhibit A, and the Form of Rights Certificate, as
Exhibit B (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form
8-K, filed on September 28, 2006) |
|
| 10.02 | —$250,000,000 Five-Year Credit Agreement dated as of June 30, 2005, among Martin Marietta
Materials, Inc., the banks parties thereto, and JPMorgan Chase Bank, N.A., as Administrative
Agent (incorporated by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc.
Current Report on Form 8-K, filed on June 30, 2005) (Commission File No. 1-12744) |
|
| 10.03 | —Extension Agreement to $250,000,000 Five-Year Credit Agreement dated as of June 2, 2006,
among Martin Marietta Materials, Inc., the banks parties thereto, and JPMorgan Chase Bank,
N.A., as Administrative Agent (incorporated by reference to Exhibit 10.03 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
(Commission File No. 1-12744) |
|
| 10.04 | —Form of Martin Marietta Materials, Inc. Second Amended and Restated Employment Protection
Agreement (incorporated by reference to Exhibit 10.05 to the Martin Marietta Materials, Inc.
Annual Report on Form 10-K for the fiscal year ended December 31, 2003) (Commission File No.
1-12744)** |
|
| 10.05 | —Amended and Restated Martin Marietta Materials, Inc. Common Stock Purchase Plan for
Directors (incorporated by reference to Exhibit 10.10 to the Martin Marietta Materials, Inc.
Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (Commission File No.
1-12744)** |
|
| 10.06 | —Amendment No. 1 to the Amended and Restated Martin Marietta Materials, Inc. Common Stock
Purchase Plan for Directors (incorporated by reference to Exhibit 10.01 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30,
2004) (Commission File No. 1-12744)** |
|
| *10.07 | —Martin Marietta Materials, Inc. Amended and Restated Executive Incentive Plan** |
|
| 10.08 | —Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by reference to
Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995) (Commission File No. 1-12744)** |
35
Table of Contents
| Exhibit | ||
| No. | ||
| 10.09 | —Amendment No. 1 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997) (Commission File No. 1-12744)** |
|
| 10.10 | —Amendment No. 2 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.13 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 1999) (Commission File No. 1-12744)** |
|
| 10.11 | —Amendment No. 3 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended June 30, 2000) (Commission File No. 1-12744)** |
|
| 10.12 | —Amendment No. 4 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.14 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 2000) (Commission File No. 1-12744)** |
|
| 10.13 | —Amendment No. 5 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.03 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended June 30, 2001) (Commission File No. 1-12744)** |
|
| 10.14 | —Amendment No. 6 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended September 30, 2003) (Commission File No. 1-12744)** |
|
| 10.15 | —Amendment No. 7 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.15 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 2005) (Commission File No. 1-12744)** |
|
| 10.16 | —Martin Marietta Materials, Inc. Amended and Restated Stock-Based Award Plan dated April
3, 2006 (incorporated by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006) (Commission File No.
1-12744)** |
|
| 10.17 | —Amended and Restated Consulting Agreement dated June 26, 2006, between Janice Henry and
Martin Marietta Materials, Inc. (incorporated by reference to Exhibit 10.02 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
(Commission File No. 1-12744)** |
|
| 10.18 | —Martin Marietta Materials, Inc. Amended Omnibus Securities Award Plan (incorporated by
reference to Exhibit 10.16 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K
for the fiscal year ended December 31, 2000) (Commission File No. 1-12744)** |
|
| 10.19 | —Martin Marietta Materials, Inc. Supplemental Excess Retirement Plan (incorporated by
reference to Exhibit 10.16 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K
for the fiscal year ending December 31, 1999) (Commission File No. 1-12744)** |
|
| 10.20 | —First Amendment to Martin Marietta Materials, Inc. Supplemental Excess Retirement Plan
(incorporated by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly
Report on Form 10-Q for the quarter ended March 31, 2006) (Commission File No. 1-12744)** |
|
| 10.21 | —Form of Option Award Agreement under the Martin Marietta Materials, Inc. Amended and
Restated Stock-Based Award Plan (incorporated by reference to Exhibit 10.01 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
(Commission File No. 1-12744)** |
|
| 10.22 | —Form of Restricted Stock Unit Agreement under the Martin Marietta Materials, Inc. Amended
and Restated Stock-Based Award Plan (incorporated by reference to Exhibit 10.02 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2005) (Commission File No.
1-12744)** |
|
| *12.01 | —Computation of ratio of earnings to fixed charges for the year ended December 31, 2006 |
|
| *13.01 | —Martin Marietta Materials, Inc. 2006 Annual Report to Shareholders, portions of
which are incorporated by reference in this Form 10-K. Those portions of the
2006 Annual Report to Shareholders that are not incorporated by reference shall not be deemed
to be “filed” as part of this report. |
36
Table of Contents
| Exhibit | ||
| No. | ||
| *21.01 | —List of subsidiaries of Martin Marietta Materials, Inc. |
|
| *23.01 | —Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm for
Martin Marietta Materials, Inc. and consolidated subsidiaries |
|
| *24.01 | —Powers
of Attorney (included in this Form 10-K at page 39) |
|
| *31.01 | —Certification dated February 27, 2007 of Chief Executive Officer pursuant to
Securities and Exchange Act of 1934, rule 13a-14, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
| *31.02 | —Certification dated February 27, 2007 of Chief Financial Officer pursuant to
Securities and Exchange Act of 1934, rule 13a-14, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
| *32.01 | —Certification dated February 27, 2007 of Chief Executive Officer required by 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
| *32.02 | —Certification dated February 27, 2007 of Chief Financial Officer required by 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Other material incorporated by reference:
Martin Marietta Materials, Inc.’s 2007 Proxy Statement filed pursuant to Regulation 14A,
portions of which are incorporated by reference in this Form 10-K. Those portions of the
2007 Proxy Statement which are not incorporated by reference shall not be deemed to be
“filed” as part of this report.
| * | Filed herewith | |
| ** | Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K |
37
Table of Contents
(c) Financial Statement Schedule
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
| Col A | Col B | Col C | Col D | Col E | ||||||||||||||||
| Additions | ||||||||||||||||||||
| (1) | (2) | |||||||||||||||||||
| Charged | Charged to | |||||||||||||||||||
| Balance at | to costs | other | Balance at | |||||||||||||||||
| beginning | and | accounts | Deductions | end of | ||||||||||||||||
| Description | of period | expenses | describe | describe | period | |||||||||||||||
| (Amounts in Thousands) | ||||||||||||||||||||
Year ended December 31, 2006 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 5,545 | $ | 640 | (a) | $ | 4,905 | |||||||||||||
Allowance for uncollectible
notes receivable |
795 | $ | 58 | 853 | ||||||||||||||||
Inventory valuation allowance |
12,101 | 3,093 | 973 | (e) | 14,221 | |||||||||||||||
Accumulated amortization of |
213 | (b) | ||||||||||||||||||
intangible assets |
29,399 | 3,858 | 12,374 | (c) | 20,670 | |||||||||||||||
Year ended December 31, 2005 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 6,505 | $ | 960 | (a) | $ | 5,545 | |||||||||||||
Allowance for uncollectible
notes receivable |
737 | $ | 58 | 795 | ||||||||||||||||
Inventory valuation allowance |
5,463 | 6,638 | 12,101 | |||||||||||||||||
Accumulated amortization of |
1,328 | (b) | ||||||||||||||||||
intangible assets |
29,605 | 3,964 | 2,842 | (c) | 29,399 | |||||||||||||||
Year ended December 31, 2004 |
||||||||||||||||||||
Allowance for doubtful accounts |
$ | 4,594 | $ | 1,911 | $ | 6,505 | ||||||||||||||
Allowance for uncollectible
notes receivable |
602 | 192 | $ | 57 | (a) | 737 | ||||||||||||||
Inventory valuation allowance |
5,990 | 945 | 1,393 | (a) | 5,463 | |||||||||||||||
| 79 | (b) | |||||||||||||||||||
Accumulated amortization of |
2,119 | (b) | ||||||||||||||||||
intangible assets |
28,356 | 4,677 | 1,309 | (c) | 29,605 | |||||||||||||||
| (a) | To adjust allowance for change in estimates. | |
| (b) | Divestitures. | |
| (c) | Write off of fully amortized intangible assets. | |
| (d) | Write off of uncollectible accounts against allowance. | |
| (e) | Write off of fully reserved inventory. |
38
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| MARTIN MARIETTA MATERIALS, INC. |
||||
| By: | /s/ Roselyn R. Bar | |||
| Roselyn R. Bar | ||||
| Senior Vice President, General Counsel and Corporate Secretary | ||||
Dated: February 27, 2007
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below appoints
Roselyn R. Bar and M. Guy Brooks, III, jointly and severally, as his or her true and lawful
attorney-in-fact, each with full power of substitution and resubstitution, for him or her and in
his or her name, place and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, jointly and severally, full power and authority to do and perform each in
connection therewith, as fully to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact, jointly and severally, or
their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
39
Table of Contents
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the capacities and on the dates
indicated:
| Signature | Title | Date | ||
/s/ Stephen P. Zelnak, Jr.
|
Chairman of the Board and Chief Executive Officer | February 27, 2007 | ||
/s/ Anne H. Lloyd
|
Senior Vice President, Chief Financial Officer and Treasurer | February 27, 2007 | ||
/s/ Dana F. Guzzo
|
Vice President, Controller and Chief Accounting Officer | February 27, 2007 | ||
/s/ Marcus C. Bennett
|
Director | February 27, 2007 | ||
/s/ Sue W. Cole
|
Director | February 27, 2007 | ||
/s/ David G. Maffucci
|
Director | February 27, 2007 | ||
/s/ William E. McDonald
|
Director | February 27, 2007 | ||
/s/ Frank H. Menaker, Jr.
|
Director | February 27, 2007 | ||
/s/ Laree E. Perez
|
Director | February 27, 2007 |
40
Table of Contents
| Signature | Title | Date | ||
/s/ Dennis L. Rediker
|
Director | February 27, 2007 | ||
/s/ Richard A. Vinroot
|
Director | February 27, 2007 |
41
Table of Contents
EXHIBITS
| Exhibit | ||
| No. | ||
| 3.01 | —Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibits 3.1
and 3.2 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on October 25, 1996) (Commission File No. 1-12744) |
|
| 3.02 | —Articles of Amendment with Respect to the Junior Participating Class B Preferred Stock of the
Company, dated as of October 19, 2006 (incorporated by reference to Exhibit 3.1 to the
Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on October 19, 2006) (Commission File No. 1-12744) |
|
| 3.03 | —Restated Bylaws of the Company, as amended (incorporated by reference to Exhibit 3.01 to the
Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on November 20, 2006) (Commission File No. 1-12744) |
|
| 4.01 | —Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Martin
Marietta Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31,
2003) (Commission File No. 1-12744) |
|
| 4.02 | —Articles 2 and 8 of the Company’s Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 4.02 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (Commission File No. 1-12744) |
|
| 4.03 | —Article I of the Company’s Restated Bylaws, as amended (incorporated by reference to Exhibit
4.03 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (Commission File No. 1-12744) |
|
| 4.04 | —Indenture dated as of December 1, 1995 between Martin Marietta Materials, Inc. and First Union
National Bank of North Carolina (incorporated by reference to Exhibit 4(a) to the Martin
Marietta Materials, Inc. registration statement on Form S-3 (SEC Registration No. 33-99082)) |
|
| 4.05 | —Form of Martin Marietta Materials, Inc. 7% Debenture due 2025 (incorporated by reference to
Exhibit 4(a)(i) to the Martin Marietta Materials, Inc. registration statement on Form S-3 (SEC Registration No. 33-99082)) |
|
| 4.06 | —Form of Martin Marietta Materials, Inc. 6.9% Notes due 2007 (incorporated by reference to
Exhibit 4(a)(i) to the Martin Marietta Materials, Inc. registration statement on Form S-3
(SEC Registration No. 33-99082)) |
|
| 4.08 | —Indenture dated as of December 7, 1998 between Martin Marietta Materials, Inc. and First Union National
Bank (incorporated by reference to Exhibit 4.08 to the Martin Marietta Materials, Inc.
registration statement on Form S-4 (SEC Registration No. 333-71793)) |
|
| 4.09 | —Form of Martin Marietta Materials, Inc. 5.875% Note due December 1, 2008 (incorporated by reference to
Exhibit 4.09 to the Martin Marietta Materials, Inc. registration statement on Form S-4 (SEC
Registration No. 333-71793)) |
|
| 4.10 | —Form of Martin Marietta Materials, Inc. 6.875% Note due April 1, 2011 (incorporated by reference to
Exhibit 4.12 to the Martin Marietta Materials, Inc. registration statement on Form S-4 (SEC
Registration No. 333-61454)) |
|
| 10.01 | —Rights Agreement, dated as of September 27, 2006, by and between Martin Marietta Materials, Inc.
and American Stock Transfer & Trust Company, as Rights Agent, which includes the Form of
Articles of Amendment With Respect to the Junior Participating Class B Preferred Stock of
Martin Marietta Materials, Inc., as Exhibit A, and the Form of Rights Certificate, as Exhibit B (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on
Form 8-K, filed on September 28, 2006) |
Table of Contents
| Exhibit | ||
| No. | ||
| 10.02 | —$250,000,000 Five-Year Credit Agreement dated as of June 30, 2005, among Martin Marietta
Materials, Inc., the banks parties thereto, and JPMorgan Chase Bank, N.A., as
Administrative Agent (incorporated by reference to Exhibit 10.01 to the Martin Marietta
Materials, Inc. Current Report on Form 8-K, filed on June 30, 2005) (Commission File No.
1-12744) |
|
| 10.03 | —Extension Agreement to $250,000,000 Five-Year Credit Agreement dated as of June 2, 2006, among
Martin Marietta Materials, Inc., the banks parties thereto, and JPMorgan Chase Bank, N.A.,
as Administrative Agent (incorporated by reference to Exhibit 10.03 to the Martin Marietta
Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
(Commission File No. 1-12744) |
|
| 10.04 | —Form of Martin Marietta Materials, Inc. Second Amended and Restated Employment Protection
Agreement (incorporated by reference to Exhibit 10.05 to the Martin Marietta Materials,
Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2003) (Commission
File No. 1-12744)** |
|
| 10.05 | —Amended and Restated Martin Marietta Materials, Inc. Common Stock Purchase Plan for Directors
(incorporated by reference to Exhibit 10.10 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 1996) (Commission File No. 1-12744)** |
|
| 10.06 | —Amendment No. 1 to the Amended and Restated Martin Marietta Materials, Inc. Common Stock
Purchase Plan for Directors (incorporated by reference to Exhibit 10.01 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30,
2004) (Commission File No. 1-12744)** |
|
| *10.07 | —Martin Marietta Materials, Inc. Amended and Restated Executive Incentive Plan** |
|
| 10.08 | —Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by reference to Exhibit
10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995) (Commission File No. 1-12744)** |
|
| 10.09 | —Amendment No. 1 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended September 30, 1997) (Commission File No. 1-12744)** |
|
| 10.10 | —Amendment No. 2 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.13 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 1999) (Commission File No. 1-12744)** |
|
| 10.11 | —Amendment No. 3 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended June 30, 2000) (Commission File No. 1-12744)** |
|
| 10.12 | —Amendment No. 4 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.14 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 2000) (Commission File No. 1-12744)** |
|
| 10.13 | —Amendment No. 5 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.03 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended June 30, 2001) (Commission File No. 1-12744)** |
|
| 10.14 | —Amendment No. 6 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.01 to the Martin Marietta Materials, Inc. Quarterly Report on Form
10-Q for the quarter ended September 30, 2003) (Commission File No. 1-12744)** |
Table of Contents
| Exhibit | ||
| No. | ||
| 10.15 | —Amendment No. 7 to the Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated by
reference to Exhibit 10.15 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 2005) (Commission File No. 1-12744)** |
|
| 10.16 | —Martin Marietta Materials, Inc. Amended and Restated Stock-Based Award Plan dated April 3, 2006
(incorporated by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006) (Commission File No.
1-12744)** |
|
| 10.17 | —Amended and Restated Consulting Agreement dated June 26, 2006, between Janice Henry and Martin
Marietta Materials, Inc. (incorporated by reference to Exhibit 10.02 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30,
2006) (Commission File No. 1-12744)** |
|
| 10.18 | —Martin Marietta Materials, Inc. Amended Omnibus Securities Award Plan (incorporated by
reference to Exhibit 10.16 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 2000) (Commission File No. 1-12744)** |
|
| 10.19 | —Martin Marietta Materials, Inc. Supplemental Excess Retirement Plan (incorporated by reference
to Exhibit 10.16 to the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the
fiscal year ending December 31, 1999) (Commission File No. 1-12744)** |
|
| 10.20 | —First Amendment to Martin Marietta Materials, Inc. Supplemental Excess Retirement Plan
(incorporated by reference to Exhibit 10.01 to the Martin Marietta Materials, Inc.
Quarterly Report on Form 10-Q for the quarter ended March 31, 2006) (Commission File No.
1-12744)** |
|
| 10.21 | —Form of Option Award Agreement under the Martin Marietta Materials, Inc. Amended and Restated
Stock-Based Award Plan (incorporated by reference to Exhibit 10.01 to the Martin Marietta
Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
(Commission File No. 1-12744)** |
|
| 10.22 | —Form of Restricted Stock Unit Agreement under the Martin Marietta Materials, Inc. Amended and
Restated Stock-Based Award Plan (incorporated by reference to Exhibit 10.02 to the Martin
Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30,
2005) (Commission File No. 1-12744)** |
|
| *12.01 | —Computation of ratio of earnings to fixed charges for the year ended December 31, 2006 |
|
| *13.01 | —Martin Marietta Materials, Inc. 2006 Annual Report to Shareholders, portions of which are
incorporated by reference in this Form 10-K. Those portions of the 2006 Annual Report to
Shareholders that are not incorporated by reference shall not be deemed to be “filed” as
part of this report. |
|
| *21.01 | —List of subsidiaries of Martin Marietta Materials, Inc. |
|
| *23.01 | —Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm for Martin Marietta
Materials, Inc. and consolidated subsidiaries |
|
| *24.01 | —Powers
of Attorney (included in this Form 10-K at page 39) |
|
| *31.01 | —Certification dated February 27, 2007 of Chief Executive Officer pursuant to Securities and
Exchange Act of 1934, rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
| *31.02 | —Certification dated February 27, 2007 of Chief Financial Officer pursuant to Securities and
Exchange Act of 1934, rule 13a-14, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 |
|
| *32.01 | —Certification dated February 27, 2007 of Chief Executive Officer required by 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
| *32.02 | —Certification dated February 27, 2007 of Chief Financial Officer required by 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Table of Contents
Other material incorporated by reference:
Martin Marietta Materials, Inc.’s 2007 Proxy Statement filed pursuant to Regulation 14A,
portions of which are incorporated by reference in this Form 10-K. Those portions of the
2007 Proxy Statement which are not incorporated by reference shall not be deemed to be
“filed” as part of this report.
| * | Filed herewith | |
| ** | Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K |
Exhibit 10.07
February 2007
MARTIN MARIETTA MATERIALS, INC.
AMENDED AND RESTATED EXECUTIVE INCENTIVE PLAN
| I. | PURPOSE | |
| The purpose of the Martin Marietta Materials, Inc. Executive Incentive Plan (the “Plan”) is to enhance profits and overall performance by providing for its key management an additional inducement for achieving and exceeding Martin Marietta Materials, Inc. (“MMM” or the “Corporation”) performance objectives. Additionally, the Plan will allow a level of compensation that is appropriate when compared with compensation levels of other comparable organizations. | ||
| II. | STANDARD OF CONDUCT AND PERFORMANCE EXPECTATION |
| A. | It is expected that the business and individual goals and objectives established for this Plan will be accomplished in accordance with the Corporation’s policy on ethical conduct in business. It is a prerequisite before any award can be considered that a participant will have acted in accordance with the Martin Marietta Materials, Inc. Code of Ethics and Standards of Conduct and fostered an atmosphere to encourage all employees acting under the participant’s supervision to perform their duties in accordance with the highest ethical standards. Ethical behavior is imperative. Thus, in achieving one’s goals, the individual’s commitment and adherence to the Corporation’s ethical standards will be considered paramount in determining awards under this Plan. | ||
| B. | Plan participants whose individual performance is determined to be less than acceptable are not eligible to receive incentive awards. |
| III. | EFFECTIVE DATE | |
| The Plan will become effective each year commencing January 1. | ||
| IV. | BASIC PROGRAM ELIGIBILITY | |
| Subject to the discretion of the Chief Executive Officer of the Corporation, an employee will be eligible to participate in the Plan for any Plan year in which the employee is classified no later than July 1 of that year as one of the following: |
President
Vice President
General Manager
Director
Others recommended by a Corporate Officer
Vice President
General Manager
Director
Others recommended by a Corporate Officer
| A Corporate Officer is any elected officer of the Corporation. |
Page 1 of 5
| V. | BASIS FOR AWARDS | |
| Awards will be paid based on the actual base salary paid to each participant during each Plan year, and will be determined based on the following criteria: |
| A. | Responsibility | Target Incentive Award | ||
| Level | (% of Annual Salary) | |||
| Chief Financial Officer | 80-100% | |||
| Division Presidents | 60%-80% | |||
| Designated VPs of major functions reporting to the Corporation’s President (Corporate Unit Head) | 60%-80% | |||
| Vice President/General Manager reporting to a Division President or Corporate Unit Head | 40%-50% | |||
| Designated Directors/General Managers/Vice Presidents | 30%-50% | |||
| Other Directors/Managers | 30%-35% |
| The award percentages noted above may be adjusted up or down subject to the discretion of the Chief Executive Officer of the Corporation. |
| B. | Available Award | ||
| Total incentive awards will be based on a combination of the performance of MMM, the Operating Unit (as defined below), the Corporate Unit (as defined below) and the individual, depending on the position occupied by the participant and other factors described below. An “Operating Unit” is an operating unit(s) of the Corporation for which the individual is responsible (for example, one or more segments, divisions, regions, districts, etc.) as designated by the Chief Executive Officer. A “Corporate Unit” is a non-operating unit(s) of the Corporation for which the individual is responsible (for example, one or more of finance, legal, marketing, purchasing, etc.) as designated by the Chief Executive Officer. The portion of the total award determined by the performance of MMM, the Operating Unit, the Corporate Unit and the individual is outlined below. |
Page 2 of 5
| 1. | Operating Units | ||
| For Division Presidents, participants reporting to Division Presidents, and participants whose work is primarily related to an Operating Unit, the award will be based on the following: |
| Operating Unit | Division | MMM | Individual | |||||||||||||
| Performance | Performance | Performance | Performance | |||||||||||||
Divisions |
||||||||||||||||
Line Management |
50 | % | — | 25 | % | 25 | % | |||||||||
Staff |
37.5 | % | — | 25 | % | 37.5 | % | |||||||||
Areas, Districts &
Regions |
||||||||||||||||
Line Management |
50 | % | 12.5 | % | 12.5 | % | 25 | % | ||||||||
Staff |
37.5 | % | 12.5 | % | 12.5 | % | 37.5 | % | ||||||||
| 2. | Corporate Units | ||
| For individuals reporting to the Chief Executive Officer who are responsible for a Corporate Unit and are not in an Operating Unit (“Corporate Unit head”), participants reporting to a Corporate Unit head, and participants whose work is primarily related to the Corporation, the award will be based on the following: |
| • | Fifty percent (50%) of the award will be based on MMM performance, as defined in Paragraph V.C.1 below. | ||
| • | Fifty percent (50%) of the award will be based on individual performance, as defined in Paragraph V.C.2 above. |
| 3. | Combined Responsibilities | ||
| For individuals who have responsibilities described in both Paragraphs V.B.1 and V.B.2 above, the award will be based on the following: |
| • | Sixty-five percent (65%) of the award will be based on the performance of MMM and the Operating Unit(s) which that individual is responsible, as defined in Paragraph V.C.1 below. | ||
| • | Thirty-five percent (35%) of the award will be based on individual performance, as defined in Paragraph V.C.2 below. |
Page 3 of 5
| C. | Performance Criteria |
| 1. | MMM, Operating Units and Corporate Units | ||
| MMM, Operating Unit and Corporate Unit performance will be measured by profit contribution, cash flow, sales and production metrics and/or other appropriate financial performance, return, safety and other factors reflecting the performance of the Corporation, Operating Unit and Corporate Unit. | |||
| The Management Development and Compensation Committee of the Board of Directors will determine the percentage that was achieved by MMM and the Chief Executive Officer of the Corporation will determine the percentage that was achieved by the Operating Units and the Corporate Units, each based on an assessment of the factors listed above and on a subjective evaluation of the overall contribution to the Corporation and will apply that percentage to the portion of the total award that is available for MMM, the Operating Unit(s) and/or the Corporate Unit(s) as outlined in Paragraph V.B. above. | |||
| 2. | Individual Performance | ||
| The portion of the total award based on individual performance, if applicable, will be based on an assessment of the actual achievement of the individual relative to quantitative, measurable goals established for the Plan year, conduct in accordance with the Corporation’s Code of Ethics and Standards of Conduct and a subjective evaluation of the relative significance of one’s efforts in respect to its bearing on the overall Corporation, Operating Unit(s) and/or Corporate Unit(s). | |||
| The Chief Executive Officer will determine the percentage that was achieved by the individual based on an assessment of the factors listed above and on a subjective evaluation of the overall contribution of the individual, and will apply that percentage to the portion of the total award that is available for the individual, as outlined in Paragraph V.B. above. |
| D. | Discretion of the Chief Executive Officer | ||
| Subject to approval by the Management Development and Compensation Committee of the Board of Directors, the Chief Executive Officer of the Corporation may modify the percentage of available award for any or all of the MMM, Operating Unit, Corporate Unit and/or individual awards, based on an assessment of organizational and/or individual contribution. The participant’s individual performance may impact the percent of available MMM, Operating Unit and/or Corporate Unit award. The performance of MMM, the Operating Unit and/or Corporate Unit may impact the percent of available individual award. | |||
| E. | Payment of Awards | ||
| Awards under the Plan shall be payable in a lump sum, excluding the amounts, if any, credited on an elective or non-elective basis to stock units pursuant to the Martin Marietta |
Page 4 of 5
| Materials, Inc. Incentive Stock Plan, as soon as practicable following the close of the Plan year. | |||
| F. | Changes in Participation | ||
| An employee must be a full-time employee of the Corporation on December 31 of the Plan Year to be eligible to participate in the Plan. It is recognized that during a Plan year, individual changes in the eligibility group may occur as participants change jobs or terminate through death, retirement or other reasons. As these circumstances occur, the Chief Executive Officer of the Corporation may, in his discretion, give consideration to grant the award under the Plan and/or to adjust the amount of incentive award paid. | |||
| Persons in the eligibility group hired during a Plan year may be eligible for an award under the Plan in that year at the discretion and approval of the Chief Executive Officer. |
Page 5 of 5
EXHIBIT 12.01
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Year Ended December 31, 2006
EARNINGS: |
||||
Earnings before income taxes |
$ | 350,444 | ||
(Earnings) of less than 50%-owned associated companies, net |
(1,963 | ) | ||
Interest Expense |
40,359 | |||
Portion of rents representative of an interest factor |
11,332 | |||
Adjusted Earnings and Fixed Charges |
$ | 400,172 | ||
FIXED CHARGES: |
||||
Interest Expense |
$ | 40,359 | ||
Capitalized Interest |
5,420 | |||
Portion of rents representative of an interest factor |
11,332 | |||
Total Fixed Charges |
$ | 57,111 | ||
Ratio of Earnings to Fixed Charges |
7.01 |
S T A T E M E N T O F F I N A N C I A L R E S P O N S I B I L I T Y
Shareholders
Martin Marietta Materials, Inc.
Martin Marietta Materials, Inc.
The management of Martin Marietta Materials, Inc., is responsible for the consolidated
financial statements, the related financial information contained in this 2006 Annual Report and
the establishment and maintenance of adequate internal control over financial reporting. The
consolidated balance sheets for Martin Marietta Materials, Inc., at December 31, 2006 and 2005,
and the related consolidated statements of earnings, shareholders’ equity and cash flows for each
of the three years in the period ended December 31, 2006, 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 Corporation 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 Corporation’s management recognizes its responsibility to foster a strong ethical climate.
Management has issued written policy statements that document the Corporation’s business code of
ethics. The importance of ethical behavior is regularly communicated to all employees through the
distribution of the Code of Ethics and Standards of 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 and the New York Stock Exchange as they
relate to the composition and practices of audit committees.
Management of Martin Marietta Materials, Inc., assessed the effectiveness of the Corporation’s
internal control over financial reporting as of December 31, 2006. 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 (COSO). Based on management’s
assessment under the framework in Internal Control — Integrated Framework, management concluded
that the Corporation’s internal control over financial reporting was effective as of December 31,
2006.
The consolidated financial statements and management’s assertion regarding its assessment of
internal control over financial reporting have been audited by Ernst & Young LLP, an independent
registered public accounting firm, whose reports appear on the following pages.
|
 |
|
Stephen P. Zelnak, Jr.
|
Anne H. Lloyd | |
Chairman, Board of Directors
|
Senior Vice President, | |
and Chief Executive Officer
|
Chief Financial Officer and Treasurer | |
February 26, 2007 |
Martin
Marietta Materials, Inc. and Consolidated Subsidiaries page ten
R E P O R T
O F I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G
F I R M
Board of Directors and Shareholders
Martin Marietta Materials, Inc.
Martin Marietta Materials, Inc.
We have audited management’s assessment, included in the accompanying Statement of Financial
Responsibility, that Martin Marietta Materials, Inc., maintained effective internal control over
financial reporting as of December 31, 2006, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). Martin Marietta Materials, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
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 (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) 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 (3) 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.
In our opinion, management’s assessment that Martin Marietta Materials, Inc., maintained effective
internal control over financial reporting as of December 31, 2006, is fairly stated, in all
material respects, based on the COSO criteria. Also, in our opinion, Martin Marietta Materials,
Inc., maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Martin Marietta Materials, Inc., and
subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of
earnings, shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2006, of Martin Marietta Materials, Inc., and subsidiaries and our report dated
February 26, 2007, expressed an unqualified opinion thereon.
Raleigh, North Carolina
February 26, 2007
Martin
Marietta Materials, Inc. and Consolidated Subsidiaries page eleven
R E P O R T
O F I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G
F I R M
Board of Directors and Shareholders
Martin Marietta Materials, Inc.
Martin Marietta Materials, Inc.
We have audited the accompanying consolidated balance sheets of Martin Marietta Materials,
Inc., and subsidiaries at December 31, 2006 and 2005, and the related consolidated statements of
earnings, shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2006. These financial statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Martin Marietta Materials, Inc., and subsidiaries
at December 31, 2006 and 2005, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, in 2006 the Corporation adopted
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment; Statement of Financial
Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans; and Emerging Issues Task Force Issue 04-06, Accounting for Stripping Costs in
the Mining Industry.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Martin Marietta Materials, Inc.’s internal control
over financial reporting as of December 31, 2006, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2007, expressed an unqualified opinion
thereon.
Raleigh, North Carolina
February 26, 2007
Martin
Marietta Materials, Inc. and Consolidated Subsidiaries page twelve
C O N S O L I D A T E D S T A T E M E N T S O F E A R N I N G S
for years ended December 31
| (add 000, except per share) | 2006 | 2005 | 2004 | |||||||||
Net Sales |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | ||||||
Freight and delivery revenues |
263,504 | 248,478 | 204,480 | |||||||||
Total revenues |
2,206,401 | 1,994,149 | 1,720,369 | |||||||||
Cost of sales |
1,420,433 | 1,321,279 | 1,169,302 | |||||||||
Freight and delivery costs |
263,504 | 248,478 | 204,480 | |||||||||
Total cost of revenues |
1,683,937 | 1,569,757 | 1,373,782 | |||||||||
Gross Profit |
522,464 | 424,392 | 346,587 | |||||||||
Selling, general and administrative expenses |
146,665 | 130,704 | 127,337 | |||||||||
Research and development |
736 | 662 | 891 | |||||||||
Other operating (income) and expenses, net |
(12,923 | ) | (16,028 | ) | (11,723 | ) | ||||||
Earnings from Operations |
387,986 | 309,054 | 230,082 | |||||||||
Interest expense |
40,359 | 42,597 | 42,734 | |||||||||
Other nonoperating (income) and expenses, net |
(2,817 | ) | (1,937 | ) | (606 | ) | ||||||
Earnings from continuing operations before taxes on income |
350,444 | 268,394 | 187,954 | |||||||||
Taxes on income |
106,640 | 72,681 | 57,739 | |||||||||
Earnings from Continuing Operations |
243,804 | 195,713 | 130,215 | |||||||||
Gain (Loss) on discontinued operations, net of related tax
expense (benefit) of $1,177, $(1,529) and $917 respectively |
1,618 | (3,047 | ) | (1,052 | ) | |||||||
Net Earnings |
$ | 245,422 | $ | 192,666 | $ | 129,163 | ||||||
Net Earnings (Loss) Per Common Share |
||||||||||||
– Basic from continuing operations |
$ | 5.36 | $ | 4.21 | $ | 2.70 | ||||||
– Discontinued operations |
0.04 | (0.07 | ) | (0.02 | ) | |||||||
| $ | 5.40 | $ | 4.14 | $ | 2.68 | |||||||
– Diluted from continuing operations |
$ | 5.26 | $ | 4.14 | $ | 2.68 | ||||||
– Discontinued operations |
0.03 | (0.06 | ) | (0.02 | ) | |||||||
| $ | 5.29 | $ | 4.08 | $ | 2.66 | |||||||
Reconciliation of Denominators for Basic and Diluted Earnings Per Share Computations |
||||||||||||
– Basic weighted-average common shares outstanding |
45,453 | 46,540 | 48,142 | |||||||||
– Effect of dilutive employee and director awards |
914 | 739 | 392 | |||||||||
– Diluted weighted-average shares outstanding and assumed
conversions |
46,367 | 47,279 | 48,534 | |||||||||
Cash Dividends Per Common Share |
$ | 1.01 | $ | 0.86 | $ | 0.76 | ||||||
The notes on pages 17 to 39 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page thirteen
C O N S O L I D A T E D B A L A N C E S H E E T S
at December 31
| Assets (add 000) | 2006 | 2005 | ||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 32,282 | $ | 76,745 | ||||
Investments |
— | 25,000 | ||||||
Accounts receivable, net |
242,399 | 225,012 | ||||||
Inventories, net |
256,287 | 222,728 | ||||||
Current portion of notes receivable |
2,521 | 5,081 | ||||||
Current deferred income tax benefits |
25,317 | 14,989 | ||||||
Other current assets |
33,548 | 32,486 | ||||||
Total Current Assets |
592,354 | 602,041 | ||||||
Property, plant and equipment, net |
1,295,491 | 1,166,351 | ||||||
Goodwill |
570,538 | 569,263 | ||||||
Other intangibles, net |
10,948 | 18,744 | ||||||
Noncurrent notes receivable |
10,355 | 27,883 | ||||||
Other noncurrent assets |
26,735 | 49,034 | ||||||
Total Assets |
$ | 2,506,421 | $ | 2,433,316 | ||||
Liabilities and Shareholders’ Equity (add 000, except parenthetical share data) |
||||||||
Current Liabilities: |
||||||||
Bank overdraft |
$ | 8,390 | $ | 7,290 | ||||
Accounts payable |
85,237 | 93,445 | ||||||
Accrued salaries, benefits and payroll taxes |
25,010 | 24,199 | ||||||
Pension and postretirement benefits |
6,100 | 4,200 | ||||||
Accrued insurance and other taxes |
32,297 | 39,582 | ||||||
Income taxes |
— | 1,336 | ||||||
Current maturities of long-term debt |
125,956 | 863 | ||||||
Other current liabilities |
32,082 | 29,207 | ||||||
Total Current Liabilities |
315,072 | 200,122 | ||||||
Long-term debt |
579,308 | 709,159 | ||||||
Pension, postretirement and postemployment benefits |
106,413 | 98,714 | ||||||
Noncurrent deferred income taxes |
159,094 | 149,972 | ||||||
Other noncurrent liabilities |
92,562 | 101,664 | ||||||
Total Liabilities |
1,252,449 | 1,259,631 | ||||||
Shareholders’ Equity: |
||||||||
Common stock ($0.01 par value; 100,000,000 shares
authorized; 44,851,000 and 45,727,000 shares
outstanding at December 31, 2006 and 2005,
respectively) |
448 | 457 | ||||||
Preferred stock ($0.01 par value; 10,000,000
shares authorized; no shares outstanding) |
— | — | ||||||
Additional paid-in capital |
147,491 | 240,541 | ||||||
Accumulated other comprehensive loss |
(36,051 | ) | (15,325 | ) | ||||
Retained earnings |
1,142,084 | 948,012 | ||||||
Total Shareholders’ Equity |
1,253,972 | 1,173,685 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 2,506,421 | $ | 2,433,316 | ||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fourteen
C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S for years ended December 31
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net earnings |
$ | 245,422 | $ | 192,666 | $ | 129,163 | ||||||
Adjustments to reconcile net earnings to cash
provided by operating activities: |
||||||||||||
Depreciation, depletion and amortization |
141,429 | 138,251 | 132,859 | |||||||||
Stock-based compensation expense |
13,438 | 3,702 | 2,288 | |||||||||
Gains on divestitures and sales of assets |
(7,960 | ) | (10,670 | ) | (17,126 | ) | ||||||
Deferred income taxes |
17,156 | 5,711 | 38,544 | |||||||||
Excess tax benefits from stock-based compensation
transactions |
(17,467 | ) | 15,337 | 1,045 | ||||||||
Other items, net |
(4,872 | ) | (3,768 | ) | (3,018 | ) | ||||||
Changes in operating assets and liabilities, net of
effects of acquisitions and divestitures: |
||||||||||||
Accounts receivable, net |
(17,387 | ) | (5,424 | ) | 11,926 | |||||||
Inventories, net |
(33,681 | ) | (10,952 | ) | 786 | |||||||
Accounts payable |
(8,208 | ) | 3,621 | 13,374 | ||||||||
Other assets and liabilities, net |
10,322 | (10,690 | ) | (43,000 | ) | |||||||
Net Cash Provided by Operating Activities |
338,192 | 317,784 | 266,841 | |||||||||
Cash Flows from Investing Activities: |
||||||||||||
Additions to property, plant and equipment |
(265,976 | ) | (221,401 | ) | (163,445 | ) | ||||||
Acquisitions, net |
(3,036 | ) | (4,650 | ) | (5,567 | ) | ||||||
Proceeds from divestitures and sales of assets |
30,589 | 37,582 | 45,687 | |||||||||
Purchases of investments |
— | (25,000 | ) | — | ||||||||
Proceeds from sales of investments |
25,000 | — | — | |||||||||
Railcar construction advances |
(32,077 | ) | — | — | ||||||||
Repayments of railcar construction advances |
32,077 | — | — | |||||||||
Other investing activities, net |
— | (400 | ) | — | ||||||||
Net Cash Used for Investing Activities |
(213,423 | ) | (213,869 | ) | (123,325 | ) | ||||||
Cash Flows from Financing Activities: |
||||||||||||
Repayments of long-term debt |
(415 | ) | (532 | ) | (1,065 | ) | ||||||
Borrowings on commercial paper and line of credit, net |
537 | — | — | |||||||||
Change in bank overdraft |
1,100 | (2,237 | ) | (1,737 | ) | |||||||
Termination of interest rate swaps |
— | (467 | ) | — | ||||||||
Payments on capital lease obligations |
(147 | ) | (80 | ) | — | |||||||
Dividends paid |
(46,421 | ) | (39,953 | ) | (36,507 | ) | ||||||
Repurchases of common stock |
(172,888 | ) | (178,787 | ) | (71,507 | ) | ||||||
Issuances of common stock |
31,535 | 33,266 | 3,787 | |||||||||
Excess tax benefits from stock-based compensation
transactions |
17,467 | — | — | |||||||||
Net Cash Used for Financing Activities |
(169,232 | ) | (188,790 | ) | (107,029 | ) | ||||||
Net (Decrease) Increase in Cash and Cash
Equivalents |
(44,463 | ) | (84,875 | ) | 36,487 | |||||||
Cash and Cash Equivalents, beginning of year |
76,745 | 161,620 | 125,133 | |||||||||
Cash and Cash Equivalents, end of year |
$ | 32,282 | $ | 76,745 | $ | 161,620 | ||||||
Supplemental Disclosures of Cash Flow Information: |
||||||||||||
Cash paid for interest |
$ | 46,976 | $ | 46,711 | $ | 44,926 | ||||||
Cash paid for income taxes |
$ | 77,777 | $ | 66,106 | $ | 13,433 | ||||||
The notes on pages 17 to 39 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifteen
C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S’ E Q U I T Y
| Shares of | Accumulated Other | Total | ||||||||||||||||||||||
| Common | Common | Additional | Comprehensive | Retained | Shareholders' | |||||||||||||||||||
| (add 000) | Stock | Stock | Paid-In Capital | Earnings (Loss) | Earnings | Equity | ||||||||||||||||||
Balance at December 31, 2003 |
48,670 | $ | 486 | $ | 435,412 | $ | (8,694 | ) | $ | 702,643 | $ | 1,129,847 | ||||||||||||
Net earnings |
— | — | — | — | 129,163 | 129,163 | ||||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | (276 | ) | — | (276 | ) | ||||||||||||||||
Comprehensive earnings |
128,887 | |||||||||||||||||||||||
Dividends declared |
— | — | — | — | (36,507 | ) | (36,507 | ) | ||||||||||||||||
Issuances of common stock
for stock award plans |
158 | 1 | 5,923 | — | — | 5,924 | ||||||||||||||||||
Repurchases of common stock |
(1,522 | ) | (15 | ) | (74,709 | ) | — | — | (74,724 | ) | ||||||||||||||
Balance at December 31, 2004 |
47,306 | 472 | 366,626 | (8,970 | ) | 795,299 | 1,153,427 | |||||||||||||||||
Net earnings |
— | — | — | — | 192,666 | 192,666 | ||||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | (6,355 | ) | — | (6,355 | ) | ||||||||||||||||
Comprehensive earnings |
186,311 | |||||||||||||||||||||||
Dividends declared |
— | — | — | — | (39,953 | ) | (39,953 | ) | ||||||||||||||||
Issuances of common stock
for stock award plans |
1,079 | 11 | 49,459 | — | — | 49,470 | ||||||||||||||||||
Repurchases of common stock |
(2,658 | ) | (26 | ) | (175,544 | ) | — | — | (175,570 | ) | ||||||||||||||
Balance at December 31, 2005 |
45,727 | 457 | 240,541 | (15,325 | ) | 948,012 | 1,173,685 | |||||||||||||||||
Write off of capitalized stripping
costs, net of tax |
— | — | — | — | (4,929 | ) | (4,929 | ) | ||||||||||||||||
Reclassification of stock-based
compensation liabilities to
shareholders’ equity for FAS 123(R) adoption |
— | — | 12,339 | — | — | 12,339 | ||||||||||||||||||
Net earnings |
— | — | — | — | 245,422 | 245,422 | ||||||||||||||||||
Minimum pension liability, net of tax |
— | — | — | (1,548 | ) | — | (1,548 | ) | ||||||||||||||||
Foreign currency translation gain,
net of tax |
— | — | — | 2,419 | — | 2,419 | ||||||||||||||||||
Change in fair value of forward
starting interest rate swap agreements,
net of tax |
— | — | — | (1,179 | ) | — | (1,179 | ) | ||||||||||||||||
Comprehensive earnings |
245,114 | |||||||||||||||||||||||
Reclassifications of unrecognized
actuarial losses, prior service costs and
transition assets for FAS 158 adoption,
net of tax |
— | — | — | (20,418 | ) | — | (20,418 | ) | ||||||||||||||||
Dividends declared |
— | — | — | — | (46,421 | ) | (46,421 | ) | ||||||||||||||||
Issuances of common stock for stock
award plans |
998 | 10 | 54,042 | — | — | 54,052 | ||||||||||||||||||
Repurchases of common stock |
(1,874 | ) | (19 | ) | (172,869 | ) | — | — | (172,888 | ) | ||||||||||||||
Stock-based compensation expense |
— | — | 13,438 | — | — | 13,438 | ||||||||||||||||||
Balance at December 31, 2006 |
44,851 | $ | 448 | $ | 147,491 | $ | (36,051 | ) | $ | 1,142,084 | $ | 1,253,972 | ||||||||||||
The notes on pages 17 to 39 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixteen
N O T E S T O F I N A N C I A L S T A T E M E N T S
Note A: Accounting Policies
Organization. Martin Marietta Materials, Inc., (the “Corporation”) is engaged principally in the
construction aggregates business. The Corporation’s aggregates products, which include crushed
stone, sand and gravel, are used primarily for construction of highways and other infrastructure
projects, and in the domestic commercial and residential construction industries. Certain other
aggregates products are used in the agricultural industry. These aggregates products, along with
asphalt products and ready mixed concrete, are sold and shipped from a network of 307 quarries,
distribution facilities and plants to customers in 31 states, Canada, the Bahamas and the Caribbean
Islands. North Carolina, Texas, Georgia, Iowa and South Carolina account for approximately 58% of
the Aggregates business’ 2006 net sales. The Aggregates business contains the following reportable
segments: Mideast Group, Southeast Group and West Group. The Mideast Group operates primarily in
Indiana, Maryland, North Carolina, Ohio, Virginia and West Virginia. The Southeast Group has
operations in Alabama, Florida, Georgia, Illinois, Kentucky, Louisiana, Mississippi, South
Carolina, Tennessee, Nova Scotia and the Bahamas. The West Group operates in Arkansas, California,
Iowa, Kansas, Minnesota, Missouri, Nebraska, Nevada, Oklahoma, Texas, Washington, Wisconsin and
Wyoming.
In addition to the Aggregates business, the Corporation has a Specialty Products segment that
produces magnesia-based chemicals products used in industrial, agricultural and environmental
applications; dolomitic lime sold primarily to customers in the steel industry; and structural
composite products.
Basis of Consolidation. The consolidated financial statements include the accounts of the
Corporation and its wholly owned and majority-owned subsidiaries. Partially owned affiliates are
either consolidated in accordance with Financial Accounting Standards Board Interpretation No. 46,
Consolidation of Variable Interest Entities, or accounted for at cost or as equity investments
depending on the level of ownership interest or the Corporation’s ability to exercise control over
the affiliates’ operations. Intercompany balances and transactions have been eliminated in
consolidation.
The Corporation is a minority member of a limited liability company whereby the majority member is
paid a preferred annual return. The Corporation has the ability to redeem the majority member’s
interest after the lapse of a specified number of years. The Corporation consolidates the limited
liability company in its consolidated financial statements.
Use of Estimates. The preparation of the Corporation’s consolidated financial statements in
conformity with accounting principles generally accepted in the United States requires management
to make certain estimates and assumptions. Such judgments affect the reported amounts in the
consolidated financial statements and accompanying notes. Actual results could differ from those
estimates.
Revenue Recognition. Revenues for product sales are recognized when finished products are shipped
to unaffiliated customers. Revenues derived from the road paving business are recognized using the
percentage completion method. Total revenues include sales of materials and services provided to
customers, net of discounts or allowances, if any, and include freight and delivery charges billed
to 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. Additionally, at December
31, 2005, cash of $878,000 was held in an unrestricted escrow account on behalf of the Corporation
and was reported in other noncurrent assets.
Investments.
At December 31, 2005, investments were comprised of variable rate demand notes. These
available-for-sale securities were carried at fair value. While the contractual maturity for each
of the Corporation’s variable rate demand notes exceeded ten years, these securities represented
investments of cash available for current operations. Therefore, in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, these securities were classified as current assets in the 2005 consolidated balance
sheet. During 2006, the Corporation sold the investments at their par values and, accordingly, did
not recognize a gain or loss related to the sale.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventeen
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
Customer Receivables. Customer receivables are stated at cost. The Corporation does not
charge interest on customer accounts receivable. The Corporation records an allowance for doubtful
accounts, which includes a general reserve based on historical write offs and a specific reserve
for accounts greater than $50,000 deemed at risk.
Inventories Valuation. Inventories are stated at the lower of cost or market. Cost for finished
products and in process inventories is determined by the first-in, first-out method.
Notes Receivable. Notes receivable are stated at cost. The Corporation records an allowance for
notes receivable deemed uncollectible. At December 31, 2006 and 2005, the allowance for
uncollectible notes receivable was $853,000 and $795,000, respectively.
Properties and Depreciation. 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 |
1 to 50 years | |||
Machinery & Equipment |
1 to 35 years | |||
Land Improvements |
1 to 30 years | |||
The Corporation begins capitalizing quarry development costs at a point when reserves are
determined to be proven and probable, when economically mineable by the Corporation’s geological
and operational staff, and when demand supports investment in the market. Quarry development costs
are classified as mineral reserves.
Mineral reserves are valued at the present value of royalty payments, using a prevailing market
royalty rate that would have been incurred if the Corporation had leased the reserves as opposed to
fee-ownership for the life of the reserves, not to exceed twenty years.
Depreciation is computed over estimated service lives, principally by the straight-line method.
Depletion of mineral deposits is calculated over proven and probable reserves by the
units-of-production method on a quarry-by-quarry basis. Amortization of assets recorded under
capital leases is computed using the straight-line method over the lesser of the life of the lease
or the assets’ useful lives.
Repair and Maintenance Costs. Repair and maintenance costs that do not substantially extend the
life of the Corporation’s plant and equipment are expensed as incurred.
Intangible Assets. Goodwill represents the excess purchase price paid for acquired businesses over
the estimated fair value of identifiable assets and liabilities. The carrying value of goodwill is
reviewed annually, as of October 1, for impairment in accordance with the provisions of Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”). An
interim review is performed between annual tests if facts or circumstances indicate potential
impairment. If an impairment review indicates that the carrying value is impaired, a charge is
recorded.
The Corporation’s reporting units, which represent the level at which goodwill is tested for
impairment under FAS 142, are based on its geographic regions. Goodwill is allocated to the
reporting units based on the location of acquisitions and divestitures at the time of
consummation.
In accordance with FAS 142, leased mineral rights acquired in a business combination that have a
royalty rate less than a prevailing market rate are recognized as other intangible assets. The
leased mineral rights are valued at the present value of the difference between the market royalty
rate and the contractual royalty rate over the lesser of the life of the lease, not to exceed
thirty years, or the amount of mineable reserves.
Other intangibles represent amounts assigned principally to contractual agreements and are
amortized ratably over periods based on related contractual terms. The carrying value of other
intangibles is reviewed if facts and circumstances indicate potential impairment. If this review
determines that the carrying value is impaired, a charge is recorded.
Derivatives. The Corporation records derivative instruments at fair value on its consolidated
balance sheet. At December 31, 2006, the Corporation’s derivatives were forward starting interest
rate swaps, which represent cash flow hedges. The Corporation’s objective for holding these
derivatives is to lock in the interest rate related to a por-
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page eighteen
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
tion of the Corporation’s anticipated refinancing of Notes due in 2008. In accordance
with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (“FAS 133”), the fair values of these hedges are recorded as other
noncurrent assets or liabilities in the consolidated balance sheet and changes in the fair value
are recorded net of tax directly in shareholders’ equity as other comprehensive earnings or loss.
The changes in fair value recorded as other comprehensive earnings or loss will be reclassified to
earnings in the same periods as interest expense is incurred on the anticipated debt issuance. At
December 31, 2005, the Corporation did not hold any derivative instruments.
Retirement Plans and Postretirement Benefits. The Corporation sponsors defined benefit retirement
plans and provides other postretirement benefits. The Corporation’s defined benefit retirement
plans comply with the following principal standards: the Employee Retirement Income Security Act of
1974, as amended (ERISA), which, in conjunction with the Internal Revenue Code, determines legal
minimum and maximum deductible funding requirements; and Statement of Financial Accounting
Standards No. FAS 87, Employers’ Accounting for Pensions (“FAS 87”), which specifies that certain
key actuarial assumptions be adjusted annually to reflect current, rather than long-term, trends in
the economy. The Corporation’s other postretirement benefits comply with Statement of Financial
Accounting Standards No. 106, Employers’ Accounting for Postretirement Benefits Other than Pensions
(“FAS 106”), which requires the cost of providing post-retirement benefits to be recognized over an
employee’s service period. Further, the Corporation’s defined benefit retirement plans and other
postretirement benefits comply with Statement of Financial Accounting Standards No. 132(R),
Employers’ Disclosures About Pensions and Other Postretirement Benefits (“FAS 132(R)”), as revised,
which establishes rules for financial reporting.
On December 31, 2006, the Corporation adopted the recognition and disclosure provisions of
Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FAS 87, 88, 106 and 132(R) (“FAS 158”). FAS
158 required the Corporation to recognize 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 in the December 31,
2006 consolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive
earnings or loss, net of tax. The adjustment to accumulated other comprehensive earnings or loss at
adoption represents the net unrecognized actuarial gains or losses, any unrecognized prior service
costs and any unrecognized transition obligations remaining from the initial adoption of FAS 87 and
FAS 106, all of which were previously netted against a plan’s funded status in the Corporation’s
consolidated balance sheet pursuant to the provisions of FAS 87 and FAS 106. These amounts will be
subsequently recognized as a component of net periodic benefit cost pursuant to the Corporation’s
historical accounting policy for amortizing such amounts. Further, actuarial gains or losses that
arise in subsequent periods are not recognized as net periodic benefit cost in the same periods,
but rather will be recognized as a component of other comprehensive earnings or loss. Those amounts
will be subsequently recognized as a component of net periodic benefit cost. Finally, FAS 158
requires an employer to measure plan assets and benefit obligations as of the date of the
employer’s balance sheet. The measurement date requirement is effective for fiscal years ending
after December 15, 2008. The Corporation currently uses an annual measurement date of November 30.
The adoption of FAS 158 had no impact on the Corporation’s consolidated statements of earnings or
cash flows for the year ended December 31, 2006 or for any prior periods presented and will not
affect the Corporation’s operating results in future periods. The incremental effects of adopting
the recognition and disclosure provisions of FAS 158 on the Corporation’s consolidated balance
sheet at December 31, 2006 are presented in the following table. Prior to adopting FAS 158 at
December 31, 2006, the Corporation recognized an additional minimum pension liability pursuant to
the provisions of FAS 87. The effect of recognizing this additional minimum pension liability is
included in the table below in the column labeled “Prior to Adopting FAS 158.”
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page nineteen
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
| Prior to | Effect of | As Reported at | ||||||||||
| Adopting | Adopting | December 31, | ||||||||||
| (add 000) | FAS 158 | FAS 158 | 2006 | |||||||||
Intangible pension asset |
$ | 5,589 | $ | (5,589 | ) | $ — | ||||||
Accrued pension liability |
$ | 22,134 | $ | 35,923 | $ 58,057 | |||||||
Accrued postretirement
liability |
$ | 60,766 | $ | (7,735 | ) | $ 53,031 | ||||||
Noncurrent deferred
income taxes |
$ | 172,453 | $ | (13,359 | ) | $159,094 | ||||||
Accumulated other
comprehensive loss |
$ | 15,633 | $ | 20,418 | $ 36,051 | |||||||
In addition to changes in the fair value of forward starting swap agreements and foreign
currency translation adjustments, accumulated other comprehensive loss at December 31, 2006
included the following amounts that have not yet been recognized in net periodic benefit costs
related to the Corporation’s pension plans: unrecognized transition asset of $17,000 ($11,000 net
of tax); unrecognized prior service costs of $5,606,000 ($3,389,000 net of tax) and unrecognized
actuarial losses of $63,836,000 ($38,589,000 net of tax). Further, accumulated other comprehensive
loss at December 31, 2006 included the following amounts for the Corporation’s other postretirement
benefits that have not yet been recognized in net periodic benefit costs: unrecognized prior
service credit of $11,030,000 ($6,668,000 net of tax) and unrecognized actuarial losses of
$3,295,000 ($1,992,000 net of tax).
Stock-Based Compensation. The Corporation has stock-based compensation plans for employees and
directors. Effective January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)”) to account for these plans.
FAS 123(R) requires all forms of share-based payments to employees, including stock options, to be
recognized as compensation expense. The compensation expense is the fair value of the awards at the
measurement date. Further, FAS 123(R) requires compensation cost to be recognized over the
requisite service period for all awards granted subsequent to adoption. As required by FAS 123(R),
the Corporation will continue to recognize compensation cost over the explicit vesting period for
all unvested awards as of January 1, 2006, with acceleration for any remaining unrecognized
compensation cost if an employee retires prior to the end of the vesting period.
The Corporation adopted the provisions of FAS 123(R) using the modified prospective transition
method, which recognizes stock option awards as compensation expense for unvested awards as of
January 1, 2006 and awards granted or modified subsequent to that date. In accordance with the
modified prospective transition method, the Corporation’s consolidated statements of earnings and
cash flows for the years ended December 31, 2005 and 2004 have not been restated and do not
include the impact of FAS 123(R).
Under FAS 123(R), an entity may elect either the accelerated expense recognition method or a
straight-line recognition method for awards subject to graded vesting based on a service condition.
The Corporation elected to use the accelerated expense recognition method for stock options issued
to employees. The accelerated recognition method requires stock options that vest ratably to be
divided into tranches. The expense for each tranche is allocated to its particular vesting period.
The adoption of FAS 123(R) did not change the Corporation’s accounting for stock-based
compensation related to restricted stock awards, incentive compensation awards and directors’ fees
paid in the form of common stock. The Corporation continues to expense the fair value of these
awards based on the closing price of the Corporation’s common stock on the awards’ respective
grant dates.
The adoption of FAS 123(R) resulted in the recognition of compensation expense for stock options
granted by the Corporation. During the year ended December 31, 2006, the Corporation recognized
$3,201,000 of compensation expense for the May 2006 grant of 168,393 stock options (141,393 to
employees and 27,000 to directors). Of this amount, $885,000 related to directors’ options that
were expensed at the grant date as the options vested immediately. The remaining options are being
expensed over their requisite service periods. With the current forfeiture rate assumptions, total
stock-based compensation expense to be recognized for the May 2006 option grant is $5,397,000, of
which $2,196,000 has yet to be recognized as of December 31, 2006.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
The impact of expensing stock options granted in 2006 and the unvested portion of
outstanding employee stock options at January 1, 2006 affected the Corporation’s results of
operations for the year ended December 31, 2006 as follows:
(add 000, except per share) |
||||
Decreased earnings from continuing
operations before taxes on income by: |
$ | 5,897 | ||
Decreased earnings from continuing
operations and net earnings by: |
$ | 3,564 | ||
Decreased basic and diluted earnings
per share by: |
$ | 0.08 |
Furthermore, FAS 123(R) requires tax benefits attributable to stock-based compensation
transactions to be classified as financing cash flows. Prior to the adoption of FAS 123(R), the
Corporation presented excess tax benefits from stock-based compensation transactions as an
operating cash flow on its consolidated statements of cash flows. The $17,467,000 excess tax
benefit classified as a financing cash flow for the year ended December 31, 2006 would have been
classified as an operating cash inflow had the Corporation not adopted FAS 123(R).
In connection with the adoption of FAS 123(R), the Corporation reclassified $12,339,000 of
stock-based compensation liabilities to additional paid-in-capital, thereby increasing
shareholders’ equity at January 1, 2006.
Prior to January 1, 2006, the Corporation accounted for its stock-based compensation plans under
the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees and Related Interpretations. As the Corporation granted stock options with an exercise
price equal to the market value of the stock on the date of grant, no compensation cost for stock
options granted was recognized in net earnings as reported in the consolidated statements of
earnings prior to adopting FAS 123(R). The following table illustrates the effect on net earnings
and earnings per share if the Corporation had applied the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation:
| years ended December 31 | ||||||||
| (add 000, except per share) | 2005 | 2004 | ||||||
Net earnings, as reported |
$ | 192,666 | $ | 129,163 | ||||
Add: Stock-based compensation
expense included in reported net
earnings, net of related tax effects |
2,147 | 1,244 | ||||||
Deduct: Stock-based compensation
expense determined under fair
value for all awards, net of related
tax effects |
(5,525 | ) | (5,185 | ) | ||||
Pro forma net earnings |
$ | 189,288 | $ | 125,222 | ||||
Earnings per share: |
||||||||
Basic-as reported |
$ | 4.14 | $ | 2.68 | ||||
Basic-pro forma |
$ | 4.07 | $ | 2.60 | ||||
Diluted-as reported |
$ | 4.08 | $ | 2.66 | ||||
Diluted-pro forma |
$ | 4.00 | $ | 2.58 | ||||
The Corporation used the lattice valuation model to determine the fair value of stock option
awards granted under the Corporation’s stock-based compensation plans. The lattice valuation model
takes into account employees’ exercise patterns based on changes in the Corporation’s stock price
and other variables and is considered to result in a more accurate valuation of employee stock
options. The period of time for which options are expected to be outstanding, or expected term of
the option, is a derived output of the lattice valuation model. The Corporation considers the
following factors when estimating the expected term of options: vesting period of the award,
expected volatility of the underlying stock, employees’ ages and external data. Other key
assumptions used in determining the fair value of the stock options awarded in 2006, 2005 and 2004
were:
| 2006 | 2005 | 2004 | ||||||||||
Risk-free interest rate |
4.92 | % | 3.80 | % | 4.00 | % | ||||||
Dividend yield |
1.10 | % | 1.60 | % | 1.68 | % | ||||||
Volatility factor |
31.20 | % | 30.80 | % | 26.10 | % | ||||||
Expected term |
6.9 years | 6.3 years | 6.6 years | |||||||||
Based on these assumptions, the weighted-average fair value of each stock option granted was
$33.21, $18.72 and $11.00 for 2006, 2005 and 2004, respectively.
The risk-free interest rate reflects the interest rate on zero-coupon U.S. government bonds
available at the time each option was granted having a remaining life approximately equal to the
option’s expected life. The
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-one
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
dividend yield represents the dividend rate expected to be paid over the option’s
expected life and is based on the Corporation’s historical dividend payments and targeted dividend
pattern. The Corporation’s volatility factor measures the amount by which its stock price is
expected to fluctuate during the expected life of the option and is based on historical stock price
changes. Additionally, FAS 123(R) requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The
Corporation estimated forfeitures and will ultimately recognize compensation cost only for those
stock-based awards that vest.
Environmental Matters. The Corporation accounts for asset retirement obligations in accordance with
Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations
(“FAS 143”) and Related Interpretations. In accordance with FAS 143, a liability for an asset
retirement obligation is recorded 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.
Further, the Corporation 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. 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 tax assets and liabilities 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.
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.
Research and Development Costs. Research and development costs are charged to operations as
incurred.
Start-Up Costs. Preoperating costs and noncapital start-up costs for new facilities and products
are charged to operations as incurred.
Comprehensive Earnings. Comprehensive earnings for the Corporation consist of net earnings, foreign
currency translation adjustments, changes in the fair value of forward starting interest rate swap
agreements and adjustments to the minimum pension liability.
The components of accumulated other comprehensive loss consist of the following at December 31:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
FAS 158 reclassifications |
$ | (37,291 | ) | $ | — | $ | — | |||||
Foreign currency
translation gains |
2,419 | — | — | |||||||||
Changes in fair value of
forward starting interest
rate swap agreements |
(1,179 | ) | — | — | ||||||||
Minimum pension liability |
— | (15,325 | ) | (8,970 | ) | |||||||
Accumulated other
comprehensive loss |
$ | (36,051 | ) | $ | (15,325 | ) | $ | (8,970 | ) | |||
FAS 158 reclassifications represent unrecognized actuarial losses, prior service costs and
transition assets for the adoption of FAS 158. The FAS 158 reclassifications and changes in fair
value of forward starting interest rate swap agreements at December 31, 2006 are net of noncurrent
deferred tax assets of $24,399,000 and $772,000, respectively. The minimum pension liability at
December 31, 2005 and 2004 is net of deferred tax assets of $10,027,000 and $5,869,000,
respectively.
Earnings Per Common Share. Basic earnings per common share are based on the weighted-average number
of common shares outstanding during the year. 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 to be issued to employees and nonemployee members of the
Corporation’s Board of Directors under certain stock-based compensation arrangements. The diluted
per-share computations reflect a change in the number of common shares outstanding (the
“denominator”) to include
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-two
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
the number of additional shares that would have been outstanding if the potentially
dilutive common shares had been issued. For each year presented in the Corporation’s consolidated
statements of earnings, the net earnings available to common shareholders (the “numerator”) is the
same for both basic and dilutive per-share computations.
Accounting Changes. Effective January 1, 2006, the Corporation adopted Emerging Issues Task Force
Issue 04-06, Accounting for Stripping Costs in the Mining Industry (“EITF 04-06”). EITF 04-06
clarifies that post-production stripping costs, which represent costs of removing overburden and
waste materials to access mineral deposits, should be considered costs of the extracted minerals
under a full absorption costing system and recorded as a component of inventory to be recognized
in costs of sales in the same period as the revenue from the sale of the inventory. Prior to the
adoption of EITF 04-06, the Corporation capitalized certain post-production stripping costs and
amortized these costs over the lesser of half of the life of the uncovered reserve or 5 years. In
connection with the adoption of EITF 04-06, the Corporation wrote off $8,148,000 of capitalized
post-production stripping costs previously reported as other noncurrent assets and a related
deferred tax liability of $3,219,000, thereby reducing retained earnings by approximately
$4,929,000 at January 1, 2006.
The Corporation adopted Statement of Financial Accounting Standards No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 (“FAS 151”), on January 1, 2006. The amendments made by FAS 151
clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted
materials should be recognized as current-period charges and require the allocation of fixed
production overhead to inventory to be based on the normal capacity of the underlying production
facilities. The adoption of FAS 151 did not impact the Corporation’s net earnings or financial
position.
In September 2006, the U.S. Securities and Exchange Commission published Staff Accounting Bulletin
No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements (“SAB 108”). SAB 108 provides guidance on quantifying and
evaluating the materiality of unrecorded
misstatements. For corrections of errors that were properly determined to be immaterial prior to
its adoption, SAB 108 permits an entity to record the correcting amount as an adjustment to the
opening balance of assets and liabilities, with an offsetting cumulative effect adjustment to
retained earnings as of the beginning of the year of adoption. The Corporation adopted SAB 108 for
the year ended December 31, 2006. The adoption of SAB 108 did not impact the Corporation’s
financial position.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertain Tax Positions, an
Interpretation of FAS 109 (“FIN 48”), which clarifies the criteria for recognition and measurement
of benefits from uncertain tax positions. Under FIN 48, an entity should recognize a tax benefit
when it is “more-likely-than-not,” based on the technical merits, that the position would be
sustained upon examination by a taxing authority. The amount to be recognized should be measured as
the largest amount of tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement with a taxing authority that has full knowledge of all relevant information.
Furthermore, any change in the recognition, derecognition or measurement of a tax position should
be recognized in the interim period in which the change occurs. FIN 48 is effective January 1, 2007
for the Corporation, and any change in net assets as a result of applying the Interpretation will
be recognized as an adjustment to retained earnings at that date. Management is in the process of
evaluating its uncertain tax positions in accordance with FIN 48 and, at this time, believes that
the adoption of FIN 48 will not have a material adverse effect on the Corporation’s financial
position.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (“FAS 157”). FAS 157 establishes a framework for measuring fair value in generally
accepted accounting principles, clarifies the definition of fair value within that framework and
expands disclosures about the use of fair value measurements. FAS 157 applies to all accounting
pronouncements that require fair value measurements, except for the measurement of share-based
payments. FAS 157 is effective January 1, 2008 for the Corporation. The Corporation
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-three
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
does not expect the adoption of FAS 157 to materially change its current practice of
measuring fair value.
In June 2005, the FASB issued Exposure Draft, Business Combinations, a Replacement of FAS No.
141. In its current form, the exposure draft requires recognizing the full fair value of all
assets acquired, liabilities assumed and non-controlling minority interests in acquisitions of less
than a 100% controlling interest; expensing all acquisition-related transaction and restructuring
costs; capitalizing in-process research and development assets acquired; and recognizing contingent
consideration obligations and contingent gains acquired and contingent losses assumed. The FASB has
indicated that it expects to issue a final standard during 2007 to be applied prospectively to all
business combinations with acquisition dates on or after the effective date, which is still being
deliberated.
Reclassifications. Certain 2005 and 2004 amounts included on the consolidated statements of cash
flows have been reclassed to conform to the 2006 presentation. The reclassifications had no impact
on previously reported net cash provided by or used for operating, investing and financing
activities.
Note B: Intangible Assets
The following table shows the changes in goodwill, all of which relate to the Aggregates business,
by reportable segment and in total for the years ended December 31:
| Mideast | Southeast | West | ||||||||||||||
| Group | Group | Group | Total | |||||||||||||
| (add 000) | 2006 | |||||||||||||||
Balance at beginning of period |
$ | 106,757 | $ | 60,494 | $ | 402,012 | $ | 569,263 | ||||||||
Acquisitions |
— | — | 202 | 202 | ||||||||||||
Adjustments
to purchase
price allocations |
— | — | 1,998 | 1,998 | ||||||||||||
Amounts
allocated to
divestitures |
— | — | (925 | ) | (925 | ) | ||||||||||
Balance at
end of period |
$ | 106,757 | $ | 60,494 | $ | 403,287 | $ | 570,538 | ||||||||
| Mideast | Southeast | West | ||||||||||||||
| Group | Group | Group | Total | |||||||||||||
| (add 000) | 2005 | |||||||||||||||
Balance at beginning of period |
$ | 106,757 | $ | 60,494 | $ | 400,244 | $ | 567,495 | ||||||||
Acquisitions |
— | — | 2,685 | 2,685 | ||||||||||||
Adjustments
to purchase
price allocations |
— | — | 308 | 308 | ||||||||||||
Amounts
allocated to
divestitures |
— | — | (1,225 | ) | (1,225 | ) | ||||||||||
Balance at
end of period |
$ | 106,757 | $ | 60,494 | $ | 402,012 | $ | 569,263 | ||||||||
Intangible assets subject to amortization consist of the following at December 31:
| Gross | Accumulated | Net | ||||||||||
| Amount | Amortization | Balance | ||||||||||
| (add 000) | 2006 | |||||||||||
Noncompetition
agreements |
$ | 16,110 | $(12,033 | ) | $ | 4,077 | ||||||
Trade names |
1,300 | (1,006 | ) | 294 | ||||||||
Supply agreements |
900 | (872 | ) | 28 | ||||||||
Use rights and other |
13,108 | (6,759 | ) | 6,349 | ||||||||
Total |
$ | 31,418 | $(20,670 | ) | $ | 10,748 | ||||||
| 2005 | ||||||||||||
Noncompetition
agreements |
$ | 26,171 | $(20,616 | ) | $ | 5,555 | ||||||
Trade names |
1,800 | (1,042 | ) | 758 | ||||||||
Supply agreements |
900 | (789 | ) | 111 | ||||||||
Use rights and other |
19,072 | (6,952 | ) | 12,120 | ||||||||
Total |
$ | 47,943 | $(29,399 | ) | $ | 18,544 | ||||||
During 2006, the Corporation did not acquire any additional intangible assets. The
Corporation acquired $5,396,000 of equipment use rights during 2005, which are subject to
amortization. The weighted-average amortization period for these use rights is 12.8 years in 2005.
At December 31, 2006 and 2005, the Corporation had water use rights of $200,000 that are deemed to
have an indefinite life and are not being amortized.
During 2006, the Corporation wrote off a licensing agreement related to the structural composites
product line, as the asset had no future use to the Corporation. The write off, which was included
in cost of sales on the consolidated statement of earnings, reduced net earnings by approximately
$460,000, or $0.01 per diluted share.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-four
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
Total amortization expense for intangible assets for the years ended December 31, 2006,
2005 and 2004 was $3,858,000, $3,964,000 and $4,677,000, respectively.
The estimated amortization expense for intangible assets for each of the next five years and
thereafter is as follows:
(add 000) |
||||
2007 |
$ | 1,859 | ||
2008 |
1,356 | |||
2009 |
1,034 | |||
2010 |
924 | |||
2011 |
924 | |||
Thereafter |
4,651 | |||
Total |
$ | 10,748 | ||
Note C: Business Combinations and Divestitures
Effective January 1, 2005, the Corporation formed a joint venture with Hunt Midwest Enterprises
(“Hunt Midwest”) to operate substantially all of the aggregates facilities of both companies in
Kansas City and surrounding areas. The joint venture company, Hunt Martin Materials LLC, is 50%
owned by each party. The Corporation consolidated the financial statements of the joint venture
effective January 1, 2005 and includes minority interest for the net assets attributable to Hunt
Midwest in other noncurrent liabilities. In the Corporation’s consolidated financial statements,
the assets contributed by Hunt Midwest were recorded at their fair value on the date of
contribution to the joint venture, while assets contributed by the Corporation continued to be
recorded at historical cost. The terms of the joint venture agreement provide that the Corporation
will operate as the managing partner and receive a management fee based on tons sold. Additionally,
pursuant to the joint venture agreement, the Corporation has provided a $7,000,000 revolving credit
facility for working capital purposes and a term loan that provides up to $26,000,000 for a capital
project. Any outstanding borrowings under these agreements are eliminated in the Corporation’s
consolidated financial statements. The joint venture has a term of fifty years with certain
purchase rights provided to the Corporation and Hunt Midwest.
In 2006, the Corporation disposed of or permanently shut down various underperforming operations in
the following markets:
Reportable Segment
|
Markets | |
Mideast Group
|
Ohio | |
Southeast Group
|
Alabama and Louisiana | |
West Group
|
Arkansas, Kansas, Missouri, | |
| Texas and Washington | ||
These divestitures represent discontinued operations, and, therefore, the results of their
operations through the dates of disposal and any gain or loss on disposals are included in
discontinued operations on the consolidated statements of earnings.
The discontinued operations included the following net sales, pretax loss on operations, pretax
gain or loss on disposals, income tax expense or benefit and overall net earnings or loss:
| years ended December 31 | ||||||||||||
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Net sales |
$ | 4,196 | $ | 15,950 | $ | 51,228 | ||||||
| |
||||||||||||
Pretax loss on operations |
$ | (262 | ) | $ | (3,676 | ) | $ | (6,862 | ) | |||
Pretax gain (loss) on disposals |
3,057 | (900 | ) | 6,727 | ||||||||
Pretax gain (loss) |
2,795 | (4,576 | ) | (135 | ) | |||||||
Income tax expense (benefit) |
1,177 | (1,529 | ) | 917 | ||||||||
Net earnings (loss) |
$ | 1,618 | $ | (3,047 | ) | $ | (1,052 | ) | ||||
On October 29, 2004, the Corporation divested certain asphalt plants in the Houston, Texas
area. In connection with the divestiture, the Corporation entered into a supply agreement to sell
aggregates to the buyer at market rates. The divestiture is included in continuing operations
because of the Corporation’s continuing financial interest in the Houston asphalt market.
Note D: Accounts Receivable, Net
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Customer receivables |
$ | 242,497 | $ | 225,039 | ||||
Other current receivables |
4,807 | 5,518 | ||||||
| 247,304 | 230,557 | |||||||
Less allowances |
(4,905 | ) | (5,545 | ) | ||||
Total |
$ | 242,399 | $ | 225,012 | ||||
Bad debt expense was $300,000, $1,855,000 and $3,574,000 in 2006, 2005 and 2004, respectively,
and is recorded in other operating income and expenses, net, on the consolidated statements of
earnings.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-five
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
Note E: Inventories, Net
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Finished products |
$ | 213,302 | $ | 185,681 | ||||
Products in process and raw
materials |
19,271 | 17,990 | ||||||
Supplies and expendable parts |
37,935 | 31,158 | ||||||
| 270,508 | 234,829 | |||||||
Less allowances |
(14,221 | ) | (12,101 | ) | ||||
Total |
$ | 256,287 | $ | 222,728 | ||||
During 2006 and 2005, the Corporation reserved certain inventories related to its structural
composites product line. The charges reduced net earnings by approximately $664,000, or $0.01 per
diluted share, for 2006, and approximately $2,877,000, or $0.06 per diluted share, for 2005.
Note F: Property, Plant and Equipment, Net
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Land and improvements |
$ | 379,925 | $ | 317,803 | ||||
Mineral reserves |
186,001 | 190,914 | ||||||
Buildings |
93,310 | 87,748 | ||||||
Machinery and equipment |
2,000,880 | 1,781,990 | ||||||
Construction in progress |
79,211 | 123,319 | ||||||
| 2,739,327 | 2,501,774 | |||||||
Less allowances for depreciation,
depletion and amortization |
(1,443,836 | ) | (1,335,423 | ) | ||||
Total |
$ | 1,295,491 | $ | 1,166,351 | ||||
At December 31, 2006 and 2005, the net carrying value of mineral reserves was $131,249,000
and $139,212,000, respectively.
The gross asset values and related accumulated amortization for machinery and equipment recorded
under capital leases at December 31 were as follows:
| (add 000) | 2006 | 2005 | ||||||
Machinery and equipment under capital
leases |
$ | 1,014 | $ | 740 | ||||
Less accumulated amortization |
(231 | ) | (81 | ) | ||||
Total |
$ | 783 | $ | 659 | ||||
Depreciation, depletion and amortization expense related to property, plant and equipment was
$136,866,000, $133,593,000 and $127,496,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.
Interest cost of $5,420,000, $3,045,000 and $1,101,000 was capitalized during 2006, 2005 and
2004, respectively.
At December 31, 2006 and 2005, $80,887,000 and $82,399,000, respectively, of the Corporation’s net
fixed assets were located in foreign countries, namely the Bahamas and Canada.
Note G: Long-Term Debt
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
6.875% Notes, due 2011 |
$ | 249,829 | $ | 249,800 | ||||
5.875% Notes, due 2008 |
204,224 | 206,277 | ||||||
6.9% Notes, due 2007 |
124,995 | 124,988 | ||||||
7% Debentures, due 2025 |
124,312 | 124,295 | ||||||
Line of credit, interest rate of 5.83% |
537 | — | ||||||
Acquisition notes, interest rates
ranging from 2.11% to 8.00% |
702 | 3,657 | ||||||
Other notes |
665 | 1,005 | ||||||
Total |
705,264 | 710,022 | ||||||
Less current maturities |
(125,956 | ) | (863 | ) | ||||
Long-term debt |
$ | 579,308 | $ | 709,159 | ||||
All Notes and Debentures are carried net of original issue discount, which is being amortized
by the effective interest method over the life of the issue. None are redeemable prior to their
respective maturity dates. The principal amount, effective interest rate and maturity date for the
Corporation’s Notes and Debentures are as follows:
| Principal | ||||||||||||
| Amount | Effective | Maturity | ||||||||||
| (add 000) | Interest Rate | Date | ||||||||||
6.875% Notes |
$ | 249,975 | 6.98% | April 1, 2011 | ||||||||
5.875% Notes |
$ | 200,000 | 6.03% | December 1, 2008 | ||||||||
6.9% Notes |
$ | 125,000 | 7.00% | August 15, 2007 | ||||||||
7% Debentures |
$ | 125,000 | 7.12% | December 1, 2025 | ||||||||
At December 31, 2006 and 2005, the unamortized value of terminated interest rate swaps was
$4,469,000 and $6,640,000, respectively, and was included in the carrying values of the Notes due
in 2008. The accretion of the unamortized value of terminated swaps will decrease annual interest
expense by approximately $2,200,000 until the maturity of the Notes in 2008.
In September 2006, the Corporation entered into two forward starting interest rate swap agreements
(the “Swap Agreements”) with a total notional amount of
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-six
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
$150,000,000. Each of the two Swap Agreements covers $75,000,000 of principal. The Swap
Agreements locked in at 5.42% the interest rate relative to LIBOR related to $150,000,000 of the
Corporation’s anticipated refinancing of its $200,000,000 5.875% Notes due in 2008. Each of the
Swap Agreements provides for a single payment at its mandatory termination date, December 1, 2008.
If the LIBOR swap rate increases above 5.42% at the mandatory termination date, the Corporation
will receive a payment from each of the counterparties based on the notional amount of each
agreement over an assumed 10-year period. If the LIBOR swap rate falls below 5.42% at the mandatory
termination date, the Corporation will be obligated to make a payment to each of the counterparties
on the same basis. In accordance with FAS 133, the fair values of the Swap Agreements are recorded
as an asset or liability in the consolidated balance sheet. The change in fair value is recorded
net of tax directly in shareholders’ equity as other comprehensive earnings/loss. At December 31,
2006, the fair value of the Swap Agreements was a liability of $1,951,000 and was included in other
noncurrent liabilities in the Corporation’s consolidated balance sheet with a corresponding loss of
$1,179,000, net of a deferred tax asset of $772,000, recorded in other comprehensive earnings/loss.
The Corporation has a $250,000,000 five-year revolving credit agreement (the “Credit Agreement”),
which is syndicated with a group of domestic and foreign commercial banks. In June 2006, the
Corporation extended the expiration date of the Credit Agreement by one year to June 30, 2011.
Borrowings under the Credit Agreement are unsecured and bear interest, at the Corporation’s
options, at rates based upon: (1) the Eurodollar rate (as defined on the basis of LIBOR) plus basis
points related to a pricing grid; (ii) a bank base rate (as defined on the basis of a published
prime rate or the Federal Funds Rate plus 1/2 of 1%); or (iii) a competitively determined rate (as
defined on the basis of a bidding process). The Credit Agreement contains restrictive covenants
relating to the Corporation’s debt-to-capitalization ratio, requirements for limitations on
encumbrances and provisions that relate to certain changes in control. Available borrowings under
the Credit Agreement are reduced by any outstanding letters of credit issued by the Corporation
under the Credit Agreement. At December 31, 2006, the Corporation had
$1,650,000 of outstanding letters of credit issued under the Credit Agreement. No outstanding
letters of credit were issued under the Credit Agreement at December 31, 2005. The Corporation pays
an annual loan commitment fee to the bank group. No borrowings were outstanding under the Credit
Agreement at December 31, 2006 and 2005.
The Credit Agreement supports a $250,000,000 commercial paper program. No borrowings were
outstanding under the commercial paper program at December 31, 2006 or 2005.
At December 31, 2006, $537,000 was outstanding under a $10,000,000 line of credit. No borrowings
were outstanding under the line of credit at December 31, 2005.
Excluding the unamortized value of the terminated interest rate swaps, the Corporation’s long-term
debt maturities for the five years following December 31, 2006, and thereafter are:
(add 000) |
||||
2007 |
$ | 125,956 | ||
2008 |
199,913 | |||
2009 |
50 | |||
2010 |
52 | |||
2011 |
249,883 | |||
Thereafter |
124,941 | |||
Total |
$ | 700,795 | ||
Note H: Financial Instruments
In addition to publicly registered long-term notes and debentures and the Swap Agreements, the
Corporation’s financial instruments include temporary cash investments, investments, accounts
receivable, notes receivable, bank overdraft and other long-term debt.
Temporary cash investments are placed with creditworthy financial institutions, primarily in money
market funds and Euro-time deposits. The Corporation’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.
The Corporation did not hold any investments at December 31, 2006. At December 31, 2005,
investments were comprised of variable rate demand notes and were remarketed
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-seven
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
with creditworthy financial institutions. As these available-for-sale securities were
redeemable with 7-day written notice, their estimated fair values approximated their carrying
amounts.
Customer receivables are due from a large number of customers, primarily in the construction
industry, and are dispersed across wide geographic and economic regions. However, customer
receivables are more heavily concentrated in certain states (see Note A). The estimated fair values
of customer receivables approximate their carrying amounts.
Notes receivable are primarily related to divestitures and are not publicly traded. However, using
current market interest rates, but excluding adjustments for credit worthiness, if any, management
estimates that the fair value of notes receivable approximates its carrying amount. At December 31,
2005, the Corporation had a note receivable related to one divestiture with a carrying value of
$12,507,000. The Corporation received full repayment of the note in 2006.
The bank overdraft represents the float of outstanding checks. The estimated fair value of the bank
overdraft approximates its carrying value.
The estimated fair value of the Corporation’s publicly registered long-term notes and debentures at
December 31, 2006 was approximately $722,219,000, compared with a carrying amount of $698,891,000
on the consolidated balance sheet. The estimated fair value and carrying amount exclude the impact
of interest rate swaps. The fair value of this long-term debt was estimated based on quoted market
prices. The estimated fair value of other borrowings of $1,904,000 at December 31, 2006
approximates its carrying amount.
The carrying values and fair values of the Corporation’s financial instruments at December 31 are
as follow:
| 2006 | ||||||||
| (add 000) | Carrying Value | Fair Value | ||||||
Cash and cash equivalents |
$ | 32,282 | $ | 32,282 | ||||
Accounts receivable, net |
$ | 242,399 | $ | 242,399 | ||||
Notes receivable |
$ | 12,876 | $ | 12,876 | ||||
Bank overdraft |
$ | 8,390 | $ | 8,390 | ||||
Long-term debt, excluding
interest rate swaps |
$ | 700,795 | $ | 724,123 | ||||
Swap agreement liabilities |
$ | 1,951 | $ | 1,951 | ||||
| 2005 | ||||||||
| (add 000) | Carrying Value | Fair Value | ||||||
Cash and cash equivalents |
$ | 76,745 | $ | 76,745 | ||||
Investments |
$ | 25,000 | $ | 25,000 | ||||
Accounts receivable, net |
$ | 225,012 | $ | 225,012 | ||||
Notes receivable |
$ | 32,964 | $ | 32,964 | ||||
Bank overdraft |
$ | 7,290 | $ | 7,290 | ||||
Long-term debt, excluding
interest rate swaps |
$ | 703,382 | $ | 749,012 | ||||
Note I: Income Taxes
The components of the Corporation’s tax expense (benefit) on income from continuing operations are
as follows:
| years ended December 31 | ||||||||||||
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Federal income taxes: |
||||||||||||
Current |
$ | 79,385 | $ | 54,141 | $ | 10,112 | ||||||
Deferred |
13,047 | 7,654 | 36,364 | |||||||||
Total federal income taxes |
92,432 | 61,795 | 46,476 | |||||||||
State income taxes: |
||||||||||||
Current |
9,431 | 11,916 | 7,766 | |||||||||
Deferred |
4,055 | (1,839 | ) | 1,821 | ||||||||
Total state income taxes |
13,486 | 10,077 | 9,587 | |||||||||
Foreign income taxes: |
||||||||||||
Current |
669 | 788 | 992 | |||||||||
Deferred |
53 | 21 | 684 | |||||||||
Total foreign income taxes |
722 | 809 | 1,676 | |||||||||
Total provision |
$ | 106,640 | $ | 72,681 | $ | 57,739 | ||||||
For the years ended December 31, 2006, 2005 and 2004, income tax benefits attributable to
stock-based compensation transactions that were recorded to shareholders’ equity amounted to
$24,112,000, $15,337,000 and $1,045,000, respectively.
The Corporation’s effective income tax rate on continuing operations varied from the statutory
United States income tax rate because of the following permanent tax differences:
| years ended December 31 | 2006 | 2005 | 2004 | |||||||||
Statutory tax rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (reduction) resulting from: |
||||||||||||
Effect of statutory depletion |
(6.4 | ) | (8.4 | ) | (8.0 | ) | ||||||
State income taxes |
1.8 | 2.1 | 0.2 | |||||||||
Valuation allowance for state
loss carryforwards |
0.3 | 0.3 | 3.0 | |||||||||
Tax reserves |
0.1 | (1.4 | ) | 0.4 | ||||||||
Goodwill write offs |
— | — | 1.2 | |||||||||
Effect of foreign operations |
(0.9 | ) | (0.4 | ) | — | |||||||
Other items |
0.5 | (0.1 | ) | (1.1 | ) | |||||||
Effective tax rate |
30.4 | % | 27.1 | % | 30.7 | % | ||||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-eight
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
The principal components of the Corporation’s deferred tax assets and liabilities at
December 31 are as follows:
| Deferred | ||||||||
| Assets (Liabilities) | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Property, plant and equipment |
$ | (187,913 | ) | $ | (180,870 | ) | ||
Goodwill and other intangibles |
(24,725 | ) | (21,207 | ) | ||||
Employee benefits |
35,384 | 36,516 | ||||||
Valuation and other reserves |
13,896 | 14,937 | ||||||
Inventories |
4,966 | 7,058 | ||||||
Net operating loss carryforwards |
7,194 | 6,910 | ||||||
Valuation allowance on deferred tax assets |
(6,821 | ) | (6,323 | ) | ||||
Other items, net |
(929 | ) | (2,031 | ) | ||||
Total |
$ | (158,948 | ) | $ | (145,010 | ) | ||
Additionally, the Corporation had a net deferred tax asset of $25,171,000 for certain items
recorded in accumulated other comprehensive loss at December 31, 2006 and a deferred tax asset of
$10,027,000 related to its minimum pension liability at December 31, 2005.
Deferred tax liabilities for property, plant and equipment result from accelerated depreciation
methods being used for income tax purposes as compared with the straight-line method for financial
reporting purposes.
Deferred tax liabilities related to goodwill and other intangibles reflect the cessation of
goodwill amortization for financial reporting purposes pursuant to FAS 142, while amortization
continues for income tax purposes.
Deferred tax assets for employee benefits result from the timing differences of the deductions for
pension and postretirement obligations. For financial reporting purposes, such amounts are expensed
in accordance with FAS 87. For income tax purposes, such amounts are deductible as funded.
The Corporation had net operating loss carryforwards of $112,720,000 and $112,803,000 at December
31, 2006 and 2005, respectively. These losses have various expiration dates. At December 31, 2006
and 2005, respectively, the deferred tax assets associated with these losses were $7,195,000 and
$6,910,000, for which valuation allowances of $6,821,000 and $6,323,000 were recorded.
The Internal Revenue Service began an audit of the Corporation’s consolidated federal tax
returns for the
years ended December 31, 2005 and 2004 during the fourth quarter of 2006. The Corporation has
established $9,169,000 and $10,350,000 of reserves for taxes at December 31, 2006 and 2005,
respectively, that may become payable as a result of such examinations by tax authorities. The
reserves, which are included in current income taxes payable on the consolidated balance sheets,
primarily relate to federal tax treatment of percentage depletion deductions, legal entity
transaction structuring, transfer pricing, state tax treatment of federal bonus depreciation
deductions and executive compensation. The reserves are calculated based on probable exposures to
additional tax payments to federal and state tax authorities. Tax reserves are reversed as a
discrete event if an examination of applicable tax returns is not begun by a federal or state tax
authority within the statute of limitations or upon completion of an audit by federal or state tax
authorities. Management believes these reserves are sufficient to cover any uncertain tax positions
reviewed during any audit by taxing authorities.
For the year ended December 31, 2006, reserves of $2,700,000, or $0.06 per diluted share, were
reversed into income when the statute of limitations for federal examination of the 2002 tax year
expired. For the year ended December 31, 2005, reserves of $5,900,000, or $0.12 per diluted share,
were reversed into income when the statute of limitations for federal examination of the 2001 tax
year expired.
In June 2005, the state of Ohio enacted tax reform legislation (the “Ohio Tax Act”) that reduces
state taxes paid by the Corporation related to its Ohio operations. The Ohio Tax Act phases out the
income/franchise tax over a five-year period that commenced in 2005. Over this same period, the
Ohio Tax Act phases in a new commercial activities tax levied on gross receipts. Other provisions
of the Ohio Tax Act that impact the Corporation are the elimination of personal property tax for
certain new manufacturing equipment purchased after 2004 and the phase-out of personal property tax
on existing manufacturing equipment and inventory over a four-year period that commenced in 2005.
The signing of the Ohio Tax Act represented a change in tax law. In accordance with FAS 109, the
effect of the law change should be reflected in earnings in the period that included the date of
enact-
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page twenty-nine
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
ment. Accordingly, the Corporation repriced its Ohio-related deferred tax liabilities to
reflect the income tax changes. The estimated impact of the Ohio Tax Act on the Corporation’s taxes
for the year ended December 31, 2005 resulted in an increase to net earnings of $1,202,000, or
$0.02 per diluted share.
The American Jobs Creation Act of 2004 (the “Act”) created a new tax deduction related to income
from domestic (i.e., United States) production activities. This provision, when fully phased in,
will permit a deduction equal to 9 percent of a company’s Qualified Production Activities Income
(“QPAI”) or its taxable income, whichever is lower. The deduction is further limited to the lower
of 50% of the W-2 wages paid by the Corporation during the year. QPAI includes, among other things,
income from domestic manufacture, production, growth or extraction of tangible personal property.
For 2005 and 2006, the deduction is equal to 3 percent of QPAI, increasing to 6 percent for 2007
through 2009, and reaching the full 9 percent deduction in 2010. The production deduction benefit
of the legislation reduced income tax expense and increased net
earnings by $2,263,000, or $0.05
per diluted share, in 2006 and $2,300,000, or $0.05 per diluted share, in 2005.
Note J: Retirement Plans, Postretirement and Postemployment Benefits
The Corporation sponsors defined benefit retirement plans that cover substantially all employees.
Additionally, the Corporation provides other postretirement benefits for certain employees,
including medical benefits for retirees and their spouses, Medicare Part B reimbursement
and retiree life insurance. The Corporation also provides certain benefits to former or inactive
employees after employment but before retirement, such as workers’ compensation and disability
benefits.
The measurement date for the Corporation’s defined benefit plans, postretirement benefit plans and
postemployment benefit plans is November 30.
Defined Benefit Retirement Plans. The assets of the Corporation’s retirement plans are held in the
Corporation’s Master Retirement Trust and are invested in listed stocks, bonds 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 Corporation 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 provided by the SERP.
The net periodic retirement benefit cost of defined benefit plans included the following
components:
| years ended December 31 | ||||||||||||
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Components of net periodic
benefit cost: |
||||||||||||
Service cost |
$ | 12,225 | $ | 10,878 | $ | 10,434 | ||||||
Interest cost |
18,112 | 16,472 | 15,513 | |||||||||
Expected return on assets |
(19,638 | ) | (17,713 | ) | (16,377 | ) | ||||||
Amortization of: |
||||||||||||
Prior service cost |
742 | 662 | 599 | |||||||||
Actuarial loss |
2,860 | 2,100 | 1,309 | |||||||||
Transition asset |
(1 | ) | (1 | ) | (1 | ) | ||||||
Net periodic benefit cost |
$ | 14,300 | $ | 12,398 | $ | 11,477 | ||||||
The prior service cost, actuarial loss and transition asset expected to be recognized in net
periodic benefit cost during 2007 are $688,000, $3,416,000 and $1,000, respectively, and are
included in accumulated other comprehensive loss. At December 31, 2006, the prior service cost and
actuarial loss components recorded in accumulated other comprehensive loss were net of deferred tax
assets of $272,000 and $1,351,000, respectively.
The defined benefit plans’ change in projected benefit obligation, change in plan assets, funded
status and amounts recognized in the Corporation’s consolidated balance sheets are as follows:
| years ended December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Change in projected benefit obligation: |
||||||||
Net projected benefit obligation
at beginning of year |
$ | 302,581 | $ | 267,496 | ||||
Service cost |
12,225 | 10,878 | ||||||
Interest cost |
18,112 | 16,472 | ||||||
Actuarial loss |
8,919 | 16,780 | ||||||
Plan amendments |
1,585 | 1,401 | ||||||
Gross benefits paid |
(10,319 | ) | (10,446 | ) | ||||
Net projected benefit obligation
at end of year |
$ | 333,103 | $ | 302,581 | ||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page thirty
N O T E S T O
F I N A N C I A L S T A T E M E N T S
( C O N T I N U E D )
| years ended December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets
at beginning of year |
$ | 242,859 | $ | 219,402 | ||||
Actual return on plan assets, net |
30,329 | 18,599 | ||||||
Employer contributions |
12,175 | 15,304 | ||||||
Gross benefits paid |
(10,319 | ) | (10,446 | ) | ||||
Fair value of plan assets at end of year |
$ | 275,044 | $ | 242,859 | ||||
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Funded status of the plan at end
of year |
$ | (58,059 | ) | $ | (59,722 | ) | ||
Unrecognized net actuarial loss |
— | 68,469 | ||||||
Unrecognized prior service cost |
— | 4,762 | ||||||
Unrecognized net transition asset |
— | (18 | ) | |||||
Minimum pension liability |
— | (30,096 | ) | |||||
Net accrued benefit cost at
measurement date |
(58,059 | ) | (16,605 | ) | ||||
Employer contributions subsequent
to measurement date |
2 | 43 | ||||||
Net accrued benefit cost |
$ | (58,057 | ) | $ | (16,562 | ) | ||
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Amounts recognized in consolidated
balance sheets consist of: |
||||||||
Current liability |
$ | (2,100 | ) | $ | (200 | ) | ||
Noncurrent liability |
(55,957 | ) | (8,121 | ) | ||||
Current asset |
— | 12,000 | ||||||
Noncurrent asset |
— | 9,855 | ||||||
Accrued minimum pension liability |
— | (30,096 | ) | |||||
Net amount recognized at end of
year |
$ | (58,057 | ) | $ | (16,562 | ) | ||
The Corporation recorded an intangible asset of $4,744,000 and accumulated other comprehensive
loss, net of applicable taxes, of $15,325,000 at December 31, 2005 related to the minimum pension
liability. The intangible asset was included in other noncurrent assets.
The accumulated benefit obligation for all defined benefit pension plans was $296,817,000 and
$259,459,000 at December 31, 2006 and 2005, respectively.
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan assets were $333,103,000,
$296,817,000 and $274,429,000, respectively, at December 31, 2006 and $301,967,000, $259,019,000
and $242,248,000, respectively, at December 31, 2005.
Weighted-average assumptions used to determine benefit obligations as of December 31 are:
| 2006 | 2005 | |||||||
Discount rate |
5.70 | % | 5.83 | % | ||||
Rate of increase in future
compensation levels |
5.00 | % | 5.00 | % | ||||
Weighted-average assumptions used to determine net periodic retirement benefit cost for years ended
December 31 are:
| 2006 | 2005 | 2004 | ||||||||||
Discount rate |
5.83 | % | 6.00 | % | 6.25 | % | ||||||
Rate of increase in future
compensation levels |
5.00 | % | 5.00 | % | 5.00 | % | ||||||
Expected long-term rate of
return on assets |
8.25 | % | 8.25 | % | 8.25 | % | ||||||
The Corporation’s expected long-term rate of return on assets is based on historical rates of
return for a similar mix of invested assets.
At December 31, 2006 and 2005, the Corporation used the RP 2000 Mortality Table to estimate the
remaining lives of participants in the pension plans.
The pension plan asset allocation at December 31, 2006 and 2005 and target allocation for 2007 by
asset category are as follows:
| Percentage of Plan Assets | ||||||||||||
| December 31 | ||||||||||||
| Target | ||||||||||||
| Asset Category | Allocation | 2006 | 2005 | |||||||||
Equity securities |
60 | % | 62 | % | 61 | % | ||||||
Debt securities |
39 | % | 37 | % | 38 | % | ||||||
Cash |
1 | % | 1 | % | 1 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
The Corporation’s investment strategy for pension plan assets is for approximately two-thirds of
the equity investments to be invested in large capitalization funds. The remaining third of the
equity investments is invested in small capitalization and international funds. Fixed income
investments are invested in funds with the objective of exceeding the return of the Lehman
Brothers Aggregate Bond Index.
The Corporation made voluntary contributions of $12,175,000 and $15,304,000 to its pension plan in
2006 and 2005, respectively. The Corporation’s estimate of contributions to its pension and SERP
plans in 2007 is approximately $14,100,000, of which $12,000,000 is voluntary.
Martin
Marietta Materials, Inc. and Consolidated
Subsidiaries page
thirty-one
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
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) | ||||
2007 |
$ | 12,598 | ||
2008 |
$ | 11,353 | ||
2009 |
$ | 12,113 | ||
2010 |
$ | 13,120 | ||
2011 |
$ | 13,775 | ||
Years 2012-2016 |
$ | 86,534 | ||
Postretirement Benefits. The net periodic postretirement benefit cost of postretirement
plans included the following components:
| years ended December 31 | ||||||||||||
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Components of net
periodic benefit cost: |
||||||||||||
Service cost |
$ | 551 | $ | 567 | $ | 656 | ||||||
Interest cost |
2,677 | 2,978 | 3,528 | |||||||||
Amortization of: |
||||||||||||
Prior service credit |
(1,294 | ) | (1,294 | ) | (1,294 | ) | ||||||
Actuarial (gain) loss |
(238 | ) | (147 | ) | 320 | |||||||
Total net periodic benefit cost |
$ | 1,696 | $ | 2,104 | $ | 3,210 | ||||||
The prior service credit and actuarial loss expected to be recognized in net periodic benefit
cost during 2007 are $1,294,000 and $166,000, respectively, and are included in accumulated other
comprehensive loss. At December 31, 2006, the prior service credit and actuarial loss components
recorded in accumulated other comprehensive loss were net of a deferred tax liability of $512,000
and a deferred tax asset of $66,000, respectively.
The postretirement health care plans’ change in benefit obligation, change in plan assets, funded
status and amounts recognized in the Corporation’s consolidated balance sheets are as follows:
| years ended December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Change in benefit obligation: |
||||||||
Net benefit obligation at
beginning of year |
$ | 51,613 | $ | 58,896 | ||||
Service cost |
551 | 567 | ||||||
Interest cost |
2,677 | 2,978 | ||||||
Participants’ contributions |
767 | 727 | ||||||
Actuarial loss (gain) |
2,548 | (7,183 | ) | |||||
Gross benefits paid |
(5,480 | ) | (4,372 | ) | ||||
Federal subsidy on benefits paid |
640 | — | ||||||
Net benefit obligation at end of year |
$ | 53,316 | $ | 51,613 | ||||
| years ended December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets at
beginning of year |
$ | — | $ | — | ||||
Employer contributions |
4,073 | 3,645 | ||||||
Participants’ contributions |
767 | 727 | ||||||
Gross benefits paid |
(5,480 | ) | (4,372 | ) | ||||
Federal subsidy on benefits paid |
640 | — | ||||||
Fair value of plan assets at end of year |
$ | — | $ | — | ||||
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Funded status of the plan at
end of year |
$ | (53,316 | ) | $ | (51,613 | ) | ||
Unrecognized net actuarial loss |
— | 508 | ||||||
Unrecognized
prior service credit |
— | (12,323 | ) | |||||
Accrued benefit cost at measurement date |
(53,316 | ) | (63,428 | ) | ||||
Employer contributions subsequent
to measurement date |
285 | 356 | ||||||
Accrued benefit cost |
$ | (53,031 | ) | $ | (63,072 | ) | ||
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Amounts recognized in consolidated
balance sheets consist of: |
||||||||
Current liability |
$ | (4,000 | ) | $ | (4,000 | ) | ||
Noncurrent liability |
(49,031 | ) | (59,072 | ) | ||||
Net amount recognized at end of year |
$ | (53,031 | ) | $ | (63,072 | ) | ||
In accordance with the Medicare Prescription Drug, Improvement and Modernization Act of 2003,
the Corporation began receiving a non-taxable subsidy from the federal government in 2006 as the
Corporation sponsors prescription drug benefits to retirees that are “actuarially equivalent” to
the Medicare benefit. The Corporation’s postretirement health care plans’ benefit obligation
reflects the effect of the federal subsidy.
Weighted-average assumptions used to determine the postretirement benefit obligations as of
December 31 are:
| 2006 | 2005 | |||||||
Discount rate |
5.63 | % | 5.72 | % | ||||
Weighted-average assumptions used to determine net postretirement benefit cost for the years
ended December 31 are:
| 2006 | 2005 | |||||||
Discount rate |
5.72 | % | 6.00 | % | ||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page thirty-two
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
At December 31, 2006 and 2005, the Corporation used the RP 2000 Mortality Table to
estimate the remaining lives of participants in the postretirement plans.
Assumed health care cost trend rates at December 31 are:
| 2006 | 2005 | |||||||
Health care cost trend rate
assumed for next year |
9.1 | % | 10.0 | % | ||||
Rate to which the cost trend rate
gradually declines |
5.5 | % | 5.5 | % | ||||
Year the rate reaches the ultimate rate |
2013 | 2011 | ||||||
Assumed health care cost trend rates have a significant effect on the amounts reported for the
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 |
$ | 143 | $ | (116 | ) | |||
Postretirement benefit obligation |
$ | 2,846 | $ | (2,319 | ) | |||
The Corporation’s estimate of its contributions to its post-retirement health care plans in
2007 is $4,000,000.
The expected gross benefit payments and expected federal subsidy to be received for each of the
next five years and the five-year period thereafter are as follows:
| Gross Benefit | Expected | |||||||
| (add 000) | Payments | Federal Subsidy | ||||||
2007 |
$ | 4,000 | $ | 518 | ||||
2008 |
$ | 3,541 | $ | 588 | ||||
2009 |
$ | 3,606 | $ | 657 | ||||
2010 |
$ | 3,635 | $ | 736 | ||||
2011 |
$ | 3,596 | $ | 831 | ||||
Years 2012-2016 |
$ | 16,898 | $ | 6,037 | ||||
Defined Contribution Plans. The Corporation maintains
two defined contribution plans that cover substantially all
employees. These plans, intended to be qualified under
Section 401(a) of the Internal Revenue Code, are retirement
savings and investment plans for the Corporation’s
salaried and hourly employees. Under certain provisions
of these plans, the Corporation, at established
rates, matches employees’ eligible contributions. The
Corporation’s matching obligations were $5,215,000 in
2006, $4,969,000 in 2005 and $4,649,000 in 2004.
Postemployment Benefits. The Corporation has accrued postemployment benefits of $1,425,000 at
December 31, 2006 and 2005.
Note K: Stock-Based Compensation
The shareholders approved, on May 23, 2006 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”). The Corporation has been authorized by the Board of
Directors to repurchase shares of the Corporation’s common stock for issuance under the Plans.
Under the Plans, the Corporation grants options to employees to purchase its common stock at a
price equal to the closing market value at the date of grant. The Corporation granted 141,393
employee stock options during 2006. Options granted in 2006 and 2005 become exercisable in four
annual installments beginning one year after date of grant and expire eight years from such date.
Options granted in years prior to 2005 become exercisable in three equal annual installments
beginning one year after date of grant and expire ten years from such date.
The Plans provide that each nonemployee director receives 3,000 non-qualified stock options
annually. During 2006, the Corporation granted 27,000 options to nonemployee directors. These
options have an exercise price equal to the market value at the date of grant, vest immediately and
expire ten years from the grant date.
The following table includes summary information for stock options for employees and nonemployee
directors as of December 31, 2006:
| Weighted- | ||||||||||||||||
| Weighted- | Average | Aggregate | ||||||||||||||
| Average | Remaining | Intrinsic | ||||||||||||||
| Number of | Exercise | Contractual | Value | |||||||||||||
| Options | Price | Life (years) | (add 000) | |||||||||||||
Outstanding at
January 1, 2006 |
2,478,220 | $ | 43.97 | |||||||||||||
Granted |
168,393 | $ | 89.02 | |||||||||||||
Exercised |
(1,163,517 | ) | $ | 42.98 | ||||||||||||
Terminated |
(16,760 | ) | $ | 58.22 | ||||||||||||
Outstanding at
December 31, 2006 |
1,466,336 | $ | 49.78 | 5.8 | $ | 79,376 | ||||||||||
Exercisable at
December 31, 2006 |
1,078,727 | $ | 44.91 | 5.3 | $ | 63,646 | ||||||||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-three
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
The weighted-average grant-date fair value of options granted during 2006, 2005 and
2004 was $89.02, $61.06 and $42.38, respectively. The aggregate intrinsic values of options
exercised during the years ended December 31, 2006, 2005 and 2004 was $58,960,000, $35,912,000 and
$2,391,000, respectively, and were based on the closing prices of the Corporation’s common stock
on the dates of exercise. The aggregate intrinsic value for options outstanding and exercisable at
December 31, 2006 was based on the closing price of the Corporation’s common stock at December 31,
2006, which was $103.91.
Additionally, an incentive 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 Corporation’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 stock plan at certain minimum levels. Participants earn the right to receive their
respective shares at the discounted value 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, with the exception of dividend equivalents that are paid on the
units during the vesting period.
The Corporation grants restricted stock awards under the Plans to a group of executive officers and
key personnel. Certain restricted stock awards are based on specific common stock performance
criteria over a specified period of time. In addition, certain awards were 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.
The following table summarizes information for incentive stock awards and restricted stock awards
as of December 31, 2006:
| Incentive Stock | Restricted Stock | |||||||||||||||
| Weighted- | Weighted- | |||||||||||||||
| Average | Average | |||||||||||||||
| Number of | Grant-Date | Number of | Grant-Date | |||||||||||||
| Awards | Fair Value | Awards | Fair Value | |||||||||||||
January 1, 2006 |
69,855 | 276,712 | ||||||||||||||
Awarded |
27,302 | $ | 91.05 | 119,306 | $ | 88.85 | ||||||||||
Distributed |
(32,341 | ) | (7,813 | ) | ||||||||||||
Forfeited |
(4,064 | ) | (10,158 | ) | ||||||||||||
December 31, 2006 |
60,752 | 378,047 | ||||||||||||||
The weighted-average grant-date fair value of incentive compensation awards granted during
2006, 2005 and 2004 was $91.05, $55.15 and $46.80, respectively. The weighted-average grant-date
fair value of restricted stock awards granted during 2006, 2005 and 2004 was $88.85, $60.63 and
$46.80, respectively. The aggregate intrinsic values for incentive compensation awards and
restricted stock awards at December 31, 2006 were $2,910,000 and $39,283,000, respectively, and
were based on the closing price of the Corporation’s common stock at December 31, 2006, which was
$103.91.
At December 31, 2006, there are approximately 1,378,000 awards available for grant under the
Plans.
In 1996, the Corporation adopted the Shareholder Value Achievement Plan to award shares of the
Corporation’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, 2006, 42,025 shares have been issued under this plan.
No awards have been granted under this plan after 2000.
Also, the Corporation adopted and the shareholders approved the Common Stock Purchase Plan for
Directors in 1996, which provides nonemployee directors the election to receive all or a portion of
their total fees in the form of the Corporation’s common stock. Under the terms of this plan,
300,000 shares of common stock were reserved for issuance. Currently, directors are required to
defer at least 50% of their retainer in the form of the Corporation’s common stock at a 20%
discount to market value. Directors elected to defer portions of their fees representing 7,263,
9,838 and 12,007 shares of the Corporation’s common stock under this plan during 2006, 2005 and
2004, respectively.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-four
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
The following table summarizes stock-based compensation expense for the years ended December
31, 2006, 2005 and 2004, unrecognized compensation cost for nonvested awards at December 31, 2006
and the weighted-average period over which unrecognized compensation cost is expected to be
recognized:
| Incentive | ||||||||||||||||||||
| Restricted | Compen- | |||||||||||||||||||
| Stock | Stock | sation | Directors’ | |||||||||||||||||
| (add 000) | Options | Awards | Awards | Awards | Total | |||||||||||||||
| Stock-based compensation expense recognized for years ended December 31: | ||||||||||||||||||||
2006 |
$ | 5,897 | $ | 6,410 | $ | 474 | $ | 657 | $ | 13,438 | ||||||||||
2005 |
$ | 255 | $ | 2,505 | $ | 314 | $ | 628 | $ | 3,702 | ||||||||||
2004 |
$ | — | $ | 1,384 | $ | 307 | $ | 597 | $ | 2,288 | ||||||||||
| Unrecognized compensation cost at December 31, 2006: | ||||||||||||||||||||
| $ | 3,340 | $ | 10,724 | $ | 324 | $ | 135 | $ | 14,523 | |||||||||||
| Weighted-average period over which unrecognized compensation cost to be recognized: | ||||||||||||||||||||
| 1.9 yrs | 2.4 yrs | 1.1 yrs | 0.3 yrs | |||||||||||||||||
For the years ended December 31, 2006, 2005 and 2004, the Corporation recognized a tax
benefit related to stock-based compensation of $24,112,000, $15,337,000 and $1,045,000,
respectively.
The following presents expected stock-based compensation expense in future periods for outstanding
awards as of December 31, 2006:
| (add 000) | ||||
2007 |
$ | 7,198 | ||
2008 |
4,228 | |||
2009 |
2,297 | |||
2010 |
691 | |||
2011 |
109 | |||
Total |
$ | 14,523 | ||
Stock-based compensation expense is included in selling, general and administrative expenses
on the Corporation’s consolidated statements of earnings.
Note L: Leases
Total lease expense for all operating leases was $72,248,000, $61,468,000 and $57,291,000 for
the years ended December 31, 2006, 2005 and 2004, respectively. The Corporation’s operating leases
generally contain renewal and/or purchase options with varying terms.
The Corporation 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 $43,751,000, $40,377,000 and $34,692,000 for the years ended December 31,
2006, 2005 and 2004, respectively.
The Corporation has capital lease agreements, expiring in 2010, for machinery and equipment.
Current and long-term capital lease obligations are included in other current liabilities and other
noncurrent liabilities, respectively, in the consolidated balance sheet.
Future minimum lease and mineral and other royalty commitments for all noncancelable agreements as
of December 31, 2006 are as follows:
| (add 000) | Capital Leases | Operating Leases | ||||||
2007 |
$ | 214 | $ | 48,904 | ||||
2008 |
213 | 40,115 | ||||||
2009 |
137 | 30,015 | ||||||
2010 |
308 | 22,138 | ||||||
2011 |
— | 18,855 | ||||||
Thereafter |
— | 66,807 | ||||||
Total |
872 | $ | 226,834 | |||||
Less imputed interest |
(84 | ) | ||||||
Present value of minimum lease
payments |
788 | |||||||
Less current capital lease obligations |
(168 | ) | ||||||
Long-term capital lease obligations |
$ | 620 | ||||||
Note M: Shareholders’ Equity
The authorized capital structure of the Corporation includes 100,000,000 shares of common stock,
with a par value of $0.01 a share. At December 31, 2006, approximately 3,700,000 common shares were
reserved for issuance under stock-based plans. At December 31, 2006 and 2005, there were 945 and
1,036, respectively, shareholders of record.
During 2006, 2005 and 2004, respectively, the Corporation repurchased 1,874,200, 2,658,000 and
1,522,200 shares of its common stock at public market prices at various purchase dates. In February
2006, the Board authorized the Corporation to repurchase an additional 5,000,000 shares of its
common stock. At December 31, 2006, 4,231,000 shares of common stock were remaining under the
Corporation’s repurchase authorization.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-five
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
In addition to common stock, the capital structure includes 10,000,000 shares of
preferred stock with a par value of $0.01 a share. 100,000 shares of Class A Preferred Stock were
reserved for issuance under the Corporation’s 1996 Shareholders Rights Plan that expired by its own
terms on October 21, 2006. Upon its expiration, the Board of Directors adopted a new Shareholders
Rights Plan (the “Rights Plan”) and reserved 200,000 shares of Junior Participating Class B
Preferred Stock for issuance. In accordance with the Rights Plan, the Corporation issued a dividend
of one right for each share of the Corporation’s common stock outstanding as of October 21, 2006,
and one right continues to attach to each share of common stock issued thereafter. The rights will
become exercisable if any person or group acquires beneficial ownership of 15 percent or more of
the Corporation’s common stock. Once exercisable and upon a person or group acquiring 15 percent or
more of the Corporation’s common stock, each right (other than rights owned by such person or
group) entitles its holder to purchase, for an exercise price of $315 per share, a number of shares
of the Corporation’s common stock (or in certain circumstances, cash, property or other securities
of the Corporation) having a market value of twice the exercise price, and under certain
conditions, common stock of an acquiring company having a market value of twice the exercise price.
If any person or group acquires beneficial ownership of 15 percent or more of the Corporation’s
common stock, the Corporation may, at its option, exchange the outstanding rights (other than
rights owned by such acquiring person or group) for shares of the Corporation’s common stock or
Corporation equity securities deemed to have the same value as one share of common stock or a
combination thereof, at an exchange ratio of one share of common stock per right. The rights are
subject to adjustment if certain events occur, and they will initially expire on October 21, 2016,
if not terminated sooner. The Corporation’s Rights Plan provides that the Corporation’s Board of
Directors may, at its option, redeem all of the outstanding rights at a redemption price of $0.001
per right.
Note N: Commitments and Contingencies
The Corporation is engaged in certain legal and administrative proceedings incidental to its
normal business activities. While it is not possible to determine the
ultimate outcome of those
actions at this time, in the opinion of management and counsel, it is unlikely that the
outcome of such litigation and other proceedings, including those pertaining to environmental
matters (see Note A), will have a material adverse effect on the results of the Corporation’s
operations, its cash flows or financial position.
Asset
Retirement Obligations. The Corporation incurs reclamation costs as part of its aggregates
mining process. The estimated future reclamation obligations have been discounted to their present
value and are being accreted to their projected future obligations via charges to operating
expenses. Additionally, the fixed assets recorded concurrently with the liabilities are being
depreciated over the period until reclamation activities are expected to occur. Total accretion and
depreciation expenses for 2006, 2005 and 2004 were $2,033,000, $2,144,000 and $1,710,000,
respectively, and are included in other operating income and expenses, net, on the consolidated
statements of earnings.
The provisions of FAS 143 require the projected estimated reclamation obligation to include a
market risk premium which represents the amount an external party would charge for bearing the
uncertainty of guaranteeing a fixed price today for performance in the future. However, due to the
average remaining quarry life exceeding 50 years at current production rates and the nature of
quarry reclamation work, the Corporation believes that it is impractical for external parties to
agree to a fixed price today. Therefore, a market risk premium has not been included in the
estimated reclamation obligation.
The following shows the changes in the asset retirement obligations for the years ended December
31:
| (add 000) | 2006 | 2005 | ||||||
Balance at January 1 |
$ | 22,965 | $ | 20,285 | ||||
Accretion expense |
1,190 | 1,205 | ||||||
Liabilities incurred |
1,822 | 2,295 | ||||||
Liabilities settled |
(894 | ) | (1,345 | ) | ||||
Revisions in estimated cash flows |
151 | 525 | ||||||
Balance at December 31 |
$ | 25,234 | $ | 22,965 | ||||
Other Environmental Matters. The Corporation’s operations are subject to and affected by
federal, state and local laws and regulations relating to the environment, health
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-six
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
and safety and other regulatory matters. Certain of the Corporation’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 Corporation’s operations, and such permits are subject to modification, renewal
and revocation. The Corporation 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 Corporation’s businesses,
as it is with other companies engaged in similar businesses. The Corporation has no material
provisions for environmental remediation liabilities and does not believe such liabilities will
have a material adverse effect on the Corporation in the future.
Insurance Reserves and Letters of Credit. The Corporation has insurance coverage for workers’
compensation, automobile liability and general liability claims with deductibles ranging from
$250,000 to $3,000,000. The Corporation is also self-insured for health claims. At December 31,
2006 and 2005, reserves of approximately $30,301,000 and $31,060,000, respectively, were recorded
for all such insurance claims. In connection with these workers’ compensation and automobile and
general liability insurance deductibles, the Corporation has entered into standby letter of credit
agreements of $26,210,000 at December 31, 2006.
Guarantee Liability. At December 31,2005, the Corporation recorded a liability of $3,600,000 for a
guarantee of debt of a limited liability company of which it is a member. The liability was settled
in 2006.
Surety Bonds. In the normal course of business, at December 31, 2006, the Corporation was
contingently liable for $119,679,000 in surety bonds required by certain states and municipalities
and their related agencies. The bonds are principally for certain construction contracts,
reclamation obligations and mining permits guaranteeing the Corporation’s own performance. The
Corporation has indemnified the underwriting insurance company against any exposure under the
surety bonds. In the Corporation’s past experience, no material claims have been made against these
financial instruments. Four
of these bonds, totaling $33,385,000, or 28% of all outstanding surety bonds, relate to specific
performance for road construction projects currently underway.
Purchase Commitments. The Corporation had purchase commitments for property, plant and equipment of
$27,737,000 as of December 31, 2006. The Corporation also had other purchase obligations related to
energy and service contracts of $11,431,000 as of December 31, 2006. The Corporation’s contractual
purchase commitments as of December 31, 2006 are as follows:
| (add 000) | ||||
2007 |
$ | 37,968 | ||
2008 |
400 | |||
2009 |
400 | |||
2010 |
400 | |||
Total |
$ | 39,168 | ||
Employees. The Corporation had approximately 5,500 employees at December 31, 2006. Approximately
14% of the Corporation’s employees are represented by a labor union. All such employees are hourly
employees. One of the Corporation’s labor union contracts expires in August 2007.
Note O: Business Segments
During 2006, the Corporation reorganized the operations and management of its Aggregates business,
which resulted in a change to its reportable segments. The Corporation currently conducts its
aggregates operations through three reportable business segments: Mideast Group, Southeast Group
and West Group. The Corporation also has a Specialty Products segment that includes the Magnesia
Specialties and Structural Composite Products businesses. These segments are consistent with the
Corporation’s current management reporting structure. The accounting policies used for segment
reporting are the same as those described in Note A.
The Corporation’s evaluation of performance and allocation of resources are based primarily on
earnings from operations. Earnings from operations are net sales less cost of sales, selling,
general and administrative expenses, and research and development expenses; include other operating
income and expenses; and exclude interest expense, other nonoperating income and expenses, net, and
income taxes. Corporate earnings from operations primarily include
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-seven
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
depreciation on capitalized interest, expenses for corporate administrative functions,
unallocated corporate expenses and other nonrecurring and/or non-operational adjustments excluded
from the Corporation’s evaluation of business segment performance and resource allocation. All 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 and other assets not directly identifiable with a reportable business segment. Property
additions include property, plant and equipment that have been purchased through acquisitions in
the amount of $2,095,000 for the West Group in 2005 and $667,000 for the Mideast Group in 2004.
During 2006, the Corporation did not purchase any property, plant and equipment through
acquisitions.
The following tables display selected financial data for the Corporation’s reportable business
segments for each of the three years in the period ended December 31, 2006. Prior year information
has been reclassified to conform to the presentation of the Corporation’s 2006 reportable segments.
Selected Financial Data by Business Segment
| years ended December 31 | ||||||||||||
| (add 000) | ||||||||||||
| Total revenues | 2006 | 2005 | 2004 | |||||||||
Mideast Group |
$ | 632,155 | $ | 567,051 | $ | 519,569 | ||||||
Southeast Group |
638,734 | 559,497 | 473,675 | |||||||||
West Group |
768,951 | 723,043 | 602,989 | |||||||||
Total Aggregates business |
2,039,840 | 1,849,591 | 1,596,233 | |||||||||
Specialty Products |
166,561 | 144,558 | 124,136 | |||||||||
Total |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Net sales |
||||||||||||
Mideast Group |
$ | 580,489 | $ | 517,492 | $ | 476,004 | ||||||
Southeast Group |
546,778 | 480,149 | 411,220 | |||||||||
West Group |
664,915 | 617,415 | 518,571 | |||||||||
Total Aggregates business |
1,792,182 | 1,615,056 | 1,405,795 | |||||||||
Specialty Products |
150,715 | 130,615 | 110,094 | |||||||||
Total |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | ||||||
| Gross profit | 2006 | 2005 | 2004 | |||||||||
Mideast Group |
$ | 232,332 | $ | 182,908 | $ | 166,271 | ||||||
Southeast Group |
123,379 | 94,140 | 78,112 | |||||||||
West Group |
141,051 | 130,839 | 89,880 | |||||||||
Total Aggregates
business |
496,762 | 407,887 | 334,263 | |||||||||
Specialty Products |
33,511 | 21,445 | 19,012 | |||||||||
Corporate |
(7,809 | ) | (4,940 | ) | (6,688 | ) | ||||||
Total |
$ | 522,464 | $ | 424,392 | $ | 346,587 | ||||||
| Selling, general and administrative expenses | ||||||||||||
Mideast Group |
$ | 39,790 | $ | 39,574 | $ | 38,135 | ||||||
Southeast Group |
27,822 | 26,096 | 26,274 | |||||||||
West Group |
44,959 | 43,347 | 43,690 | |||||||||
Total Aggregates
business |
112,571 | 109,017 | 108,099 | |||||||||
Specialty Products |
10,954 | 11,271 | 11,075 | |||||||||
Corporate |
23,140 | 10,416 | 8,163 | |||||||||
Total |
$ | 146,665 | $ | 130,704 | $ | 127,337 | ||||||
| Earnings from operations | ||||||||||||
Mideast Group |
$ | 199,426 | $ | 149,009 | $ | 130,912 | ||||||
Southeast Group |
97,136 | 68,815 | 53,281 | |||||||||
West Group |
103,785 | 98,496 | 54,032 | |||||||||
Total Aggregates
business |
400,347 | 316,320 | 238,225 | |||||||||
Specialty Products |
22,528 | 9,522 | 6,890 | |||||||||
Corporate |
(34,889 | ) | (16,788 | ) | (15,033 | ) | ||||||
Total |
$ | 387,986 | $ | 309,054 | $ | 230,082 | ||||||
Assets employed |
||||||||||||
Mideast Group |
$ | 692,370 | $ | 654,597 | $ | 629,841 | ||||||
Southeast Group |
512,771 | 482,858 | 429,595 | |||||||||
West Group |
1,020,572 | 931,548 | 886,147 | |||||||||
Total Aggregates
business |
2,225,713 | 2,069,003 | 1,945,583 | |||||||||
Specialty Products |
95,511 | 84,138 | 81,032 | |||||||||
Corporate |
185,197 | 280,175 | 329,237 | |||||||||
Total |
$ | 2,506,421 | $ | 2,433,316 | $ | 2,355,852 | ||||||
| Depreciation, depletion and amortization | ||||||||||||
Mideast Group |
$ | 46,065 | $ | 45,343 | $ | 42,020 | ||||||
Southeast Group |
30,460 | 28,798 | 28,461 | |||||||||
West Group |
46,053 | 46,973 | 44,833 | |||||||||
Total Aggregates
business |
122,578 | 121,114 | 115,314 | |||||||||
Specialty Products |
7,692 | 6,387 | 6,179 | |||||||||
Corporate |
11,159 | 10,750 | 11,366 | |||||||||
Total |
$ | 141,429 | $ | 138,251 | $ | 132,859 | ||||||
Property additions |
||||||||||||
Mideast Group |
$ | 66,865 | $ | 66,703 | $ | 67,814 | ||||||
Southeast Group |
55,719 | 67,402 | 23,022 | |||||||||
West Group |
115,726 | 70,702 | 52,097 | |||||||||
Total Aggregates
business |
238,310 | 204,807 | 142,933 | |||||||||
Specialty Products |
12,985 | 8,724 | 8,295 | |||||||||
Corporate |
14,681 | 9,965 | 12,884 | |||||||||
Total |
$ | 265,976 | $ | 223,496 | $ | 164,112 | ||||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-eight
N O T E S T O F I N A N C I A L S T A T E M E N T S ( C O N T I N U E D )
The product lines, asphalt, ready mixed concrete, road paving and other, are considered
internal customers of the core aggregates business. The following tables display total revenues and
net sales by product line for the years ended December 31:
| (add 000) | ||||||||||||
| Total revenues | 2006 | 2005 | 2004 | |||||||||
Aggregates |
$ | 1,931,010 | $ | 1,743,396 | $ | 1,477,630 | ||||||
Asphalt |
48,832 | 44,448 | 64,153 | |||||||||
Ready Mixed Concrete |
35,421 | 33,446 | 31,549 | |||||||||
Road Paving |
17,657 | 21,048 | 12,690 | |||||||||
Other |
6,920 | 7,253 | 10,211 | |||||||||
Total Aggregates business |
2,039,840 | 1,849,591 | 1,596,233 | |||||||||
Specialty Products |
166,561 | 144,558 | 124,136 | |||||||||
Total |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Net sales |
||||||||||||
Aggregates |
$ | 1,683,352 | $ | 1,508,861 | $ | 1,287,192 | ||||||
Asphalt |
48,832 | 44,448 | 64,153 | |||||||||
Ready Mixed Concrete |
35,421 | 33,446 | 31,549 | |||||||||
Road Paving |
17,657 | 21,048 | 12,690 | |||||||||
Other |
6,920 | 7,253 | 10,211 | |||||||||
Total Aggregates business |
1,792,182 | 1,615,056 | 1,405,795 | |||||||||
Specialty Products |
150,715 | 130,615 | 110,094 | |||||||||
Total |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | ||||||
The following table presents domestic
and foreign total revenues for the years ended
December 31:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Domestic |
$ | 2,164,370 | $ | 1,958,159 | $ | 1,688,828 | ||||||
Foreign |
42,031 | 35,990 | 31,541 | |||||||||
Total |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Note P: Supplemental Cash Flow Information
The following table presents supplemental
cash flow information for the years ended
December 31:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Noncash investing and
financing activities: |
||||||||||||
Notes receivable issued in
connection with divestitures |
$ | — | $ | — | $ | 12,000 | ||||||
Machinery and equipment
acquired through capital leases |
$ | 274 | $ | 740 | $ | — | ||||||
The following table presents the components of the change in other assets and liabilities,
net, for the years ended December 31:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Other current and
noncurrent assets |
$ | (9,297 | ) | $ | (3,565 | ) | $ | 10,406 | ||||
Notes receivable |
5,833 | 1,178 | (9,311 | ) | ||||||||
Accrued salaries, benefits
and payroll taxes |
951 | 1,348 | (6,563 | ) | ||||||||
Accrued insurance and
other taxes |
(7,285 | ) | 3,678 | (2,022 | ) | |||||||
Accrued income taxes |
14,679 | (14,541 | ) | 6,161 | ||||||||
Accrued pension, postretirement
and postemployment benefits |
(281 | ) | (5,182 | ) | (39,461 | ) | ||||||
Other current and noncurrent
liabilities |
5,722 | 6,394 | (2,210 | ) | ||||||||
Total |
$ | 10,322 | $ | (10,690 | ) | $ | (43,000 | ) | ||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page
thirty-nine
M A N A G E M E N T ’ S
D I S C U S S I O N & A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S
INTRODUCTORY OVERVIEW
Martin Marietta Materials, Inc., (the “Corporation”) is the nation’s second largest producer of
construction aggregates. The Aggregates business includes the following reportable segments,
primary markets and primary product lines:
| AGGREGATES BUSINESS | |||||||||||
Reportable Segments |
Mideast Group |
Southeast Group |
West Group |
||||||||
Primary Markets |
Indiana, Maryland, North Carolina, Ohio, Virginia and West Virginia |
Alabama, Florida, Georgia, Illinois, Kentucky, Louisiana, Mississippi, South Carolina, Tennessee, Nova Scotia and the Bahamas |
Arkansas, California, Iowa, Kansas, Minnesota, Missouri, Nebraska, Nevada, Oklahoma, Texas, Washington, Wisconsin and Wyoming |
||||||||
Primary
Product Lines |
Aggregates (stone, sand and gravel) |
Aggregates (stone, sand and gravel) |
Aggregates (stone, sand and gravel), asphalt, ready mixed concrete and road paving |
||||||||
The Corporation’s Magnesia Specialties business is a leading producer of magnesia-based
chemicals and dolomitic lime. The Corporation also produces structural composites products. These
product lines are reported through the Specialty Products segment.
The overall areas of focus for the Corporation include the following:
| • | Maximize long-term shareholder return by pursuing
sound growth and earnings objectives; |
|
| • | Conduct business in full compliance with applicable laws,
rules, regulations and the highest ethical standards; |
|
| • | Provide a safe and healthy workplace for the
Corporation’s employees; and |
|
| • | Reflect all aspects of good citizenship by being
responsible neighbors. |
Notable items regarding the Corporation’s financial condition and 2006 operating results include:
| • | Return of 35.4% on the Corporation’s common stock
price in 2006 compared with a return of 13.6% for the
S&P 500 Index; |
|
| • | Return on shareholders’ equity of 20.2% in 2006; |
|
| • | Record earnings per diluted share of $5.29; |
|
| • | Gross margin and operating margin improvement in
the core aggregates business as a result of: |
| – | heritage aggregates pricing increase of 13.5%, partially offset by a volume decrease of 1.7%; |
||
| – | enhanced operating efficiency and targeted cost reduction resulting from plant automation and
productivity improvement initiatives; and |
||
| – | focused expansion in high growth markets, particularly
in the southeastern and southwestern United States where 74% of the Aggregates business’ net
sales were generated. |
| • | Return of $219 million in cash to shareholders, inclusive
of $173 million for the repurchase of 1,874,200 shares
of the Corporation’s common stock (representing an
average price of $92.25) and $46 million in dividends; |
|
| • | Selling, general and administrative expenses, as a
percentage of net sales, remained relatively flat at 7.5%, in
spite of the initial absorption of stock option expense
and increased long-term incentive compensation costs; |
|
| • | Capital expenditures increase of 20% over 2005,
with the Corporation’s capital program focused on
capacity expansion and efficiency improvement projects
in high-growth areas and at fixed-based quarries
serving long-haul high-growth markets; |
|
| • | Continued maximization of transportation and materials
options created by the Corporation’s long-haul distribution network; |
|
| • | Strong financial results by the Magnesia Specialties
business; |
|
| • | Structural composites product line’s financial results
below expectations; |
|
| • | Improvement in employee safety performance; and |
|
| • | Management’s assessment and the independent
auditors’ opinion that the Corporation’s system of
internal control over financial reporting was effective
as of December 31, 2006. |
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
In 2007, management will emphasize, among other things, the following initiatives:
| • | Effectively serving high-growth markets having strong
aggregates demand, particularly in the Southeast and
Southwest; |
|
| • | Continuing to build a competitive advantage from its
long-haul distribution network; |
|
| • | Using best practices and information technology to
drive cost performance; |
|
| • | Increasing the number of quarries using plant automation; |
|
| • | Continuing the strong performance and operating
results of the Magnesia Specialties business; |
|
| • | Increasing the Corporation’s gross margin and operating
margin; |
|
| • | Focusing part of the capital spending program on the
recapitalization of several Southeast operations; |
|
| • | Maximizing return on invested capital consistent with
the successful long-term operation of the Corporation’s
business; |
|
| • | Reviewing the Corporation’s capital structure and
focusing on the establishment of prudent leverage
targets; and |
|
| • | Returning cash to shareholders through sustainable
dividends and share repurchases. |
Management considers each of the following factors in evaluating the Corporation’s financial
condition and operating results.
Aggregates Economic Considerations
The construction aggregates industry is a mature and cyclical business dependent on activity within
the construction marketplace. The principal end-users are in public infrastructure (e.g., highways,
bridges, schools and prisons), commercial (e.g., office buildings, large retailers and wholesalers,
and malls) and residential construction markets. As discussed further under the section Aggregates
Industry and Corporation Trends on pages 49 through 51, end-user markets respond to changing
economic conditions in different ways. Public infrastructure construction is ordinarily more stable
than commercial and residential construction due to funding from federal, state and local
governments. Commercial and residential construction levels are interest rate-sensitive and
typically move in a direct correlation with economic cycles.
The Safe, Accountable, Flexible and Efficient Transportation Equity Act — A Legacy for Users
(“SAFETEA-LU”) is the current federal highway legislation providing funding of $286.4 billion over
the six-year period ending September 30, 2009. Overall, infrastructure spending was strong in 2006,
and the outlook for 2007 is positive. On February 15, 2007, the President signed a measure that
provides funding of $39.1 billion for the federal highway program and $9.0 billion for the federal
transit program. These amounts represent a total increase of $3.9 billion compared with 2006
levels.
The commercial construction market provided increased demand again in 2006, and the outlook for
2007 is also positive. The residential construction market declined in 2006 and is expected to
decline further in 2007. The residential construction market
accounted for approximately 17
percent of the Corporation’s aggregates product line shipments in 2006.
In 2006, the Corporation shipped 198.5 million tons of aggregates to customers in 31 states,
Canada, the Bahamas and the Caribbean Islands from 294 quarries, underground mines and distribution
yards. While the Corporation’s aggregates operations cover a wide geographic area, financial
results depend on the strength of the applicable local economies because of the high cost of
transportation relative to the price of the product. The Aggregates business’ top five
revenue-generating states — North Carolina, Texas, Georgia, Iowa and South Carolina — accounted for
approximately 58% of its 2006 net sales by state of destination, while the top ten
revenue-generating states accounted for approximately 79% of its 2006 net sales. Management closely
monitors economic conditions and public infrastructure spending in the market areas in the states
where the Corporation’s operations are located. Further, supply and demand conditions in these
states affect their respective profitability.
Aggregates Industry Considerations
Since the construction aggregates business is conducted outdoors, seasonal changes and other
weather-related conditions, such as hurricanes, significantly affect the aggregates industry by
impacting production schedules and profitability. The financial results of the first quarter are
generally significantly lower than the financial results of the other quarters due to winter
weather.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-one
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
While natural aggregates sources typically occur in relatively homogeneous deposits in certain
areas of the United States, a significant challenge facing aggregates producers is to locate
suitable deposits that can be economically mined, can be permitted, and are in the close proximity
to growing markets (or in close proximity to long-haul transportation corridors that economically
serve growing markets). This is becoming more challenging as residential expansion and other real
estate development encroach on attractive quarrying locations, often triggering regulatory
constraints or otherwise making these locations impractical. The Corporation’s management continues
to meet this challenge through strategic planning to identify site locations in advance of economic
expansion; acquire land around existing quarry sites to increase mineral reserve capacity and
lengthen quarry life; develop underground mines; and create a competitive advantage with its
long-haul distribution network. This network moves aggregates materials from domestic and offshore
sources, via rail and water, to markets where aggregates supply is limited. The movement of
aggregates materials through long-haul networks introduces risks affecting operating results as
discussed more fully under the sections Analysis of Gross Margin
and Transportation Exposure on page 48
and pages 57 through 59, respectively.
The construction aggregates industry has been in a consolidating mode, and management expects this
trend to continue. The Corporation has actively participated in the consolidation of the industry.
When acquired, new locations sometimes do not satisfy the Corporation’s internal safety,
maintenance and pit development standards and may require additional resources before benefits of
the acquisitions are realized. However, the Corporation’s acquisition activity since 2002 has been
limited, and management believes the upgrade and integration of acquired operations is complete.
The industry consolidation trend is slowing as the number of suitable acquisition targets in high
growth markets declines. During the recent period of slow acquisition growth, the Corporation has
focused on investing in internal expansion projects in high-growth markets and on divesting
underperforming operations.
Aggregates Financial Considerations
The production of construction-related aggregates requires a significant capital investment
resulting in high fixed and semi-fixed costs, as discussed more fully under the section Cost
Structure on pages 55 through 57. Operating results and financial performance are sensitive to
volume changes. However, the shift in pricing dynamics in the industry, initially beginning in the
second half of 2004, has provided management with the opportunity to increase prices at a higher
rate and with greater frequency than historical averages. This
pricing improvement
has more than offset the
impact of the 2.3% decline in volume
in the aggregates product line in 2006. Management evaluates financial performance in a variety of ways. In particular, gross margin excluding freight and delivery revenues is a significant measure of financial performance reviewed by management on a site-by-site basis. Management also reviews |
|||||||||||||
| ESTIMATED POPULATION MOVEMENT | |||||||||||||
Top 10 Revenue- Generating States of Aggregates Business |
Population Rank in 2000 |
Rank in Estimated Change in Population From 2000 to 2030 |
Estimated Rank in Population in 2030 |
||||||||||
North Carolina
|
11 | 7 | 7 | ||||||||||
Texas
|
2 | 4 | 2 | ||||||||||
Georgia
|
10 | 8 | 8 | ||||||||||
Iowa
|
30 | 48 | 34 | ||||||||||
South Carolina
|
26 | 19 | 23 | ||||||||||
Florida
|
4 | 3 | 3 | ||||||||||
Indiana
|
14 | 31 | 18 | ||||||||||
Louisiana
|
22 | 41 | 26 | ||||||||||
Alabama
|
23 | 35 | 24 | ||||||||||
Ohio
|
7 | 47 | 9 | ||||||||||
Source:
United States Census Bureau
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-two
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
changes in average selling prices, costs per ton produced and return on invested capital.
Changes in average selling prices demonstrate economic and competitive conditions, while changes in
costs per ton produced are indicative of operating efficiency and economic conditions.
Other Business Considerations
The Corporation also produces dolomitic lime and magnesia-based chemicals through its Magnesia
Specialties business and has a small structural composites product line. These businesses are
reported in the Specialty Products segment.
The dolomitic lime business is dependent on the highly cyclical steel industry; thus operating
results are affected by changes in that industry. In the chemical products business, management is
focusing on higher margin specialty chemicals that can be produced at volume levels that support
efficient operations. This focus, coupled with an agreement to supply brine to The Dow Chemical
Company, has provided the magnesia chemicals business with a strategic advantage to improve
earnings and margins. A significant portion of cost related to the production of dolomitic lime and
magnesia chemical products is of a fixed or semi-fixed nature. The production of dolomitic lime and
certain magnesia chemical products also requires the use of natural gas, coal and petroleum coke;
hence, fluctuations in their pricing directly affect operating results.
The Corporation has been engaged in developmental activities related to structural composites. In
the fourth quarter of 2006, the Corporation decided to discontinue this effort as it relates to
certain product lines. In 2007, the Corporation will continue to develop and sell a limited number
of products, with specific quarterly milestones established for the business’ performance.
Cash Flow Considerations
The Corporation’s cash flows are generated primarily from operations. Operating cash flows
generally fund working capital needs, capital expenditures, dividends, share repurchases and
smaller acquisitions. Debt has been used to fund large acquisitions. Equity has been
used for smaller acquisitions as appropriate. During 2006, the Corporation’s management continued
to emphasize delivering value to shareholders through the return of $219 million through share
repurchases and dividends. Additionally, the Corporation invested $266 million in internal capital
projects ($137 of maintenance capital and $129 million of growth capital) and made a voluntary $12
million contribution to its pension plan.
FINANCIAL OVERVIEW
| Highlights of 2006 Financial Performance | ||||
| • | Record earnings per diluted share of $5.29, up 30% from 2005 earnings of $4.08 per diluted share | |||
| • | Net sales of $1.943 billion, an 11% increase compared with net sales of $1.746 billion in 2005 | |||
| • | Heritage aggregates product line pricing increase of 13.5% partially offset by heritage volume decrease of 1.7% | |||
Results of Operations
The discussion and analysis that follow reflect management’s assessment of the financial
condition and results of operations of the Corporation and should be read in conjunction with the
audited consolidated financial statements on pages 10 through 39. As discussed in more detail
herein, the Corporation’s operating results are highly dependent upon activity within the
construction and steel-related marketplaces, economic cycles within the public and private
business sectors, and seasonal and other weather-related conditions. Accordingly, the financial
results for a particular year, or year-to-year comparisons of reported results, may not be
indicative of future operating results. The Corporation’s Aggregates business generated 92% of net
sales and the majority of operating earnings during 2006. The following comparative analysis and
discussion should be read in that context. Further, sensitivity analysis and certain other data
are provided to enhance the reader’s understanding of Management’s Discussion and Analysis of
Financial Condition and Results of Operations and is not intended to be indicative of management’s
judgment of materiality. The Corporation’s consolidated operating results and operating results as
a percentage of net sales were as follows:
Martin Marietta Materials, Inc. and Consolidated
Subsidiaries page
forty-three
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
| years ended December 3 1 | % of | % of | % of | |||||||||||||||||||||
| (add 000) | 2006 | Net Sales | 2005 | Net Sales | 2004 | Net Sales | ||||||||||||||||||
Net sales |
$ | 1,942,897 | 100.0 | % | $ | 1,745,671 | 100.0 | % | $ | 1,515,889 | 100.0 | % | ||||||||||||
Freight and delivery revenues |
263,504 | 248,478 | 204,480 | |||||||||||||||||||||
Total revenues |
2,206,401 | 1,994,149 | 1,720,369 | |||||||||||||||||||||
Cost of sales |
1,420,433 | 73.1 | 1,321,279 | 75.7 | 1,169,302 | 77.1 | ||||||||||||||||||
Freight and delivery costs |
263,504 | 248,478 | 204,480 | |||||||||||||||||||||
Total cost of revenues |
1,683,937 | 1,569,757 | 1,373,782 | |||||||||||||||||||||
Gross profit |
522,464 | 26.9 | 424,392 | 24.3 | 346,587 | 22.9 | ||||||||||||||||||
Selling, general and
administrative expenses |
146,665 | 7.5 | 130,704 | 7.5 | 127,337 | 8.4 | ||||||||||||||||||
Research and development |
736 | 0.0 | 662 | 0.0 | 891 | 0.1 | ||||||||||||||||||
Other operating (income) and
expenses, net |
(12,923 | ) | (0.6 | ) | (16,028 | ) | (0.9 | ) | (11,723 | ) | (0.8 | ) | ||||||||||||
Earnings from operations |
387,986 | 20.0 | 309,054 | 17.7 | 230,082 | 15.2 | ||||||||||||||||||
Interest expense |
40,359 | 2.1 | 42,597 | 2.4 | 42,734 | 2.8 | ||||||||||||||||||
Other nonoperating (income) and
expenses, net |
(2,817 | ) | (0.1 | ) | (1,937 | ) | (0.1 | ) | (606 | ) | 0.0 | |||||||||||||
Earnings from continuing
operations
before taxes on income |
350,444 | 18.0 | 268,394 | 15.4 | 187,954 | 12.4 | ||||||||||||||||||
Taxes on income |
106,640 | 5.5 | 72,681 | 4.2 | 57,739 | 3.8 | ||||||||||||||||||
Earnings from continuing
operations |
243,804 | 12.5 | 195,713 | 11.2 | 130,215 | 8.6 | ||||||||||||||||||
Discontinued operations, net
of taxes |
1,618 | 0.1 | (3,047 | ) | (0.2 | ) | (1,052 | ) | (0.1 | ) | ||||||||||||||
Net earnings |
$ | 245,422 | 12.6 | % | $ | 192,666 | 11.0 | % | $ | 129,163 | 8.5 | % | ||||||||||||
The comparative analysis in this Management’s Discussion and Analysis of Financial Condition
and Results of Operations is based on net sales and cost of sales. However, gross margin as a
percentage of net sales and operating margin as a percentage of net sales represent non-GAAP
measures. The Corporation presents these ratios calculated based on net sales, as it is consistent
with the basis by which management reviews the Corporation’s operating results. Further, management
believes it is consistent with the basis by which investors analyze the Corporation’s operating
results given that freight and delivery revenues and costs represent pass-throughs and have no
profit mark-up. Gross margin and operating margin calculated as percentages of total revenues
represent the most directly comparable financial measures calculated in accordance with generally
accepted accounting principles (“GAAP”).
The following tables present the calculations of gross margin and operating margin for the years
ended December 31 in accordance with GAAP and reconciliations of the ratios as percentages of
total revenues to percentages of net sales.
| Gross Margin in Accordance with GAAP | ||||||||||||
(add 000) |
2006 | 2005 | 2004 | |||||||||
Gross profit |
$ | 522,464 | $ | 424,392 | $ | 346,587 | ||||||
Total revenues |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Gross margin |
23.7 | % | 21.3 | % | 20.1 | % | ||||||
| Gross Margin Excluding Freight and Delivery Revenues | ||||||||||||
(add 000) |
2006 | 2005 | 2004 | |||||||||
Gross profit |
$ | 522,464 | $ | 424,392 | $ | 346,587 | ||||||
Total revenues |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Less: Freight and
delivery revenues |
(263,504 | ) | (248,478 | ) | (204,480 | ) | ||||||
Net sales |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | ||||||
Gross margin excluding
freight and delivery
revenues |
26.9 | % | 24.3 | % | 22.9 | % | ||||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-four
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
| Operating Margin in Accordance with GAAP | ||||||||||||
(add 000) |
2006 | 2005 | 2004 | |||||||||
Earnings from
operations |
$ | 387,986 | $ | 309,054 | $ | 230,082 | ||||||
Total revenues |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Operating margin |
17.6 | % | 15.5 | % | 13.4 | % | ||||||
| Operating Margin Excluding Freight and Delivery Revenues | ||||||||||||
(add 000) |
2006 | 2005 | 2004 | |||||||||
Earnings from
operations |
$ | 387,986 | $ | 309,054 | $ | 230,082 | ||||||
Total revenues |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,720,369 | ||||||
Less: Freight and
delivery revenues |
(263,504 | ) | (248,478 | ) | (204,480 | ) | ||||||
Net sales |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | ||||||
Operating margin
excluding freight and
delivery revenues |
20.0 | % | 17.7 | % | 15.2 | % | ||||||
Net Sales
Net sales by reportable segment for the years ended December 31 were as follows:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Mideast Group |
$ | 580,489 | $ | 517,492 | $ | 476,004 | ||||||
Southeast Group |
546,778 | 480,149 | 411,220 | |||||||||
West Group |
664,915 | 617,415 | 518,571 | |||||||||
Total Aggregates Business |
1,792,182 | 1,615,056 | 1,405,795 | |||||||||
Specialty Products |
150,715 | 130,615 | 110,094 | |||||||||
Total |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | ||||||
Aggregates. Net sales growth in the aggregates product line resulted primarily from strong
pricing improvement. Heritage aggregates product line average sales price increases1
were as follows for the years ended December 31:
| 2006 | 2005 | 2004 | ||||||||||
Mideast Group |
14.9 | % | 7.7 | % | 4.4 | % | ||||||
Southeast Group |
11.5 | % | 11.0 | % | 3.9 | % | ||||||
West Group |
13.4 | % | 6.1 | % | 1.4 | % | ||||||
Heritage Aggregates Operations |
13.5 | % | 8.2 | % | 3.2 | % | ||||||
Aggregates Business |
13.5 | % | 8.2 | % | 3.2 | % | ||||||
| 1 | For purposes of determining heritage sales price increases, the percentage change for the
year is calculated using the then heritage aggregates prices. |
Heritage aggregates operations exclude acquisitions that were not included in prior-year
operations for a full year and divestitures.
The average annual heritage aggregates product line price increase for the five and twenty years
ended December 31, 2006 was 5.7% and 3.2%, respectively. Aggregates sales price increases in 2006
and 2005 reflect a scarcity of supply in high-growth markets (see section Aggregates Industry and
Corporation Trends on pages 49 through 51). Pricing in 2005 also reflects higher demand for
aggregates products. Aggregates 2004 sales price increases were negatively affected by the
recessionary construction economy experienced in the first half of that year.
Aggregates shipments of 198.5 million tons in 2006 decreased compared with 203.2 million tons
shipped in 2005. The increase in the cost of construction materials in 2006 and 2005 contributed
somewhat to the decline in volume. Total aggregates product line shipments of 203.2 million tons
in 2005 increased compared with 191.5 million tons shipped in 2004. The following presents
heritage and total aggregates product line shipments for each reportable segment for the
Aggregates Business:
| Shipments (thousands of tons) | 2006 | 2005 | 2004 | |||||||||
| Heritage Aggregates Product Line2: | ||||||||||||
Mideast Group |
65,276 | 66,676 | 67,091 | |||||||||
Southeast Group |
58,366 | 56,825 | 53,643 | |||||||||
West Group |
74,545 | 75,169 | 69,303 | |||||||||
Heritage Aggregates Operations |
198,187 | 198,670 | 190,037 | |||||||||
Acquisitions |
— | 3,974 | — | |||||||||
Divestitures3 |
303 | 585 | 1,431 | |||||||||
Aggregates Business |
198,490 | 203,229 | 191,468 | |||||||||
| 2 | Heritage aggregates product line shipments are based on using the then heritage aggregates locations. |
|
| 3 | Divestitures represent tons related to divested operations up to the date of divestiture. |
Heritage aggregates product line volume variance4 by reportable segment is as
follows for the year ended December 31:
| 2006 | 2005 | 2004 | ||||||||||
Mideast Group |
(2.1 | %) | 1.2 | % | 3.2 | % | ||||||
Southeast Group |
2.7 | % | 5.9 | % | (0.1 | %) | ||||||
West Group |
(4.5 | %) | 9.0 | % | 0.5 | % | ||||||
Heritage Aggregates Operations |
(1.7 | %) | 5.4 | % | 1.2 | % | ||||||
Total Aggregates Business |
(2.3 | %) | 6.1 | % | (0.1 | %) | ||||||
| 4 | For purposes of determining heritage aggregates product line volume variance, the percentage
change for the year is calculated using the then heritage aggregates locations. |
Martin
Marietta Materials, Inc. and Consolidated
Subsidiaries page
forty-five
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Specialty Products. Specialty Products 2006 net sales of $150.7 million increased 15%
over 2005 net sales. Sales growth in the Magnesia Specialties business resulted from improved
pricing and volume of dolomitic lime to the steel industry and chemicals products to a variety of
end users. Additionally, net sales for the structural composites product line increased by 4%.
Specialty Products net sales in 2005 increased 19% over 2004.
Freight and Delivery Revenues and Costs
Freight and delivery revenues and costs represent pass-through transportation costs incurred when the Corporation arranges for a third-party carrier to deliver aggregates products to customers (see section Transportation Exposure on pages 57 through 59). These third-party freight costs are then fully billed to the customer. The increase in these revenues and costs in 2006 and 2005, both as compared with the prior year, is due to higher transportation costs primarily caused by higher energy costs. Additionally, in 2005, more tonnage was delivered under these terms as compared with 2004.
Freight and delivery revenues and costs represent pass-through transportation costs incurred when the Corporation arranges for a third-party carrier to deliver aggregates products to customers (see section Transportation Exposure on pages 57 through 59). These third-party freight costs are then fully billed to the customer. The increase in these revenues and costs in 2006 and 2005, both as compared with the prior year, is due to higher transportation costs primarily caused by higher energy costs. Additionally, in 2005, more tonnage was delivered under these terms as compared with 2004.
Cost
of Sales
Cost of sales increased primarily due to rising costs for energy, particularly diesel fuel and natural gas, and repair and supply parts. Additionally, embedded freight costs increased 24% in 2006 (see section Transportation Exposure on pages 57 through 59). These cost increases were somewhat moderated by plant automation and productivity improvement initiatives, as well as control of headcount and employee benefit costs.
Cost of sales increased primarily due to rising costs for energy, particularly diesel fuel and natural gas, and repair and supply parts. Additionally, embedded freight costs increased 24% in 2006 (see section Transportation Exposure on pages 57 through 59). These cost increases were somewhat moderated by plant automation and productivity improvement initiatives, as well as control of headcount and employee benefit costs.
The Corporation’s operating leverage can be substantial due to the high fixed and semi-fixed costs
associated with aggregates production. To better match demand, production at heritage locations
declined 1.8% in 2006, while production at heritage locations increased 5.7% and 3.9% above prior
year levels in 2005 and 2004, respectively.
Gross
Profit
Gross margin excluding freight and delivery revenues is defined as gross profit divided by net sales and is a measure of a company’s efficiency during the production process. The Corporation’s gross margin excluding freight and delivery revenues increased 260 basis points to 26.9% during 2006 and 140 basis points in 2005 as pricing improvements and productivity gains outpaced increases in production costs.
Gross margin excluding freight and delivery revenues is defined as gross profit divided by net sales and is a measure of a company’s efficiency during the production process. The Corporation’s gross margin excluding freight and delivery revenues increased 260 basis points to 26.9% during 2006 and 140 basis points in 2005 as pricing improvements and productivity gains outpaced increases in production costs.
While the gross margin for the Mideast Group and the Southeast Group improved in 2006, gross
margin for the West Group in 2006 was flat and was negatively affected by higher embedded freight
costs in addition to a decline in aggregates product line shipments. The following presents gross
margin excluding freight and delivery revenues by reportable segment for the Aggregates business.
| 2006 | 2005 | 2004 | ||||||||||
Mideast Group |
40.0 | % | 35.3 | % | 34.9 | % | ||||||
Southeast Group |
22.6 | % | 19.6 | % | 19.0 | % | ||||||
West Group |
21.2 | % | 21.2 | % | 17.3 | % | ||||||
Total Aggregates Business |
27.7 | % | 25.3 | % | 23.8 | % | ||||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales, were 7.5%, 7.5% and 8.4% for the years ended December 31, 2006, 2005 and 2004, respectively. The decline in this expense ratio in 2006 and 2005 when compared with 2004 related to reorganization changes that have reduced headcount and other overhead expenses, as well as continued efforts focused on leveraging technology to improve efficiency. The absolute dollar increase of $16.0 million in 2006 reflects a $9.7 million increase in stock-based compensation expense, which includes the initial expensing of stock options in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (“FAS 123(R)”) and increased performance-based incentive compensation costs. The increase of $3.4 million in 2005 was primarily due to increased incentive compensation costs.
Selling, general and administrative expenses, as a percentage of net sales, were 7.5%, 7.5% and 8.4% for the years ended December 31, 2006, 2005 and 2004, respectively. The decline in this expense ratio in 2006 and 2005 when compared with 2004 related to reorganization changes that have reduced headcount and other overhead expenses, as well as continued efforts focused on leveraging technology to improve efficiency. The absolute dollar increase of $16.0 million in 2006 reflects a $9.7 million increase in stock-based compensation expense, which includes the initial expensing of stock options in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (“FAS 123(R)”) and increased performance-based incentive compensation costs. The increase of $3.4 million in 2005 was primarily due to increased incentive compensation costs.
Other Operating Income and Expenses, Net
Among other items, other operating income and expenses, net, include gains and losses on the sale of assets; gains and losses related to certain amounts receivable; rental, royalty and services income; and the accretion and depreciation expenses related to Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. The decrease in 2006 when compared with 2005 reflects lower gains on sales of assets partially offset by a lower loss on receivables. The increase in 2005 compared with 2004 results primarily from higher gains on sales of assets, primarily excess land, and a lower loss on receivables, which resulted from improving economic conditions for the Corporation’s customers. Other operating income for 2004 includes a pretax gain of $5.0 million on the sale of certain asphalt plants in the Houston, Texas, market where the Corporation has a continuing financial interest.
Among other items, other operating income and expenses, net, include gains and losses on the sale of assets; gains and losses related to certain amounts receivable; rental, royalty and services income; and the accretion and depreciation expenses related to Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. The decrease in 2006 when compared with 2005 reflects lower gains on sales of assets partially offset by a lower loss on receivables. The increase in 2005 compared with 2004 results primarily from higher gains on sales of assets, primarily excess land, and a lower loss on receivables, which resulted from improving economic conditions for the Corporation’s customers. Other operating income for 2004 includes a pretax gain of $5.0 million on the sale of certain asphalt plants in the Houston, Texas, market where the Corporation has a continuing financial interest.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-six
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Earnings from Operations
Operating margin excluding freight and delivery revenues is defined as earnings from operations divided by net sales and measures a company’s operating profitability. The Corporation’s operating margin excluding freight and delivery revenues improved 230 basis points in 2006 compared with prior year, primarily as a result of the improvement in gross margin excluding freight and delivery revenues and partially offset by higher selling, general and administrative expenses.
Operating margin excluding freight and delivery revenues is defined as earnings from operations divided by net sales and measures a company’s operating profitability. The Corporation’s operating margin excluding freight and delivery revenues improved 230 basis points in 2006 compared with prior year, primarily as a result of the improvement in gross margin excluding freight and delivery revenues and partially offset by higher selling, general and administrative expenses.
Interest Expense
Interest expense decreased 5.3% in 2006 as compared with 2005 due to a higher amount of capitalized interest related to major capital projects. 2005 interest expense decreased slightly from 2004 due to higher capitalized interest related to construction projects, partially offset by a higher interest rate paid on $100 million of debt subsequent to the termination of interest rate swaps.
Interest expense decreased 5.3% in 2006 as compared with 2005 due to a higher amount of capitalized interest related to major capital projects. 2005 interest expense decreased slightly from 2004 due to higher capitalized interest related to construction projects, partially offset by a higher interest rate paid on $100 million of debt subsequent to the termination of interest rate swaps.
Other Nonoperating Income and Expenses, Net
Other nonoperating income and expenses, net, are comprised generally of interest income, net equity earnings from nonconsolidated investments and eliminations of minority interests for consolidated, non-wholly owned subsidiaries. In 2006, the elimination of minority interest for consolidated subsidiaries increased other nonoperating income, net, by $3.1 million and was partially offset by a $2.5 million decrease in interest income. The increase in 2005 resulted from higher interest income and higher earnings on nonconsolidated investments, partially offset by a higher expense related to minority interests of consolidated companies.
Other nonoperating income and expenses, net, are comprised generally of interest income, net equity earnings from nonconsolidated investments and eliminations of minority interests for consolidated, non-wholly owned subsidiaries. In 2006, the elimination of minority interest for consolidated subsidiaries increased other nonoperating income, net, by $3.1 million and was partially offset by a $2.5 million decrease in interest income. The increase in 2005 resulted from higher interest income and higher earnings on nonconsolidated investments, partially offset by a higher expense related to minority interests of consolidated companies.
Income Taxes
Variances in the estimated effective income tax rates, when compared with the federal corporate tax rate of 35%, are due primarily to the effect of state income taxes, the impact of book and tax accounting differences arising from the net permanent benefits associated with the depletion allowances for mineral reserves, foreign operating earnings, and the tax effect of nondeductibility of goodwill related to asset sales.
Variances in the estimated effective income tax rates, when compared with the federal corporate tax rate of 35%, are due primarily to the effect of state income taxes, the impact of book and tax accounting differences arising from the net permanent benefits associated with the depletion allowances for mineral reserves, foreign operating earnings, and the tax effect of nondeductibility of goodwill related to asset sales.
The Corporation’s estimated effective income tax rates for the years ended December 31 were as
follows:
| 2006 | 2005 | 2004 | ||||||||||
Continuing operations |
30.4 | % | 27.1 | % | 30.7 | % | ||||||
Discontinued operations |
42.1 | % | 33.4 | % | (679.3 | %) | ||||||
Overall |
30.5 | % | 27.0 | % | 31.2 | % | ||||||
The increase in the Corporation’s estimated effective income tax rate for 2006 compared with
2005 reflects the impact of higher pretax earnings in relation to tax deductible items and the
effect of tax contingencies reversed upon expiration of the federal statute of limitations. In
2006, reserves of $2.7 million related to contingencies in the 2002 income tax return were
reversed, while in 2005, reserves of $5.9 million related contingencies in the 2001 income tax
return were reversed. The effective income tax rates for discontinued operations reflect the tax
effects of individual operation’s transactions and are not indicative of the Corporation’s overall
effective tax rate.
Discontinued Operations
Divestitures and closures included in discontinued operations reflect nonstrategic, underperforming operations within the Aggregates business that were sold or permanently shutdown. The results of all divested operations through the dates of disposal and any gains or losses on disposals are included in discontinued operations on the consolidated statements of earnings. The discontinued operations included the following net sales, pretax loss on operations, pretax gain or loss on disposals, income tax expense or benefit, and the overall net earnings or loss for the years ended December 31:
Divestitures and closures included in discontinued operations reflect nonstrategic, underperforming operations within the Aggregates business that were sold or permanently shutdown. The results of all divested operations through the dates of disposal and any gains or losses on disposals are included in discontinued operations on the consolidated statements of earnings. The discontinued operations included the following net sales, pretax loss on operations, pretax gain or loss on disposals, income tax expense or benefit, and the overall net earnings or loss for the years ended December 31:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Net sales |
$ | 4,196 | $ | 15,950 | $ | 51,228 | ||||||
Pretax loss on operations |
$ | (262 | ) | $ | (3,676 | ) | $ | (6,862 | ) | |||
Pretax gain (loss) on
disposals |
3,057 | (900 | ) | 6,727 | ||||||||
Pretax gain (loss) |
2,795 | (4,576 | ) | (135 | ) | |||||||
Income tax expense (benefit) |
1,177 | (1,529 | ) | 917 | ||||||||
Net earnings (loss) |
$ | 1,618 | $ | (3,047 | ) | $ | (1,052 | ) | ||||
Net Earnings
2006 net earnings of $245.4 million, or $5.29 per diluted share, increased 27% compared with 2005 net earnings of $192.7 million, or $4.08 per diluted share. 2005 net earnings included favorable tax benefits of $0.15 per diluted share.
2006 net earnings of $245.4 million, or $5.29 per diluted share, increased 27% compared with 2005 net earnings of $192.7 million, or $4.08 per diluted share. 2005 net earnings included favorable tax benefits of $0.15 per diluted share.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-seven
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
2005 net earnings of $192.7 million, or $4.08 per diluted
share, increased 49% compared with 2004 net earnings of $129.2 million, or $2.66 per diluted share.
share, increased 49% compared with 2004 net earnings of $129.2 million, or $2.66 per diluted share.
Analysis of Gross Margin
| • | 2006 consolidated gross margin excluding freight and delivery revenues increased 260 basis points compared with 2005. | |||
| • | 2006 gross margin excluding freight and delivery revenues were negatively affected by 410 basis points due to embedded freight. | |||
The Corporation achieved its objective of improved overall gross margin excluding freight and
delivery revenues in
2006 by maximizing pricing opportunities and improving its
cost structure through productivity improvement and plant
automation initiatives. Consolidated gross margin excluding
freight and delivery revenues for continuing operations for
the years ended December 31 was as follows:
2006
|
26.9 | % | ||
2005
|
24.3 | % | ||
2004
|
22.9 | % |
When compared with peak gross margins excluding freight and delivery revenues in the late
1990’s, the Aggregates business’ gross margin performance has been negatively affected by several
factors. A primary factor is the expansion and development of water and rail distribution yards.
Most of this activity is in coastal areas located in the Southeast and West Groups, which generally
do not have an indigenous supply of aggregates and yet exhibit above-average growth characteristics
driven by long-term population growth. Development of this distribution network continues to be a
key component of the Corporation’s strategic growth plan and has already led to increased market
share in certain areas. However, sales from rail and water distribution locations generally yield
lower gross margins as compared with sales directly from quarry operations. Transportation freight
cost from the production site to the distribution terminals is embedded in the delivered price of
aggregates products and reflected in the pricing structure at the distribution yards. In general, a
margin is not earned on the embedded freight component of price (see section Transportation
Exposure on pages 57 through 59). In 2006, approximately 28 million tons of aggregates were sold
from distribution yards,
and results from these distribution operations reduced gross margin excluding freight and delivery
revenues by approximately 410 basis points. Management expects that the distribution network
currently in place will provide the Corporation a greater growth opportunity than many of its
competitors, and gross margin should continue to improve, subject to the economic environment.
Other factors, including vertical integration — asphalt, ready mixed concrete and road paving
operations — have further negatively affected gross margin, particularly in the West Group. Gross
margins excluding freight and delivery revenues associated with vertically integrated operations
are lower as compared with aggregates operations. Gross margins excluding freight and delivery
revenues for the Corporation’s asphalt and ready mixed concrete businesses, which reside in the
West Group, typically range from 10% to 15% as compared with the Corporation’s aggregates
operations, which generally range from 20% to 30%. The road paving business was acquired as
supplemental operations that were part of larger acquisitions. As such, it does not represent a
strategic business of the Corporation. The gross margin in this business is affected by volatile
factors including fuel costs, operating efficiencies and weather, and this business’ current
operations yield profits that are insignificant to the Corporation as a whole. In 2006, the mix of
vertically integrated operations lowered gross margin excluding freight and delivery revenues by
approximately 110 basis points. The Corporation has decreased the effects of vertically integrated
operations with certain divestitures in 2005 and 2004. The Corporation’s gross margin excluding
freight and delivery revenues will continue to be adversely affected by the lower gross margins for
these vertically integrated businesses and for the water and rail distribution network as a result
of management’s strategic growth plan.
Gross margin excluding freight and delivery revenues for the Specialty Products segment was 22.2%,
16.4% and 17.3% for the years ended December 31, 2006, 2005 and 2004, respectively. The 2006 gross
margin excluding freight and delivery revenues reflects improved pricing and volume of dolomitic
lime to the steel industry and chemicals products to a variety of end users for the Magnesia
Specialties business.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-eight
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
BUSINESS ENVIRONMENT
The sections on Business Environment on pages 49 through 63, and the disclosures therein, provide a
synopsis of the business environment trends and risks facing the Corporation. However, no single
trend or risk stands alone. The relationship between trends and risks is dynamic, and this
discussion should be read accordingly.
Aggregates Industry and Corporation Trends
| • | 2006 spending statistics, according to U.S. Census Bureau,
from 2005 to 2006: |
||
– Public-works construction spending increased 10% |
|||
– Commercial construction market spending increased 16% |
|||
– Residential construction market spending decreased 2% |
|||
The Corporation’s principal business
serves customers in construction
aggregates-related markets. This business is
strongly affected by activity within the
construction marketplace, which is cyclical in
nature. Consequently, the Corporation’s
profitability is sensitive to national,
regional and local economic
conditions and
especially to
cyclical swings in
construction
spending. The
cyclical swings in
construction
spending are, in
turn, affected by
fluctuations in
interest rates,
levels of
infrastructure
funding by the
public sector, and
demographic and
population shifts.
Total aggregates consumption in the United States in 2006 was approximately 3.3 billion tons per the U.S. Geological
profitability is sensitive to national,
regional and local economic
conditions and
especially to
cyclical swings in
construction
spending. The
cyclical swings in
construction
spending are, in
turn, affected by
fluctuations in
interest rates,
levels of
infrastructure
funding by the
public sector, and
demographic and
population shifts.Total aggregates consumption in the United States in 2006 was approximately 3.3 billion tons per the U.S. Geological
Survey. Assuming gross domestic product growth of 3% per year, an additional 100 million tons
of aggregates will be required annually, predominantly in the high-growth southern United States.
An average-sized quarry produces one million tons per year; therefore, the equivalent of an
additional 100 new quarries per year would be required to support the increased tonnage. As
discussed further under the section Environmental Regulation and Litigation on pages 59 and 60,
barriers to entry can limit the opening of new quarries.
The Aggregates business sells its products principally to contractors in connection with highway
and other public infrastructure projects, as well as commercial and residential development.
While construction spending in the
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page forty-nine
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
public and private market sectors is affected by economic cycles, historically the level of
spending on public infrastructure projects has been more stable as
governmental appropriations and expenditures are typically less interest rate-sensitive than private-sector spending.
Generally, increased levels of funding have supported highway and other infrastructure projects. By
way of example, the U.S. Census Bureau shows the total value of the United States construction spending on highways, streets and bridges was $75 billion in 2006 compared with $66 billion in
2005, while overall public-works construction spending increased 10% in 2006. Management believes
public-works projects accounted for more than 50% of the total annual aggregates consumption in the
United States during 2006; this has consistently been the case since
1990. Approximately 46% of the
Corporation’s 2006 aggregates shipments were in the public sector; thus, the Aggregates business
enjoys benefits from this level of public-works construction projects. Accordingly, management
believes exposure to fluctuations in commercial and residential, or private sector, construction
spending is lessened by the business’ mix of public sector-related shipments.
Generally, increased levels of funding have supported highway and other infrastructure projects. By
way of example, the U.S. Census Bureau shows the total value of the United States construction spending on highways, streets and bridges was $75 billion in 2006 compared with $66 billion in
2005, while overall public-works construction spending increased 10% in 2006. Management believes
public-works projects accounted for more than 50% of the total annual aggregates consumption in the
United States during 2006; this has consistently been the case since
1990. Approximately 46% of the
Corporation’s 2006 aggregates shipments were in the public sector; thus, the Aggregates business
enjoys benefits from this level of public-works construction projects. Accordingly, management
believes exposure to fluctuations in commercial and residential, or private sector, construction
spending is lessened by the business’ mix of public sector-related shipments.
For
the Corporation, the commercial construction market remained strong in 2006. Approximately 27%
of the Corporation’s 2006 aggregates shipments were related to the commercial construction market.
According to the U.S. Census Bureau, commercial construction market spending increased 16% in 2006
as compared with 2005.
Residential construction market spending decreased 2% in 2006 from 2005, according to the U.S.
Census Bureau.
The decline in this sector occurred as homebuilders reduced the level of homebuilding and
subdivision development as compared with the building levels during the recent period of
historically low interest rates. The Corporation’s percentage of its shipments attributable to the
residential construction market declined in 2006 compared with 2005. The Corporation’s
exposure to residential construction is typically split evenly between the aggregates used in the
construction of the subdivision, including roads, sidewalks, and storm and sewage drainage, and
the aggregates used in the construction of homes. Therefore, the timing of new subdivision starts
by homebuilders affects residential volumes as much as new home starts.
The Corporation’s asphalt, ready mixed concrete and road paving operations generally follow
construction industry trends. These vertically integrated operations accounted for approximately 5%
of the Aggregates business’ 2006 total revenues.
Since 1995, a higher percentage of the Corporation’s shipments have been transported by rail and
water, decreasing gross margin. In addition to competitive considerations, lower gross margins
resulted from the Corporation generally not charging customers a profit on the transportation
portion of the selling price. However, as demand increases in supply-constrained areas, additional
pricing opportunities, along with improved distribution cost, may aid profitability and improve
gross margin on transported material. Further, the long-haul transportation network can diversify
market risk for locations that engage in long-haul transportation of their aggregates products.
Many locations serve both a local market and transport products via rail and/or water to be sold in
other markets. The risk of a downturn in one market may be somewhat mitigated by other markets
served by the location.
Pricing on construction projects is generally based on terms committing to delivery of specified
products at a specified price. While commercial construction jobs usually are completed within a
year, infrastructure contracts can require several years to complete. Therefore, pricing increases
can have a lag time to take effect while the Corporation sells aggregates products under existing
price agreements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
In 2006 and 2005, management believes the Corporation experienced the beginning of a
shift in industry pricing trends. In those years, mid-year and other interim price increases became
widespread as opposed to the previous pattern of annual increases. This shift was caused by
increased demand for aggregates, along with the scarcity of supply in high-growth markets. Further,
cost pressures, primarily related to energy, also influenced pricing. Management believes that the
near-term outlook is that pricing should increase at a rate higher than historic averages and will
correlate with the rate of growth in demand. However, the expected easing of demand and cost
pressures could reduce the rate of annual price increases for the Corporation’s aggregates
products. Annual price increases went into effect on January 1, 2007; management expects fewer
mid-year increases in 2007 compared with 2006. Pricing is determined locally and is affected by
supply and demand.
Management expects the overall long-term trend for construction aggregates consolidation to
continue. The consolidation trend has notably slowed as the number of suitable acquisition targets
in attractive markets declines. The Corporation’s Board of Directors and management continue to
review and monitor strategic long-term plans. These plans include assessing business combinations
and arrangements with other companies engaged in similar businesses,
Public-sector construction projects are funded through a combination of federal, state and local
sources (see section Federal and State Highway Appropriations on pages 54 and 55). The level of
state public-works spending is varied across the nation and dependent upon individual state
economies. In addition to federal appropriations, each state funds its infrastructure spending from
specifically allocated amounts collected from various taxes, typically gasoline taxes and vehicle
fees. Additionally, subject to voter approval, the states may pass bond programs to fund
infrastructure spending. Increasingly, local governments are funding projects through bond issues
and local option taxes. Shortfalls in tax revenues can result in reductions in appropriations for
infrastructure spending. Accordingly, amounts put in place, or spent, may be below amounts awarded
under legislative bills.
In addition to bond issuances and local option taxes, state governments have developed other
alternative sources for financing the construction and maintenance of roads. For example, the state
of Indiana passed a bill that leased the 157-mile Indiana Toll Road to Macquarie Infrastructure
Group of Sydney, Australia, and Cintra Concesiones de Infraestructuras de Transporta, S.A. of
Madrid, Spain for 75 years. The $3.8 billion received by Indiana as part of the agreement is
allocated to the Major Moves Program that
increasing
market share in the Corporation’s
strategic businesses and pursuing
new opportunities that are
related to existing
markets of the Corporation.Aggregates Industry and
Corporation Risks
General Economic Conditions
The overall economy was strong in 2006, reflecting robust consumer spending, an improvement in the trade deficit and employment gains. The commercial construction market improved again in 2006, supported by lower office vacancy rates, and produced a backlog of projects going into 2007. The residential construction market declined during the year as homebuilding activity slowed.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-one
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
supports highway and economic development projects, road bond retirements and the
establishment of funds that will ultimately be used for construction projects.
operations cover a wide geographic area, financial results depend on the strength of local
economies, which may differ from the economic conditions of the state or region. This is
particularly relevant given the high cost of transportation as it
relates to the price of the product. The impact of state or regional economic
conditions is felt less by large fixed plant operations that serve
multiple end-use markets through the Corporation’s long-haul distribution network.In 2006, as reported by Moody’s Economy.com Inc., most states experienced an expanding economy. Exceptions included Ohio, South Carolina, Louisiana and Alabama, which had flat economies, and Michigan, which had a recessionary economy. Compared with 2005, all states, with the exception of Michigan, experienced an expanding economy.
The Aggregates business’ top five revenue-generating states, namely North Carolina,
Texas, Georgia, Iowa and South Carolina, together accounted for approximately 58% of
its 2006 net sales by state of destination. The top ten revenue-generating states,
which also include Florida, Indiana, Louisiana, Alabama and Ohio, together accounted
for approximately 79% of the Aggregates business’ 2006 net sales by state of
destination.
The North Carolina economy is expanding at a rate greater than the national average. Growth from an
expanding high-tech manufacturing and research base offset losses from closings of furniture and
textile plants. Commercial construction has continued to recover from the decline triggered by weak
demand for office and warehouse space. Residential construction demand has remained steady. North
Carolina’s spending on highways has been historically strong, averaging approximately $3.3 billion
annually during the 5-year period ended in fiscal 2003, according to Federal Highway Administration
data. However, new infrastructure construction project lettings declined from historical spending
levels in
The impact of economic improvement will vary by local market. Profitability of the Aggregates
business by state may not be proportionate to net sales by state because certain of the
Corporation’s markets are more profitable than others. Further, while the Corporation’s aggregates
2006. Construction activity continued from the $3.1 billion education bond passed in 2002
funding new construction, repairs and renovations on the state’s
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-two
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
sixteen campus university system. Further, a $970 million school bond for public school
construction in Wake County was passed in November 2006. The state has also authorized the use of
$900 million in grant anticipation revenue and vehicle (“GARVEE”) bonds, which will help fund the
statewide road-building program over the next few years. However, no bonds have been issued to
date. Historically, the Corporation’s North Carolina operations have been above average in
profitability due to its quarry locations in growing market areas and related transportation
advantage.
In Texas, the infrastructure market outlook is positive, as the state legislature has recently
protected infrastructure spending levels. Additionally, there is a proposed multi-use, statewide
network of transportation routes, the Trans-Texas Corridor, designed to include existing and new
highways, railways and utility right-of-ways. This proposal is a long-term project to be completed
in phases over the next 50 years. In San Antonio, the infrastructure construction market remains
strong. Despite delays in tollway spending along the burgeoning northern corridor of the community
while environmental impact studies are completed, toll projects in this area are ultimately
expected to provide a significant economic boost. San Antonio should be further enhanced by
Washington Mutual, Inc.’s decision to open a regional center that will bring approximately 5,000
new jobs to the area. Coupled with the recent completion of the construction of the Toyota truck
manufacturing facility and the net gain of several thousand new jobs from the recent military base
realignment, San Antonio is one the fastest growing markets in Texas. By contrast, mortgage rate
increases, an all-time high inventory of repossessed homes and a growing number of other available
homes have adversely affected the residential construction market. In Dallas, the construction
market should remain positive, supported by record state Department of Transportation and Tollway
budgets. The Dallas residential construction market is down slightly compared with 2005. In
Houston, the overall construction market has been strong, although residential construction has
declined. The Houston construction market faces the potential of increased competition from
waterborne imports due to higher railroad freight pricing and train availability, which affects the
delivered price of stone from interior quarries in Texas, Arkansas and
Oklahoma. The overall economy of Houston is currently being bolstered by the strong performance of
oil pricing on a global scale.
The Georgia state economy remains healthy despite the bankruptcy of Delta Airlines, the announced
closings of the General Motors and Ford assembly plants, as well as several military base closures
in the Atlanta area. The groundbreaking of a KIA automobile assembly plant in western Georgia, as
well as the announced expansions at the Ports of Savannah and Brunswick, indicate Georgia’s
increasing international focus. Infrastructure improvements are helping to further establish the
state’s position as a major southeastern distribution center. Additionally, highway construction
continues to provide an economic benefit to the state. However, increasing construction costs
expose a need for alternative means of funding such projects. The residential construction market
slowdown remains moderate, while the commercial construction market remains strong in most major
state market areas.
The Iowa state economy, heavily dependent on the agriculture industry, is moderately expanding. The
Farm Security and Rural Investment Act of 2002 governs federal farm programs through 2007. Among
other things, this legislation provides minimum price supports for certain crops, including corn
and soybeans, and has stimulated the agricultural economy in Iowa, providing an overall benefit for
the state. Iowa continues to be the largest pork-producing state in the nation. Local economies
have been strong in urban areas of the state, while economies in rural areas have been bolstered by
construction of alternative energy facilities, including ethanol, bio-diesel and wind. In fact,
corn used for the production of ethanol has increased to the point at which Iowa, the nation’s
largest corn producer, could become an importer of corn. The infrastructure construction market has
softened because of reduced levels of projects by the Iowa Department of Transportation.
Residential construction declined in 2006, a trend expected to continue in 2007. Commercial
construction has remained stable.
The South Carolina economy has experienced slow growth, and the trend is expected to continue in
the first half of 2007. Future growth is expected to come from service-based industries, including
education, healthcare,
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-three
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
and leisure and hospitality. The infrastructure construction market has declined with no
recent lettings. As a result of negative findings in an audit of the South Carolina Department of
Transportation (“SCDOT”), the Governor and the state’s legislature are now debating how to
restructure the SCDOT. This is expected to delay any future infrastructure projects until, at
least, late 2007. The residential construction market has been strong, particularly in Columbia and
Charleston, with several large new residential developments announced for the North
Charleston/Summerville area. In the commercial market, Google, Inc., has announced that it is
considering land near Blythewood County and Berkeley County for construction of several $200
million to $800 million data centers that could each employ 400 people.
The Aggregates business is subject to potential losses on customer accounts receivable in response
to economic cycles. A growing economy decreases the risk of non-payment and bankruptcy, and a
recessionary economy increases those risks. Historically, the Corporation’s bad debt write-offs
have not been significant, and management considers the allowance for doubtful accounts adequate at
December 31, 2006.
Federal
and State Highway Appropriations
| • | Six-year $286.4 billion federal highway law passed in 2005 | |||
| • | Law increases states’ minimum rates of returns of gasoline taxes paid to Highway Trust Fund | |||
The federal highway law is the principal source of highway funding for public-sector construction
projects. SAFETEA-LU is a six-year $286.4 billion law succeeding The Transportation Equity Act for
the 21st Century (“TEA-21”), which expired by its terms on September 30, 2003. SAFETEA-LU is
presently scheduled to expire on September 30, 2009.
SAFETEA-LU includes approximately $228 billion for highway programs, $52 billion for transit
programs and $6 billion for highway safety programs. Law provisions include increasing the minimum
rate of return for donor states, meaning those paying more in gasoline taxes than they receive from
the highway trust fund. The minimum rate of return will increase from the current rate of 90.5
percent
to 92.0 percent by 2008. Nine of the Aggregates business’ top ten revenue-generating states (North
Carolina, Texas, Georgia, Iowa, South Carolina, Florida, Indiana, Louisiana and Ohio) were donor
states for fiscal year 2006.
The federal highway law provides spending authorizations, representing maximum amounts. Each year,
an appropriation act is passed establishing the amount that can actually be used for particular
programs. The annual funding level is generally tied to receipts of highway user taxes placed in
the Highway Trust Fund. Once the annual appropriation is passed, funds are distributed to each
state based on formulas (apportionments) or other procedures (allocations). Apportioned and
allocated funds generally must be spent on specific programs as outlined in the federal
legislation. SAFETEA-LU includes a revenue-aligned budget authority (“RABA”) provision, an annual
review and adjustment to link annual funding to actual and anticipated revenues credited to the
Highway Trust Fund. This review commences in fiscal year 2007 and continues through the term of the
bill.
On
February 15, 2007, the President signed a measure that provides funding of $39.1 billion for the
federal highway program and $9.0 billion for the federal transit program. These amounts represent a
total increase of $3.9 billion compared with 2006 levels.
Most federal funds are available for four years. Once the federal government approves a state
project, funds are committed and considered spent regardless of when the cash is actually spent by
the state and reimbursed by the federal government. Funds are generally spent by the state over a
period of years, with approximately 27% in the year of funding authorization, 41% in the
succeeding year and 16% in the third year. The remaining 16% is spent in the fourth year and
beyond, according to the Federal Highway Administration.
Federal highway laws require Congress to annually appropriate highway funding levels, which
continue to be subject to balanced budget and other proposals that may impact the funding available
for the Highway Trust Fund. However, investments in transportation improvements generally create
new jobs, which is a priority of many of the government’s economic plans. According to American
Road and Transportation Builders Association (“ARTBA”),
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-four
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
federal data indicates that every $1 billion in federal highway investment creates
47,500 jobs. Approximately half of the Aggregates business’ net sales to the infrastructure market
come from federal funding authorizations, including matching funds from the states.
States are required to match funds at a predetermined rate
to receive federal funds for highways. Matching levels vary
Geographic Exposure and Seasonality
Seasonal changes and other weather-related conditions significantly affect the aggregates
industry. Aggregates production and shipment levels coincide with general construction activity,
most of which occurs in the spring, summer and fall. Thus, production and shipment levels vary by
quarter. Operations concentrated in the northern United
depending
on the type of project. If a state is unable
to match its allocated federal funds,
funding is forfeited. Any forfeitures
are reallocated to states providing the
appropriate matching funds. States
rarely forfeit federal highway funds;
however, in 2002, Virginia became the
first state in recent history to not meet
a federal matching requirement. Although state highway construction programs are primarily financed from highway user fees (including fuel taxes and vehicle registration fees), there has been a reduction in many states’ investment in highway maintenance. Significant increases in federal infrastructure funding typically require state governments to increase highway user fees to match federal spending. Management believes that |
|
States generally experience more severe
winter weather conditions than operations in
the Southeast and Southwest. Excessive rainfall can
also jeopardize shipments, production and profitability. The Corporation’s operations in the southeastern and Gulf Coast regions of the United States and the Bahamas are at risk for hurricane activity. During 2005, Hurricanes Katrina and Rita caused extensive damage in Louisiana and Mississippi. While the Corporation incurred losses and business interruption because of these storms, the effect on the consolidated operating results of the Corporation was mitigated as: Louisiana and Mississippi together accounted for approximately 6% of the Aggregates business’ 2005 net sales; the areas affected were mostly distribution |
innovative
financing at the state-level will grow at a faster
rate than federal funding. During the November 2006 election cycle, ARTBA’s Special 2006 Ballot Initiatives
Report indicated that voters in various states approved 22 state and local measures that would
provide over $2.1 billion in additional annual transportation funding once enacted. Generally,
state spending on infrastructure leads to increased growth opportunity for the Corporation. The
degree to which the Corporation could be affected by a reduction or slowdown in infrastructure
spending varies by state. The state economies of the Aggregates business’ five largest
revenue-generating states may disproportionately affect performance.
The Vision 100-Century of Aviation Reauthorization Act is a four-year bill ending September 30,
2007, providing funding for airport improvements throughout the United States. Funding is $3.7
billion in fiscal 2007.
yards
instead of production locations; and the area’s operating margin excluding freight and delivery revenues
has historically been below the Aggregates business’ overall operating margin excluding freight and
delivery revenues. Altogether, the Corporation did not incur significant damage from hurricanes in
2006.
Cost Structure
| • | Top 5 cost categories represent 73% of the Aggregates business’ cost of sales; | |||
| • | Increased fuel costs negatively affected the Aggregates business’ cost of sales by $23 million; | |||
| • | Higher steel and consumables prices increased costs for repairs and supplies; | |||
| • | Health and welfare cost increases were controlled; and | |||
| • | Headcount reduced by 225 employees in 2006; earnings
from operations per employee increased 26% in 2006 compared with 2005. |
|||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-five
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Due to high fixed costs associated with aggregates production, the Corporation’s operating
leverage can be substantial. Generally, the top five categories of cost of sales for the Aggregates
business are (1) labor and related benefits; (2) freight on transported material (excluding freight
billed directly to customers); (3) energy; (4) repairs; and (5) depreciation, depletion and
amortization. In 2006, these categories represented approximately 73% of the Aggregates business’
total cost of sales.
The Corporation began a process improvement program in 1999 in which personnel teams
review operational effectiveness on a function-by-function and location-by-location basis. The
resulting plant automation and mobile fleet modernization and right-sizing, coupled with continuous
cost improvement, have contributed to an improved cost structure. In particular, plant
automation maximizes the efficiency of materials flow through the production process and
has resulted in a reduced headcount.
Wage inflation and increases in labor costs may be somewhat mitigated by enhanced productivity in
an expanding economy. Rising health care costs have affected total labor costs in recent years
and are expected to continue. However, workforce reductions resulting from plant automation and
mobile fleet right-sizing have helped the Corporation control rising costs. The Corporation has
experienced health care cost increases averaging 2% over the past five years, whereas the
national aver-
age was 6% to 7%. The Corporation’s voluntary pension plan contributions have lessened the impact
of rising pension costs.
Generally, when the Corporation incurs higher capital costs to replace facilities and equipment,
increased capacity and productivity, along with reduced repair costs, offset increased depreciation
costs. However, when aggregates demand weakens, the increased productivity and related efficiencies
may not be fully realized, resulting in underabsorption of fixed costs, including depreciation.
Additionally, lead times for large mobile equipment are currently approximating one year, and a
worldwide tire shortage has negatively affected their availability and cost. These shortages and
increased lead times have resulted in higher repair and maintenance expenses as equipment is being
used over a longer service period prior to replacement. However, the Corporation’s process
improvement program has contributed to cost control of repairs and maintenance costs. In fact, such
costs per ton produced were lower in 2006 than in 2002.
The impact of inflation on the Corporation’s businesses has been less significant as inflation
rates have moderated. However, the Corporation has experienced increases in most cost areas.
Notably, energy sector inflation especially affects the costs of operating mobile equipment used
in quarry operations, electricity to operate plants, waterborne and rail transportation of
aggregates materials, and asphalt production. In
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-six
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
2006, increases in fuel prices lowered net earnings for the Aggregates business by $0.30
per diluted share when compared with 2005 fuel prices.
In addition to the top five cost categories, the Corporation’s 2006 gross margin was also reduced
by increased costs for raw materials and supplies, including explosives, tires, steel, and oil and
lubricants.
As a percentage of net sales, selling, general and administrative costs remained relatively flat
in 2006 as compared with 2005. Among other factors, these costs were
affected lease rates for such services. In recent years, the Corporation brought additional
capacity online at its Bahamas and Nova Scotia locations to transport materials via oceangoing
ship. Further, in 2006, the Corporation completed the second largest capital project in its
history, a new highly-automated plant and barge loadout system at its Three Rivers facility in
Kentucky. The new plant, a key site in the Corporation’s long-haul distribution network, is capable
of producing more than 8 million tons per year and can ship to 14 states along the Ohio and
Mississippi River network.
positively affected by headcount reductions, offset by
increased stock-based compensation costs as
a result of the adoption of FAS 123(R) and
increased long-term incentive compensation
costs.
Shortfalls in federal and state revenues
may result in increases in income and
other taxes.
Transportation Exposure
| • | 11% increase in tonnage moved by
long-haul transportation network in 2006 as compared with 2005; and |
|||
| • | Embedded freight costs increased 24% in 2006, primarily due to higher fuel costs. | |||
The U.S. Department of the Interior’s geological
map of the United States shows the
possible sources of indigenous surface rock,
illustrating the limited supply in the coastal
areas of the United States from Virginia to Texas.
With population migration into the southeastern and southwestern United States, local crushed stone
supplies must be supplemented, or in most cases supplied, from inland and offshore quarries. The
Corporation’s strategic focus includes expanding inland and offshore capacity and acquiring
distribution terminals and port locations to offload transported material. In 1994, the Corporation
had 7 distribution terminals. Today, with 72 distribution terminals, a growing percentage of the
Corporation’s aggregates shipments are being moved by rail or water through this network. The
limited availability of water and rail transportation providers, coupled with increased demand
and limited distribution sites, has adversely
As the Corporation continues to move more aggregates by rail and water, embedded freight costs have
eroded profit margins. The freight costs for aggregates products often equal or exceed the selling
price of the underlying aggregates products. The Corporation administers freight costs principally
in three ways:
| Option 1: | The customer supplies transportation. |
| Option 2: | The Corporation directly ships aggregates products from a production location to a customer by arranging for a
third party carrier to deliver aggregates and then charging the freight costs to the customer.
These freight and delivery revenues and costs are presented in the Corporation’s consolidated
statements of earnings as required by Emerging Issues Task |
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-seven
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Force Issue No. 00-10, Accounting For Shipping and Handling Fees and Costs. These
freight and delivery revenues and costs were $263.5 million, $248.5 million and $204.5 million
in 2006, 2005 and 2004, respectively. |
||
| Option 3: | The Corporation transports aggregates, either by
rail or water, from a production location to a distribution terminal. The selling price at the
distribution terminal includes the freight cost to move it there. These freight costs are included
in costs of sales and were $204.3 million, $165.2 million and $125.8 million for 2006, 2005 and
2004, respectively. Transportation costs from the distribution location to the customer are
accounted for as described above in options 1 or 2, as applicable.
|
For analytical purposes, the Corporation eliminates the effect of freight on margins with the
second option. When the third option is used, margins as a percentage of net sales are negatively
affected because the customer does not pay the Corporation a profit associated with the
transportation component of the selling price. For example, a truck
customer in a local market will pick up the material at the quarry
In 1994, 93% of the Corporation’s aggregates shipments were moved by truck, the rest by rail. In
contrast, in 2006, the Corporation’s aggregates shipments moved 73% by truck, 16% by rail and 11 %
by water (see section Analysis of Gross Margin on page 48).
The Corporation’s increased dependence on rail shipments has made it vulnerable to railroad
performance issues, including track congestion, crew and power availability, and the ability to
renegotiate favorable railroad shipping contracts. In 2006, and to a lesser extent in 2005, the
Corporation experienced significant rail transportation shortages in Texas and parts of the
Southeast. These shortages were caused by the downsizing of personnel and equipment by certain
railroads during the economic downturn in the early part of this decade. Further, in response to
these issues, rail transportation providers focused on increasing the number of cars per unit train
under transportation contracts and are generally requiring customers, through the freight rate
structure, to accommodate larger unit train movements. A unit train is a freight train moving large
tonnages of a single bulk product between two points without intermediate yarding and switching.
In 2006, the Corporation brought a new plant online
and pay $6.50 per ton of aggregates. Assuming a $1.50 gross
profit per ton, the Corporation would recognize a 23% gross margin. However, if a customer
purchased a ton of aggregates that was transported to a distribution yard by the Corporation via
rail or water, the selling price may be $12.50 per ton, assuming a $6.00 cost of internal freight.
With the same $1.50 gross profit per ton and no profit associated
with the transportation component, the gross margin would be reduced to 12% as a result of the embedded freight cost.
|
|
at its North Troy operation in Oklahoma, which is capable
of producing 5 million tons per year and also handling up to multiple 90-car
unit trains. Further, in 2005, the Corporation addressed certain of its
railcar needs for future shipments by leasing 780 railcars under two master
lease agreements. One of the lease agreements has an initial lease term of 5
years with a renewal option for an additional 5-year period; the other lease
has a term of 20 years. Generally, the Corporation does not buy railcars, barges or ships, but rather supports its long-term distribution network with leases and
contracts of affreightments for these modes of transportation.
|
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fifty-eight
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
The waterborne distribution network increases the Corporation’s exposure to certain risks,
including, among other items, the ability to negotiate favorable shipping contracts, demurrage
costs, fuel costs, barge or ship availability and weather disruptions. The Corporation has
long-term agreements providing dedicated shipping capacity from its Bahamas and Nova Scotia
operations to its coastal ports. These contracts of affreightments have varying expiration dates
ranging from 2008 to 2017 and generally contain renewal options. Further, barge availability has
become an issue, as the rate of retirements is exceeding the rate of construction. Shipyards that
build barges are operating at capacity, and lead times for barges are approximately 18 months. In
2007, the Corporation will accept delivery of 50 new barges.
In 2006, the Corporation experienced delays in shipping its materials through Lock 52 on the Ohio
River as repair and maintenance activities were performed. These delays resulted from the reduction
of water traffic able to pass through the lock during this time. Lock 52 repairs were suspended in
2006 and are expected to be completed in the third quarter of 2007.
Water levels can also affect the Corporation’s ability to transport materials. High water levels
can result in a reduction of the number of barges that can be included in a tow and additional
horsepower to provide required towing services. Additionally, low water levels can result in
reduced tonnage included on a barge for shipping.
Management expects the multiple transportation modes that have been developed with various rail
carriers and via deepwater ships and barges to provide the Corporation with the flexibility to
effectively serve customers in the Southwest and Southeast coastal markets.
Internal Expansion
The Corporation’s capital expansion, acquisition and greensite programs are designed to take
advantage of construction market growth through investment in both permanent and portable quarrying
operations. Recently, the Corporation has focused on an extensive array of plant automation and
capacity expansion projects, particularly at locations that are part of the long-haul distribution network.
A current priority of the Corporation’s capital spending program is to recapitalize its
Southeast operations. While such capital projects generally increase capacity, lower production
costs and improve product quality, they may experience short-term, higher-than-average start-up
costs. Additionally, it may take time to increase shipments and absorb the increased depreciation
and other fixed costs, particularly in a slow economy. Pricing, too, may be negatively affected by
the additional volume available in the market. Therefore, the full economic benefit of a capital
project may not be realized immediately upon completion.
A long-term capital focus for the Corporation is underground aggregates mines, which provide a
neighbor-friendly alternative to surface quarries. The Corporation is the largest operator of
underground aggregates mines in the United States. Production costs are generally higher
underground than for surface quarries since the depth of the aggregates deposits and the access to
the reserves result in higher development costs, smaller blast shots and higher depreciation costs.
However, these locations tend to be closer to their end-use markets and, therefore, generally have
higher average selling prices.
On average, the Corporation’s aggregates reserves exceed 50 years of production based on current
levels of activity. Management of the Corporation has focused on acquisitions of additional
property around existing quarry locations. This property can serve as buffer property or additional
mineral reserve capacity, assuming the underlying geology supports economical aggregates mining. In
either instance, the acquisition of additional property around an existing quarry allows an
expansion of the quarry footprint and extension of quarry life. Some locations having limited
reserves may be unable to expand.
Environmental Regulation and Litigation
The expansion and growth of the aggregates industry is subject to increasing challenges from
environmental and political advocates hoping to control the pace of future development and preserve
open space. Rail and other transportation alternatives are being heralded by these groups as
solutions to mitigate road traffic congestion and overcrowding.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page fifty-nine
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
The Clean Air Act, originally passed in 1963 and periodically updated by amendments, is
the United States’ national air pollution control program that granted the Environmental Protection
Agency (“EPA”) authority to set limits on the level of various air pollutants. To be in compliance
with national ambient air quality standards (“NAAQS”), a defined geographic area must be below the
limits set for six pollutants. Recently, environmental groups have been successful in lawsuits
against the federal and certain state departments of transportation, delaying highway construction
in municipal areas not yet in compliance with the Clean Air Act. The EPA designates geographic
areas as nonattainment areas when the level of air pollutants exceed the national standard.
Nonattainment areas receive deadlines to reduce air pollutants by instituting various control
strategies. They otherwise face fines or control by the EPA. Included as non-attainment areas are
several major metropolitan areas in the Corporation’s markets, such as: Charlotte, North Carolina;
Greensboro/Winston-Salem/High Point, North Carolina; Raleigh/Durham/Chapel Hill, North Carolina;
Hickory/ Morganton/Lenoir, North Carolina; Houston/Galveston, Texas; Dallas/Fort Worth, Texas; San
Antonio, Texas; Atlanta, Georgia; Macon, Georgia; Columbia, South Carolina; Rock Hill, South
Carolina; Indianapolis, Indiana; and Terre Haute, Indiana. Federal transportation funding through
SAFETEA-LU is directly tied to compliance with the Clean Air Act.
Other environmental groups have published lists of targeted municipal areas, including areas
within the Corporation’s marketplace, for environmental and suburban growth control. The effect of
these initiatives on the Corporation’s growth is typically localized. Further challenges are
expected as these initiatives gain momentum across the United States.
The Corporation’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 Corporation’s operations may occasionally involve the use of substances classified as toxic
or hazardous. The Corporation regularly monitors and reviews its operations, procedures and
policies for compliance with these laws and regulations. Despite these compliance efforts, risk of
environmental liability is inherent in the operation of the Corporation’s businesses, as it is with
other companies engaged in similar businesses.
Environmental operating permits are, or may be, required for certain of the Corporation’s
operations; such permits are subject to modification, renewal and revocation. New permits, which
are generally required for opening new sites or for expansion at existing operations, can take
several years to obtain. Rezoning and special purpose permits are increasingly difficult to
acquire. Once a permit is obtained, the location is required to generally operate in accordance
with the approved site plan.
The Corporation is engaged in certain legal and administrative proceedings incidental to its
normal business activities (see Notes A and N to the audited consolidated financial statements on
pages 17 through 24 and pages 36 and 37, respectively).
Magnesia Specialties Business
Through its Magnesia Specialties business, the Corporation manufactures and markets magnesia-based
chemical products for industrial, agricultural and environmental applications, and dolomitic lime
for use primarily in the steel industry. Chemicals products have varying uses, including flame
retardants, wastewater treatment, pulp and paper production and other environmental applications.
In 2006, 65% of Magnesia Specialties’ net sales were attributable to chemicals products, 33% were
attributable to lime and 2% were attributable to stone.
Given the high fixed costs associated with operating the business, low capacity utilization
negatively affects its results of operations. Further, the production of certain magnesia chemical
products and lime products requires natural gas, coal and petroleum coke to fuel kilns. Price
fluctuations of these fuels affect the profitability of the Magnesia Specialties business.
In 2006, approximately 75% of the lime produced was sold to third-party customers, while the
remaining 25% was used internally as a raw material for the business’ manufacturing of chemicals
products. Dolomitic lime products sold to external customers are primarily used by the steel
industry, and overall, approximately 43% of Magnesia Specialties’ 2006 net sales related to
products used in the steel industry. Accordingly, a portion of the business’ revenue and profits is
affected by production and inventory trends within the steel industry. These
Martin
Marietta Materials, Inc. and Consolidated
Subsidiaries page
sixty
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
trends are guided by the rate of consumer consumption, the flow of offshore imports and
other economic factors. During 2006 and 2005, the domestic steel industry curtailed production by
20 percent to 25 percent for periods of approximately 3 months in order for the industry to absorb
excess steel inventory. Lime sales to the steel industry were curtailed by similar percentages.
This dynamic is expected to continue for the foreseeable future. Other factors, including growth in
Asian steel production, will continue to challenge the long-term competitiveness of the U.S. steel
industry.
Approximately 12% of Magnesia Specialties’ 2006 revenues came from foreign jurisdictions. Magnesia
Specialties sells its products in the United States, Canada, Mexico, Europe, South America and the
Pacific Rim. As a result of foreign market sales, financial results could be affected by foreign
currency exchange rates or weak economic conditions in the foreign markets. To mitigate the
short-term effect of currency exchange rates, the U.S. dollar is used as the functional currency in
foreign transactions.
Approximately 99% of Magnesia Specialties’ hourly workforce belongs to a labor union. Union
contracts cover employees at the Manistee, Michigan, magnesia-based chemicals plant and the
Woodville, Ohio, lime plant. The labor contract with the Manistee labor union expires in August
2007, while the Woodville labor union contract expires in June 2010. Management does not expect any
significant issues related to renewing the Manistee labor union contract. However, there can be no
assurance that a new agreement will be reached.
Structural Composites Products
The Corporation, through its wholly owned subsidiary, Martin Marietta Composites, Inc.
(“MMC”), is engaged in developmental activities related to structural composites products. MMC has
a licensing agreement related to a proprietary composite sandwich panel technology, which is
expected to play an important role in its product line related to flat panel applications. A third
machine related to this technology was installed in 2006 at the Sparta, North Carolina, facility.
MMC’s fiber-reinforced polymer (“FRP”) composite materials are manufactured from complex glass
fabrics and polymer resins. The fabrics are impregnated with resins and drawn under tension through
a heated die to generate panels with the desired physical properties. The final product is then cut
to the desired length. The component shapes are then assembled with adhesives to construct final
products. Composite products offer weight reduction, corrosion resistance and other positive
attributes compared with conventional materials.
In 2006, MMC focused on several market sectors for its composite products: military, transportation
and infrastructure. Military products consist of ballistic and blast panels. Transportation
products include commercial trucks, as well as rail cars. Infrastructure products include bridge
decks. MMC is currently focusing its efforts on homeland security, military applications and panel
products. As with any start-up opportunity, these activities are subject to uncertainty and risk,
including development and sale of composites products for targeted market segments and market
acceptance of these products.
MMC’s line of DuraSpan® bridge decks offers several advantages over bridge decks made of
conventional materials, including lighter weight and high strength; rapid installation that
significantly reduces construction time and labor costs; and resistance to corrosion and fatigue
that results in a longer life expectancy. To date, MMC has completed thirty successful DuraSpan®
installations in thirteen states and two foreign countries.
In 2006, management decided to exit its composite truck trailer business. In connection with this
decision, the Corporation wrote off certain assets and also accrued future contractual payment
obligations related to a licensing agreement, which resulted in a pretax charge of $3.8 million.
MMC also recorded additional charges of $0.4 million for inventory writedowns during 2006. The
Corporation also downsized the management group and the hourly workforce associated with the
structural composites product line. In 2007, the remaining components of the structural composites
product line have specific quarterly benchmarks to achieve to determine its viability.
During 2006, the Corporation incurred a loss of $13.2 million from operations, inclusive of the
inventory write down and the Composite truck trailer-related charges, associated with developing
structural composites products. At December 31, 2006, this business had inventory, fixed assets
and intangible
Martin Marietta Materials, Inc. and Consolidated
Subsidiaries page
sixty-one
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
assets with an aggregate carrying value of $7.2 million in addition to $1.9 million of
off-balance sheet obligations, which were primarily lease and royalty obligations.
Internal Control and Accounting and Reporting Risk
The Corporation’s independent registered public accounting firm issued an unqualified opinion on
management’s assessment that the Corporation’s internal controls as of December 31, 2006 were
effective. A system of internal controls over financial reporting is designed to provide
reasonable assurance, in a cost-effective manner, on the reliability of a company’s financial
reporting and the process for preparing and fairly presenting financial statements in accordance
with generally accepted accounting principles. Further, a system of internal control over
financial reporting, by its nature, should be dynamic and responsive to the changing risks of the
underlying business. Changes in the system of internal control over financial reporting could
increase the risk of occurrence of a significant deficiency or material weakness.
Accounting rulemaking, which may come in the form of accounting standards, principles,
interpretations or speeches, has become increasingly more complex and generally requires
significant estimates and assumptions in their interpretation and application. Further, accounting
principles generally accepted in the United States continue to be reviewed, updated and subject to
change by various rule-making bodies, including the Financial Accounting Standards Board and the
Securities and Exchange Commission (see Accounting Changes section of Note A to the audited
consolidated financial statements on pages 23 and 24 and section Application of Critical Accounting
Policies on pages 63 through 74).
For additional discussion on risks, see the section “Risk Factors” in the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2006.
Corporate Governance
The Corporation’s Board of Directors has established Corporate Governance Guidelines to support
its oversight of management’s strategy and operation of the business in order to promote the
long-term successful performance of the Corporation. The guidelines are subject to periodic review
and change by the Board, as appropriate, and are
available
on the Corporation’s Web site at
www.martinmarietta.com. Among other requirements, these guidelines include the following:
www.martinmarietta.com. Among other requirements, these guidelines include the following:
| • | The Board adheres to the Corporation’s Code of Ethics
and Standards of Conduct and periodically assesses its
performance. |
|
| • | A board size of 9 to 11 members, with at least
two-thirds of the Directors being independent non-management Directors. |
|
| • | Six Board Committees currently organized: Audit; Ethics,
Environment, Safety and Health; Executive; Finance;
Management Development and Compensation; and
Nominating and Corporate Governance. |
|
| • | Board of Directors and the Audit Committee meet at
least five times annually. |
|
| • | An executive session of the non-employee Directors is
held at least twice annually. |
|
| • | Chairman and Chief Executive Officer reports at least
annually to the Board on succession planning for
senior executive positions. |
Outlook 2007
Based on current forecasts and indications of business activity, management has a positive outlook
for 2007. Aggregates product line pricing is expected to increase 9% to 11% for the year,
reflecting continued supply constraints in many of the Corporation’s southeast and southwest market
areas. Demand for aggregates products is expected to be flat, with expectations of a softer
construction market in the first half of 2007 mitigated by volume growth in the back half of 2007.
Commercial and infrastructure construction is expected to increase in 2007, although not at the
same rate as in 2006. The delays in infrastructure spending in North Carolina and South Carolina
are expected to continue throughout 2007; however, management continues to believe that the
environment remains positive for pricing improvements, and, combined with the Corporation’s strict
adherence to cost control, it expects to be able to more than offset these infrastructure issues
and report increased earnings. Management believes residential construction is likely to decline in
the first half of 2007, with the downturn beginning to moderate during the latter part of the year.
Volume growth in other uses of aggregates products, including chemical grade stone used in
controlling electric power plant emissions and railroad ballast, is expected to continue in 2007.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page sixty-two
M A N A G E M E N T ’ S
D I S C U S S I O N & A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
The Specialty Products segment, which includes magnesia chemicals, dolomitic lime and
focused activity in structural composites, is expected to contribute $33 million to $36 million in
pretax earnings compared with $22 million in 2006. Management expects the magnesia chemicals
business to continue to grow and also expects demand for dolomitic lime from the steel industry to
be flat or down slightly.
Against this backdrop, management currently expects to report double-digit growth in net earnings
per diluted share in 2007 with results in a range of $5.95 to $6.50. For the first quarter,
management expects earnings per diluted share to be in a range of $0.36 to $0.52. The earnings per
share guidance is based on the current capital structure and existing share repurchase program.
Changes in leverage targets and increased levels of share repurchases, as outlined in the section
Capital Structure and Resources on pages 76 through 78, may increase earnings per diluted share.
The 2007 estimated earnings range includes management’s assessment of the likelihood of certain
risk factors that will affect performance within the range. The level and timing of aggregates
demand in the Corporation’s end-use markets and the management of production costs will affect
profitability in the Aggregates business. Logistical issues in the Corporation’s long-haul network,
particularly the availability of barges on the Mississippi River system and the availability of
rail cars and locomotive power to move trains, affect the Corporation’s ability to efficiently
transport material into certain markets (most notably Texas and the Gulf Coast region). Production
cost in the Aggregates business is sensitive to energy prices, the costs of repair and supply
parts, and the startup expenses for recently completed large-scale plant projects. The Magnesia
Specialties business is sensitive to changes in natural gas prices and is dependent on the steel
industry for sales of a significant portion of its dolomitic lime. Opportunities to reach the upper
end of the earnings range include the continued moderation of energy prices, namely diesel fuel and
natural gas; the easing of cost pressures on energy-related consumables (i.e., steel, rubber,
lubricants); the ability to achieve mid-year price increases across a larger portion of the
Corporation’s markets; aggregates product line demand exceeding
expectations; and the execution of a share repurchase program at a level similar to the past
several years. Risks to the low end of the earnings range are primarily volume related and include
a precipitous drop in demand as a result of a continued decline in residential construction, a
pullback in commercial construction, or some combination thereof. Further, increased highway
construction funding pressures in North Carolina and South Carolina can affect profitability.
The first quarter is particularly subject to volatility due to the effect of winter weather on
volumes and profitability. In addition, the key factor driving performance in the first quarter,
outside of the weather variable, is likely to be volume in the aggregates product line. In the
first quarter of 2006, heritage aggregates product line volume rose 8% due to historically
favorable weather. Management expects volumes to decline in the first quarter of 2007 compared with
the prior year.
OTHER FINANCIAL INFORMATION
Application of Critical Accounting Policies
The Corporation’s audited consolidated financial statements include certain critical estimates
regarding the effect of matters that are inherently uncertain. These estimates require management’s
subjective and complex judgments. Amounts reported in the Corporation’s consolidated financial
statements could differ materially if management had used different assumptions in making these
estimates, resulting in actual results differing from those estimates. Methodologies used and
assumptions selected by management in making these estimates, as well as the related disclosures,
have been reviewed by and discussed with the Corporation’s Audit Committee. Management’s
determination of the critical nature of accounting estimates and judgments may change from time to
time depending on facts and circumstances that management cannot currently predict.
Stock-Based Compensation
The Corporation adopted FAS 123(R) on January 1, 2006. FAS 123(R) requires all forms of
share-based payments to employees, including employee stock options, to be recognized as
compensation expense. The compensation
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixty-three
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
expense is the fair value of the awards at the measurement date. The Corporation
adopted the provisions of FAS 123(R) using the modified prospective transition method, which
recognizes stock option awards as compensation expense for unvested awards as of January 1,
2006 and awards granted or modified subsequent to that date. In accordance with the modified
prospective transition method, the Corporation’s consolidated statements of earnings and cash
flows for the prior-year periods have not been restated. The impact to the Corporation of
adopting FAS 123(R) and expensing stock options was as follows for the year ended December
31, 2006:
Decreased earnings from continuing operations before taxes on income by: |
$ | 5,897,000 | ||||||
Decreased earnings from continuing operations and net earnings by: |
$ | 3,564,000 | ||||||
Decreased basic and diluted earnings per share by: |
$ | 0.08 |
In addition, the Corporation reclassified $12,339,000 of stock-based
compensation liabilities to additional paid-in-capital, thereby increasing
shareholders’ equity at January 1, 2006.
Prior
to January 1, 2006, the Corporation accounted for its stock-based
compensation plans under the intrinsic value method prescribed by APB
Opinion 25, Accounting for Stock Issued to Employees, and Related
Interpretations. Compensation cost was recognized in net earnings for
awards granted under those plans with an exercise price less than the
market value of the underlying common stock on the date of grant. For
nonqualified stock options granted under those plans with an exercise
price equal to the market value of the stock on the date of grant, no
compensation cost was recognized in net earnings as reported in the
consolidated statements of earnings. Rather, stock-based compensation
expense was included as a pro forma disclosure in the notes to the
financial statements. Pro forma disclosures of net earnings and earnings
per share continue to be provided for periods prior to January 1, 2006
(see Stock-Based Compensation section of Note A to the audited
consolidated financial statements on pages 20 through 22).
The Corporation has stock-based compensation plans for certain of its employees and its
nonemployee directors. All stock-based compensation equity awards are units until distributed as
shares of common stock upon vesting. The plans provide for the following types of equity awards:
| • | Nonqualified stock options to certain employees and
nonemployee directors |
|
| • | Restricted stock awards to certain employees (“restricted
stock awards”) |
|
| • | Stock awards to certain employees related to incentive
compensation (“incentive compensation awards”) |
|
| • | Common stock purchase plan for nonemployee directors related to their annual retainer and meeting fees (“directors’ awards”) |
In 2005, the Corporation’s Management Development and Compensation Committee redesigned the
Corporation’s long-term compensation program to more directly tie pay with performance. Prior to
redesign, the long-term compensation program consisted primarily of stock options, which were
awarded based on a multiple of base compensation and targeted to be competitive with equity awards
granted for comparable positions in other companies similar to the Corporation. The revised program
consists of a mix of stock options and restricted stock awards for senior level employees and
restricted stock awards for other participants. Awards granted under the revised program are based
on the Corporation’s achievement of specific goals related to the return on invested capital as
compared to its weighted average cost of capital. Additionally, the Corporation may grant
restricted stock awards based on its performance relative to peer groups to certain employees.
The following table summarizes stock-based compensation expense for the years ended December 31,
2006, 2005 and 2004, unrecognized compensation cost for nonvested awards at December 31, 2006 and
the weighted-average period over which unrecognized compensation cost is expected to be
recognized:
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
page sixty-four
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
| Incentive | ||||||||||||||||||||
| Restricted | Compen- | |||||||||||||||||||
| Stock | Stock | sation | Directors' | |||||||||||||||||
| (add 000) | Options | Awards | Awards | Awards | Total | |||||||||||||||
| Stock-based compensation expense recognized for years ended December 31: |
||||||||||||||||||||
2006 |
$ | 5,897 | $ | 6,410 | $ | 474 | $ | 657 | $ | 13,438 | ||||||||||
2005 |
$ | 255 | $ | 2,505 | $ | 314 | $ | 628 | $ | 3,702 | ||||||||||
2004 |
$ | — | $ | 1,384 | $ | 307 | $ | 597 | $ | 2,288 | ||||||||||
| Unrecognized compensation cost at December 31, 2006: | ||||||||||||||||||||
| $ | 3,340 | $ | 10,724 | $ | 324 | $ | 135 | $ | 14,523 | |||||||||||
| Weighted-average period over which unrecognized compensation cost to be recognized: |
||||||||||||||||||||
| 1.9 yrs | 2.4 yrs | 1.1 yrs | 0.3 yrs | |||||||||||||||||
The following presents a horizon for stock-based compensation expense for outstanding awards as
of December 31, 2006 (in thousands):
2007 |
$ | 7,198 | ||
2008 |
4,228 | |||
2009 |
2,297 | |||
2010 |
691 | |||
2011 |
109 | |||
Total |
$ | 14,523 | ||
Valuation of Stock-Based Compensation Awards
The Corporation makes an annual stock option grant to qualifying employees with the stock option price equaling the closing price of the
Corporation’s common stock on the date of grant. The Corporation used a lattice valuation model to
determine the fair value of stock option awards granted in 2006, 2005 and 2004. The Black-Scholes
valuation model was used for stock options granted prior to 2004. The lattice valuation model takes
into account exercise patterns based on changes in the Corporation’s stock price, the lack of
transferability of the awards and other complex and subjective variables and is considered to
result in a more accurate valuation of stock options than the Black-Scholes valuation model. The
period of time for which options are expected to be outstanding, or expected term of the option, is
a derived output of the lattice valuation model. The Corporation considers the following factors
when estimating the expected term of options: vesting period of the award, expected volatility of
the underlying stock, employees’ ages and external data.
Other key assumptions used in determining the fair value of the stock options awarded in 2006, 2005
and 2004 were:
| 2006 | 2005 | 2004 | ||||||||||
Risk-free interest rate |
4.92 | % | 3.80 | % | 4.00 | % | ||||||
Dividend yield |
1.10 | % | 1.60 | % | 1.68 | % | ||||||
Volatility factor |
31.20 | % | 30.80 | % | 26.10 | % | ||||||
Expected term |
6.9 years | 6.3 years | 6.6 years | |||||||||
Based on these assumptions, the weighted-average fair value of each stock option granted was
$33.21 for 2006, $18.72 for 2005 and $11.00 for 2004.
The risk-free interest rate reflects the interest rate on zero-coupon U.S. government bonds
available at the time each option was granted having a remaining life approximately equal to the
option’s expected life. The dividend yield represents the dividend rate expected to be paid over
the option’s expected life and is based on the Corporation’s historical dividend payments and
targeted dividend pattern. The Corporation’s dividend pattern is outlined in its Annual Report on
Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission
on February 27, 2007. The Corporation’s volatility factor measures the amount by which its stock
price is expected to fluctuate during the expected life of the option and is based on historical
stock prices.
Any change in the aforementioned assumptions could affect the estimated fair value of future stock
options. The following table shows the impact on the fair value estimate if there were a change in
any of the key assumptions:
| Results in a fair | ||
| An increase to the: | value that is: | |
Price of the underlying common stock |
Higher | |
Exercise price of option |
Lower | |
Expected term of option |
Higher | |
Risk-free interest rate |
Higher | |
Expected dividends on stock |
Lower | |
Expected volatility of stock |
Higher | |
Restricted stock awards require no payment from the employee upon distribution. Therefore, the
closing price of the Corporation’s common stock on the measurement date represents the fair value
of these awards. These awards are expensed over the requisite service period.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixty-five
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Incentive compensation awards allow participants to use up to 50% of their annual incentive
compensation to acquire units representing shares of the Corporation’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 plan at certain minimum levels.
The Corporation expenses the 80% purchase price to the employees in the year the employees earn the
incentive compensation. Additionally, the Corporation amortizes the 20% discount over 34 months for
unvested awards as of January 1, 2006 and/or over the requisite service period for awards granted
subsequent to the adoption of FAS 123(R). The expense related to the 20% discount is based on the
closing price of the Corporation’s common stock on the measurement date of the award.
Common stock awards provide nonemployee directors the election to receive all or a portion of their
total fees in the form of the Corporation’s common stock. Currently, directors are required to
defer at least 50% of their annual retainer in the form of the Corporation’s common stock at a 20%
discount to market value. The Corporation expenses directors’ fees in the period in which they are
earned, with the exception of the annual retainer, which is expensed over a 12-month period from
the award date. Additionally, the Corporation amortizes the 20% discount over 12 months. The
expense related to the 20% discount is based on the closing price of the Corporation’s common stock
on the measurement date of the award.
Expense Allocation
FAS 123(R) requires stock-based compensation cost to be recognized over the requisite service
period for all awards granted subsequent to adoption. The requisite service period is defined as
the period of time over which an employee must provide service in exchange for an award under a
share-based payment arrangement. Certain of the Corporation’s stock-based compensation plans
provide for accelerated vesting of awards when an employee retires from active service and is
eligible to receive unreduced retirement benefits under the Corporation’s pension plans (defined as
“age 62” or “normal retirement age”). The requisite service period for employees of the Corporation
who reach normal retirement age of 62 prior to the end
of the stated vesting period of the award is the period from the measurement date of the award
until the date the employee reaches retirement age. For stock-based payment awards granted to
employees that are close to age 62 or have already reached the age of 62, the expense will be
front-loaded as compared with the vesting period. Stock options granted to nonemployee directors
vest immediately. Therefore, these awards have no requisite service period and are expensed on the
measurement date.
Prior to the adoption of FAS 123(R), the Corporation expensed stock-based payment awards for
recognition or pro forma purposes, as required, over their stated vesting periods. The Corporation
will recognize compensation cost over the stated vesting period for the unvested portion of
existing awards as of January 1, 2006, with acceleration for any remaining unrecognized
compensation cost if an employee actually retires prior to the vesting date. The stated vesting
periods for existing awards as of January 1, 2006 are as follows:
Options granted in 2005
|
4-year graded vesting | |
Options granted prior to 2005
|
3-year graded vesting | |
Restricted stock awards
|
35 to 93 months (award specific) |
|
Incentive compensation awards
|
34 months |
Under FAS 123(R), an entity may elect either the accelerated expense recognition method or a
straight-line recognition method for awards subject to graded vesting based on a service condition.
The Corporation elected to use the accelerated expense recognition method for stock options issued
to employees. 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.
FAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. The Corporation estimated
forfeitures for each homogenous group of employees granted awards. Employee groups consist of
Directors; Section 16 Officers and Division Presidents; Vice Presidents/General Managers; and
Others. The Corporation will ultimately recognize compensation cost only for those stock-based
awards that vest.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixty-six
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Other Factors
FAS 123(R), similar to other accounting rulemaking, is complex and requires significant estimates
and assumptions. In response to certain implementation issues, the Financial Accounting Standards
Board has created the FAS 123(R) Resource Group (the “Resource Group”) to deliberate certain
issues. The Corporation’s accounting and reporting treatment of certain issues may change as a
result of the issuance of any future guidance by the Resource Group.
Impairment Review of Goodwill
Goodwill is required to be tested at least annually for impairment using a discounted cash flow
model to estimate fair value. The impairment evaluation of goodwill is a critical accounting
estimate because goodwill represents 45.5% of the Corporation’s total shareholders’ equity at
December 31, 2006, the evaluation requires the selection of assumptions that are inherently
volatile and an impairment charge could be material to the Corporation’s financial condition and
its results of operations. Goodwill is as follows at December 31:
| % of | |||||||||||||
| Goodwill | % of Total | Shareholders’ | |||||||||||
| (in millions) | Assets | Equity | |||||||||||
2006 |
$ | 570.5 | 22.8 | % | 45.5 | % | |||||||
2005 |
$ | 569.3 | 23.4 | % | 48.5 | % | |||||||
There is no goodwill associated with the Specialty Products segment. For the Aggregates business,
management determined the reporting units, which represent the level at which goodwill is tested
for impairment under Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, (“FAS 142”), were as follow:
| • | Carolina, which includes North Carolina; |
|
| • | Mideast, which includes Indiana, Maryland, Ohio, Virginia and West Virginia; |
|
| • | South Central, which includes Alabama, Louisiana, Mississippi, North Georgia, and Tennessee; quarry operations
and distribution yards along the Mississippi River system and Gulf Coast; and offshore quarry operations
in the Bahamas and Nova Scotia; |
|
| • | Southeast, which includes Florida, South Carolina, and South Georgia; |
|
| • | West, which includes Arkansas, California, Iowa, Kansas, Minnesota, Missouri, Nebraska, Nevada, Oklahoma, Texas, Washington, Wisconsin and Wyoming. |
In accordance with Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, disclosures for the aforementioned reporting units are
consolidated for financial reporting purposes as they meet the aggregation criteria. Any impact on
reporting units resulting from organizational changes made by management is reflected in the
succeeding evaluation. In accordance with the reorganization of the Aggregates business as of
October 1, 2006, the reporting units were changed.
Goodwill for each of the reporting units was tested for impairment by comparing the reporting
unit’s fair value to its carrying value, which represents step 1 of a two-step approach required by
FAS 142. If the fair value of a reporting unit 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 leads to a step 2 evaluation to determine the goodwill write-off. If a step 1 failure
occurs, the excess of the carrying value over the fair value does not equal the amount of the
goodwill write-off. Step 2 requires the calculation of the implied fair value of goodwill by
allocating the fair value of the reporting unit to its tangible and intangible assets, other than
goodwill, similar to the purchase price allocation prescribed under Statement of Financial
Accounting Standards No. 141, Business Combinations. The remaining unallocated fair value
represents the implied fair value of the goodwill. If the implied fair value of goodwill exceeds
its carrying amount, there is no impairment. If the carrying value of goodwill exceeds its implied
fair value, an impairment charge is recorded for the difference. When performing step 2 and
allocating a reporting unit’s fair value, assets having a higher fair value as compared to book
value increase any possible write off of impaired goodwill.
In 2006, the impairment evaluation was performed as of October 1, which represents the ongoing
annual evaluation date. The fair values of the reporting units were determined using a 15-year
discounted cash flow model. Key assumptions included management’s estimates of future
profitability, capital requirements, a 10% discount rate and a 2.5% terminal growth rate. The fair
values for each reporting unit exceeded their respective carrying values.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixty-seven
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
The term of the discounted cash flow model is a significant factor in determining the
fair value of the reporting units. A 15-year term was selected based on management’s judgment
supported by quantitative factors, including the Corporation’s strong financial position, long
history of earnings growth and the remaining life of underlying mineral reserves, estimated at over
50 years at current production rates. Additional consideration was given to qualitative factors,
including the Corporation’s industry leadership position and the lack of obsolescence risks related
to the Aggregates business.
Future profitability and capital requirements are, by their nature, estimates. The profitability
estimates utilized in the evaluation were generally consistent with the five-year operating plan
prepared by management and reviewed by the Board of Directors. The succeeding ten years (2011 to
2020) of profitability were estimated using assumptions for price, cost and volume increases.
Future price, cost and volume assumptions were primarily weighted toward current forecasts and
market conditions, but also included a review of these trends during the most recent preceding
fifteen-year period. Capital requirements were estimated based on expected recapitalization needs
of the reporting units.
The assumed discount rate was based on the Corporation’s weighted-average cost of capital. The
terminal growth rate was selected based on the projected annual increase in Gross Domestic Product.
Price, cost and volume increases, profitability of acquired operations, efficiency improvements,
the discount rate and the terminal growth rate are significant assumptions in performing the
impairment test. These assumptions are interdependent and have a significant impact on the results
of the test.
The West reporting unit is significant to the evaluation as $403 million of the Corporation’s
goodwill at December 31, 2006 is attributable to this reporting unit. For the 2006 evaluation, the
excess of fair value over carrying value was $183 million. The following provides sensitivity
analysis related to the 2006 FAS 142 evaluation:
| • | The West reporting unit would fail the step 1 analysis using an 11% discount rate and a 2% terminal growth rate. |
| • | If the present value of projected future cash flows for the West reporting unit were 18%
less than currently forecasted, assuming a 10% discount rate and a 2.5% terminal growth rate,
that reporting unit would have failed step 1. |
The failure of step 1 does not necessarily result in an impairment charge. Rather, it requires step
2 to be completed. The completion of step 2 would determine the amount of the impairment charge.
Possible impairment charges under various scenarios were not calculated.
Management believes that all assumptions used were reasonable based on historical operating results
and expected future trends. However, if future operating results are unfavorable as compared with
forecasts, the results of future FAS 142 evaluations could be negatively affected. Additionally,
mineral reserves, which represent the underlying assets producing the reporting units’ cash flows,
are depleting assets by their nature. The reporting units’ future cash flows will be updated as
required based on expected future cash flow trends. Management does not expect significant changes
to the valuation term, but will continue to evaluate the discount rate and growth rate for the 2007
evaluation. Future annual evaluations and any potential write-off of goodwill represent a risk to
the Corporation.
Pension Expense-Selection of Assumptions
The Corporation sponsors noncontributory defined benefit retirement plans that cover substantially
all employees and a Supplemental Excess Retirement Plan (“SERP”) for certain retirees (see Note J
to the audited consolidated financial statements on pages 30 through 33). Key assumptions for these
benefit plans are selected in accordance with Statement of Financial Accounting Standards No. 87,
Employers’ Accounting for Pensions (“FAS 87”). In accordance with FAS 87, annual pension expense
(inclusive of SERP expense) consists of several components:
| • | Service Cost, which represents the present value of benefits attributed to services rendered in the current year, measured by expected future salary levels. |
|
| • | Interest Cost, which represents the accretion cost on the liability that has been discounted back to its present value. |
|
| • | Expected Return on Assets, which represents the expected investment return on pension fund assets. |
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixty-eight
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
| • | Amortization of Prior Service Cost and Actuarial Gains and
Losses, which represents components that are recognized over time rather than immediately, in accordance
with FAS 87. Prior service cost represents credit given
to employees for years of service prior to plan inception.
Actuarial gains and losses arise from changes in assumptions regarding future events or when actual returns on
assets differ from expected returns. At December 31,
2006, the net unrecognized actuarial loss and unrecognized prior service cost were $63.8 million and $5.6
million, respectively. These unrecognized amounts have
now been recorded in liabilities through an adjustment
to accumulated other comprehensive loss, a component of shareholders’ equity, as of December 31, 2006,
in accordance with Statement of Financial Accounting
Standards No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Benefits, an
amendment of FAS 87, 88, 106 and 132(R), (“FAS 158”).
Pension accounting rules currently allow companies to
amortize the portion of the unrecognized actuarial loss
that represents more than 10 percent of the greater of
the projected benefit obligation or pension plan assets,
using the average remaining service life for the amortization period. Therefore, the $63.8 million unrecognized
actuarial loss consists of approximately $30.5 million
that is currently subject to amortization in 2007 and
$33.3 million that is not subject to amortization in 2007.
Assuming the December 31, 2006 projected benefit
obligation and an average remaining service life of 8.9
years, approximately $4.1 million of amortization of the
actuarial loss and prior service cost will be a component
of 2007 annual pension expense. |
These components are calculated annually to determine the pension expense that is reflected in the
Corporation’s results of operations.
Management believes the selection of assumptions related to the annual pension expense is a
critical accounting estimate due to the high degree of volatility in the expense dependent on
selected assumptions. The key assumptions are as follow:
| • | The discount rate is the rate used to present value the pension obligation and represents the current rate at which the pension obligations could be effectively settled. |
| • | The rate of increase in future compensation levels is used to project the pay-related pension benefit formula and should estimate actual future compensation levels. |
|
| • | The expected long-term rate of return on pension fund assets is used to estimate future asset returns and should reflect the average rate of long-term earnings on assets already invested. |
|
| • | The mortality table represents published statistics on the expected lives of people. |
Management’s selection of the discount rate is based on an analysis that estimates the current
rate of return for high quality, fixed-income investments with maturities matching the payment of
pension benefits that could be purchased to settle the obligations. The Corporation used the 10th
to 90th percentile of the universe (approximately 500 issues) of Moody’s Aa noncallable bonds in
its analysis to determine the discount rate. Of the four key assumptions, the discount rate is
generally the most volatile and sensitive estimate. Accordingly, a change in this assumption would
have the most significant impact on the annual pension expense.
Management’s selection of the rate of increase in future compensation levels is generally based on
the Corporation’s historical salary increases, including cost of living adjustments and merit and
promotion increases, giving consideration to any known future trends. A higher rate of increase
will result in a higher pension expense. The actual rate of increase in compensation levels in
2006 and 2005 was approximately 4.0%.
Management’s selection of the expected long-term rate of return on pension fund assets is based on
the historical long-term rates of return for investments in a similar mix of assets. Given that
these returns are long-term, there are generally not significant fluctuations in the expected rate
of return from year to year. A higher expected rate of return will result in a lower pension
expense. The following table presents the expected return on pension fund assets as compared with
the actual return on pension fund assets for 2006, 2005 and 2004 (in thousands):
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page sixty-nine
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
| Expected Return | Actual Return | |||||||
| Year | on Pension Assets | on Pension Assets | ||||||
20061 |
$ | 19,638 | $ | 30,329 | ||||
20052 |
$ | 17,713 | $ | 18,599 | ||||
20043 |
$ | 16,377 | $ | 11,119 | ||||
| 1 | Return on assets is for the period December 1, 2005 to November 30, 2006. |
|
| 2 | Return on assets is for the period December 1, 2004 to November 30, 2005. |
|
| 3 | Return on assets is for the 11-month period January 1, 2004 to November 30, 2004 due to the change in the measurement date in 2004. |
The difference between expected return on pension assets and the actual return on pension
assets is not immediately recognized in the statement of earnings. Rather, pension accounting rules
require the difference to be included in actuarial gains and losses, which is amortized into annual
pension expense.
At December 31, 2006 and 2005, the Corporation used the RP 2000 Mortality Table to estimate the
remaining lives of the participants in the pension plans. The RP 2000 Mortality Table includes
separate tables for blue-collar employees and white-collar employees. The Corporation used the
blue-collar table for its hourly workforce and the white-collar table for its salaried employees.
Assumptions are selected on December 31 to be used in the calculation of the succeeding year’s
expense. For the 2006 pension expense, the assumptions selected at December 31, 2005 were as
follows:
Discount rate |
5.83 | % | ||
Rate of increase in future compensation levels |
5.00 | % | ||
Expected long-term rate of return on assets |
8.25 | % | ||
Average remaining service period for participants |
13.1 years | |||
RP 2000 Mortality Table |
||||
Using these assumptions, the 2006 pension expense was $14.3 million. A change in the assumptions
would have had the following impact on the 2006 expense:
| • | A change of 25 basis points in the discount rate would have changed 2006 expense by approximately $1.3 million. |
|
| • | A change of 25 basis points in the expected long-term rate of return on assets would have changed the 2006 expense by approximately $0.6 million. |
For the 2007 pension expense, the assumptions selected were as follows:
Discount rate |
5.70 | % | ||
Rate of increase in future compensation levels |
5.00 | % | ||
Expected long-term rate of return on assets |
8.25 | % | ||
Average remaining service period for participants |
8.9 years | |||
RP 2000 Mortality Table |
||||
Using these assumptions, the 2007 pension expense is expected to be approximately $13.0 million
based on current demographics and structure of the plans. Changes in the underlying assumptions
would have the following estimated impact on the 2007 expense:
| • | A change of 25 basis points in the discount rate would change the 2007 expense by approximately $1.8 million. |
|
| • | A change of 25 basis points in the expected long-term rate of return on assets would change the 2007 expense by approximately $0.7 million. |
The Corporation’s pension plans are underfunded (projected benefit obligation exceeds the fair
value of plan assets) by $58.1 million at December 31, 2006. Although an underfunded plan
indicates a need for cash contributions, the Employee Retirement Income Security Act of 1974
(ERISA) and, more recently, Congressional changes in the timing and calculation of pension plan
funding generally allow companies several years to make the required contributions. During this
period, improvements in actual returns on assets may decrease or eliminate the need for cash
contributions. The Corporation made pension plan contributions of $99.8 million in the five-year
period ended December 31, 2006, of which $88.0 million were voluntary. In 2007, the Corporation’s
expected contributions to its pension plans are $14.1 million, consisting of a voluntary $12.0
million contribution to the qualified pension plan and a $2.1 million contribution to the SERP.
Estimated Effective Income Tax Rate
The Corporation uses the liability method to determine its provision for income taxes, as
outlined in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“FAS
109”). Accordingly, the annual provision for income taxes reflects estimates of the current
liability for income taxes, estimates of the tax effect of book versus tax basis differences using
statutory income tax rates and
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
management’s judgment with respect to any valuation allowances on deferred tax assets.
The result is management’s estimate of the annual effective tax rate (the “ETR”).
Income for tax purposes is determined through the application of the rules and regulations under
the U.S. Internal Revenue Code and the statutes of various foreign, state and local tax
jurisdictions in which the Corporation conducts business. Changes in the statutory tax rates and/or
tax laws in these jurisdictions may have a material effect on the ETR. The effect of these changes,
if any, is recognized when the change is effective. As prescribed by these tax regulations, as well
as generally accepted accounting principles, the manner in which revenues and expenses are
recognized for financial reporting and income tax purposes is not always the same. Therefore, these
differences between the Corporation’s pretax income for financial reporting purposes and the amount
of taxable income for income tax purposes are treated as either temporary or permanent, depending
on their nature.
Temporary differences reflect revenues or expenses that are recognized for financial reporting
income in one period and taxable income in a different period. Temporary differences result from
differences between the book and tax basis of assets or liabilities and give rise to deferred tax
assets or liabilities (i.e., future tax deductions or future taxable income). Therefore, when
temporary differences occur, they are offset by a corresponding change in a deferred tax account.
As such, total income tax expense as reported on the Corporation’s consolidated statements of
earnings is not changed by temporary differences. For example, accelerated methods of depreciating
machinery and equipment are often used for income tax purposes as compared with the straight-line
method used for financial reporting purposes. Initially, the straight-line method used for
financial reporting purposes as compared with accelerated methods for income tax purposes will
result in higher current income tax expense for financial reporting purposes, with the difference
between these methods resulting in the establishment of a deferred tax liability.
The Corporation has deferred tax liabilities, primarily for property, plant and equipment and
goodwill. The deferred tax liabilities attributable to property, plant and equipment relate to
accelerated depreciation and depletion
methods used for income tax purposes as compared with the straight-line and units of production
methods used for financial reporting purposes. These temporary differences will reverse over the
remaining useful lives of the related assets. The deferred tax liabilities attributable to goodwill
arise as a result of amortizing goodwill for income tax purposes but not for financial reporting
purposes. This temporary difference reverses when goodwill is written off for financial reporting
purposes, either through divestitures or an impairment charge. The timing of such events cannot be
estimated.
The Corporation has deferred tax assets, primarily for unvested stock-based compensation awards,
employee pension and postretirement benefits, valuation reserves, inventories and net operating
loss carryforwards. The deferred tax assets attributable to unvested stock-based compensation
awards relate to differences in the timing of deductibility for book versus income tax purposes.
For book purposes, the fair value of the awards is deducted ratably over the vesting period. For
income tax purposes, no deduction is allowed until the award is vested or no longer subject to a
substantial risk of forfeiture. The deferred tax assets attributable to pension and postretirement
benefits relate to deductions as plans are funded for income tax purposes as compared with
deductions for financial reporting purposes that are based on accounting standards. The reversal of
these differences will depend on the timing of the Corporation’s contributions to the related
benefit plans as compared to the annual expense for financial reporting purposes. The deferred tax
assets attributable to valuation reserves and inventories relate to the deduction of estimated cost
reserves and various period expenses for financial reporting purposes that are deductible in a
later period for income tax purposes. The reversal of these differences will depend on facts and
circumstances, including the timing of deduction for income tax purposes for reserves previously
established and the establishment of additional reserves for financial reporting purposes. At
December 31, 2006, the Corporation had state net operating loss carryforwards of $112.7 million and
related deferred tax assets of $7.2 million that have varying expiration dates. These deferred tax
assets have a valuation allowance of $6.8 million, which was established based on the uncertainty
of generating future taxable income in certain states during the limited period that the net
operating loss carryforwards can be utilized under state statutes.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-one
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
The Corporation’s estimated ETR reflects adjustments to financial reporting income for
permanent differences. Permanent differences reflect revenues or expenses that are recognized in
determining either financial reporting income or taxable income, but not both. An example of a
material permanent difference that affects the Corporation’s estimated ETR is tax depletion in
excess of basis for mineral reserves. For income tax purposes, the depletion deduction is
calculated as a percent of sales, subject to certain limitations. As a result, the Corporation may
continue to claim tax depletion deductions exceeding the cost basis of the mineral reserves,
whereas the depletion expense for book purposes ceases once the value of the mineral reserves is
fully amortized. The continuing depletion for tax purposes is treated as a permanent difference.
Another example of a permanent difference is goodwill established for book purposes from an
acquisition of another company’s stock. This book goodwill has no basis for income tax purposes. If
the goodwill is subsequently written off as a result of divestitures or impairment losses, the book
deduction is treated as a permanent difference. Permanent differences either increase or decrease
income tax expense with no offset in deferred tax liability, thereby affecting the ETR.
Tax depletion in excess of book basis for mineral reserves is the single largest recurring
permanent deduction for the Corporation in calculating taxable income. Therefore, a significant
amount of the financial reporting risk related to the estimated ETR is based on this estimate.
Estimates of the percentage depletion allowance are based on other accounting estimates such as
sales and profitability by tax unit, which compound the risk related to the estimated ETR. Further,
the percentage depletion allowance may not increase or decrease proportionately to a change in
pretax earnings.
To calculate the estimated ETR for any year, management uses actual information where practicable.
Certain permanent and temporary differences are calculated prior to filing the income tax returns.
However, other amounts, including deductions for percentage depletion allowances, are estimated at
the time of the provision. After estimating amounts that management considers reasonable under the
circumstances, a provision for income taxes is recorded.
Each quarter, management updates the estimated ETR for the current year based on events that occur
during the quarter. For example, changes to forecasts of annual sales and related earnings,
purchases and sales of business units and product mix subject to different percentage depletion
rates are reflected in the quarterly estimate of the annual ETR. As required by FAS 109, some
events may be treated as discrete events and the tax impact is fully recorded in the quarter in
which the discrete event occurs. During 2006, the estimated ETR was changed in each quarter. In
particular, the change in the third quarter was primarily to reflect the filing of the 2005 federal
and state income tax returns that adjusted prior estimates of permanent and temporary differences,
the evaluation of the deferred tax balances and the related valuation allowances, and the reversal
of tax reserves for the 2002 tax year for which the statute of limitations expired in 2006. At the
end of the fourth quarter, certain estimates were adjusted to reflect actual reported annual sales
and related earnings and any changes in permanent differences. Historically, the Corporation’s
adjustment of prior estimates of permanent and temporary differences has not been material to its
results of operations or total tax expense.
For 2006, an estimated overall ETR of 30.5% was used to calculate the provision for income taxes, a
portion of which was allocated to discontinued operations. The estimated ETR is sensitive given
that changes in the rate can have a significant impact on annual earnings. A change of 100 basis
points in the estimated ETR would affect the 2006 tax provision expense by $3.5 million.
All income tax filings are subject to examination by federal, state and local regulatory agencies,
generally within three years of the filing date. Since these examinations could result in
adjustments to income tax expense, it is the Corporation’s policy to establish reserves for taxes
that may become payable in future years as a result of an examination by the tax authorities.
Reserves for tax contingencies related to open years are estimated based upon management’s
assessment of risk associated with differences in interpretation of the tax laws between management
and the tax authorities. These reserves contain estimated permanent differences and interest
expense applied to both permanent and temporary contingencies. The tax reserves are analyzed
quarterly, adjusted
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-two
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
accordingly based on underlying facts and circumstances and are recorded in current
income taxes payable. The Corporation’s open tax years that are subject to examination are 2003
through 2006, including 2002, 2001 and 2000 for certain state and foreign tax jurisdictions.
The Corporation has established $9.2 million in reserves for taxes at December 31, 2006 that may
become payable in future years as a result of an examination by tax authorities. The reserves are
calculated based on probable exposures to additional tax payments related primarily to federal tax
treatment of percentage depletion deductions, legal entity transaction structuring, transfer
pricing, state tax treatment of federal bonus depreciation deductions and executive compensation.
If the open tax years are not examined by federal or state tax authorities, then the tax reserves
will be reversed in the period in which the statute of limitations expires for the applicable tax
year and recorded as a discrete event. During the third quarter of 2006, reserves of $2.7 million
were reversed into income when the federal statute of limitations for examination of the 2002 tax
year expired. The Internal Revenue Service is currently auditing the Corporation’s consolidated
federal income tax returns for the years ended December 31, 2005 and 2004.
Property, Plant and Equipment
Property, plant and equipment represent 52% of total assets at December 31, 2006 and accordingly,
accounting for these assets represents a critical accounting policy. Useful lives of the assets
can vary depending on factors, including production levels, geographic location, portability and
maintenance practices. Additionally, climate and inclement weather can reduce the useful life of
an asset. Historically, the Corporation has not recognized significant losses on the disposal or
retirement of fixed assets.
The Corporation evaluates aggregates reserves in several ways, depending on the geology at a
particular location and whether the location is a potential new site (greensite), an acquisition
or an existing operation. Greensites require a more extensive drilling program that is undertaken
before any significant investment is made in terms of time, site development or efforts to obtain
appropriate zoning and permitting (see section Environmental Regulation and Litigation on pages 59
and 60). The amount of overburden and the quality of the aggregates
material are significant factors in determining whether to pursue opening the site. Further, the
estimated average selling price for products in a market is also a significant factor in concluding
that reserves are economically mineable. If the Corporation’s analysis based on these factors is
satisfactory, the total aggregates reserves available are calculated, and a determination is made
whether to open the location.
Reserve evaluation at existing locations is typically performed to evaluate purchasing adjoining
properties and, for quality control, calculating overburden volumes and mine planning. Reserve
evaluation of acquisitions may require a higher degree of sampling to locate any problem areas that
may exist and to verify the total reserves.
Well-ordered subsurface sampling of the underlying deposit is basic to determining reserves at any
location. This subsurface sampling usually involves one or more types of drilling, determined by
the nature of the material to be sampled and the particular objective of the sampling. The
Corporation’s objectives are to ensure that the underlying deposit meets aggregates specifications
and the total reserves on site are sufficient for mining. Locations underlain with hard rock
deposits, such as granite and limestone, are drilled using the diamond core method, which provides
the most useful and accurate samples of the deposit. Selected core samples are tested for
soundness, abrasion resistance and other physical properties relevant to the aggregates industry.
The number of holes and their depth are determined by the size of the site and the complexity of
the site-specific geology. Geological factors that may affect the number and depth of holes include
faults, folds, chemical irregularities, clay pockets, thickness of formations and weathering. A
typical spacing of core holes on the area to be tested is one hole for every four acres, but wider
spacing may be justified if the deposit is homogeneous.
Despite previous drilling and sampling, once accessed, the quality of reserves within a deposit
can vary. Construction contracts, for the infrastructure market in particular, include
specifications related to the aggregates material. If a flaw in the deposit is discovered, the
aggregates material may not meet the required specifications. This can have an adverse effect on
the Corporation’s ability to serve certain customers or on the Corporation’s profitability.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-three
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
In addition, other issues can arise that limit the Corporation’s ability to access
reserves in a particular quarry, including geological occurrences, blasting practices and zoning
issues.
Locations underlain with sand and gravel are typically drilled using the auger method, whereby a
6-inch corkscrew brings up material from below, which is then sampled. Deposits in these locations
are typically limited in thickness, and the quality and sand to gravel ratio of the deposit can
vary both horizontally and vertically. Hole spacing at these locations is approximately one hole
for every acre to ensure a representative sampling.
The geologist conducting the reserve evaluation makes the decision as to the number of holes and
the spacing. Further, the anticipated heterogeneity of the deposit, based on U.S. geological maps,
also dictates the number of holes used.
The generally accepted reserve categories for the aggregates industry and the designations the
Corporation uses for reserve categories are summarized as follows:
Proven Reserves — These reserves are designated using closely spaced drill data as described
above and a determination by a professional geologist that the deposit is relatively homogeneous
based on the drilling results and exploration data provided in U.S. geologic maps, the U.S.
Department of Agriculture soil maps, aerial photographs and/or electromagnetic, seismic or other
surveys conducted by independent geotechnical engineering firms. The proven reserves that are
recorded reflect reductions incurred as a result of quarrying that result from leaving ramps,
safety benches, pillars (underground), and the fines (small particles) that will be generated
during processing. The Corporation typically assumes a loss factor of 25%. However, the assumed
loss factor at coastal operations is approximately 50% due to the nature of the material. The
assumed loss factor for underground operations is 35% due to pillars. Proven reserves are reduced
by reserves that are under the plant and stockpile areas, as well as setbacks from neighboring
property lines.
Probable Reserves — These reserves are inferred utilizing fewer drill holes and/or assumptions
about the economically mineable reserves based on local geology or drill results from adjacent
properties.
The Corporation’s proven and probable reserves recognize reasonable economic and operating
constraints as to maximum depth of overburden and stone excavation, and also include reserves at
the Corporation’s inactive and undeveloped sites, including some sites where permitting and zoning
applications will not be filed until warranted by expected future growth. The Corporation has
historically been successful in obtaining and maintaining appropriate zoning and permitting (see
section Environmental Regulation and Litigation on pages 59 and 60).
The Corporation expenses all exploration costs until proven or probable reserves are established.
Mineral reserves, when acquired in connection with a business combination, are valued at the
present value of royalty payments, using a prevailing market royalty rate that would have been
incurred if the Corporation had leased the reserves as opposed to fee-ownership for the life of
the reserves, not to exceed twenty years.
The Corporation uses proven and probable reserves as the denominator in its units-of-production
calculation to amortize fee ownership mineral deposits. During 2006, depletion expense was $6.3
million.
Inventory Standards
The Corporation values its finished goods inventories under the first-in, first-out methodology,
using standard costs that are updated annually during the fourth quarter. For quarries, the
standards are developed using production costs for a twelve-month period, in addition to complying
with the principle of lower of cost or market, and adjusting, if necessary, for normal capacity
levels and abnormal costs. For sales yards, in addition to production costs, the standards include
a freight component for the cost of transporting the inventory from a quarry to the sales yard and
materials handling costs. Preoperating start-up costs are expensed and are not capitalized as part
of inventory costs. These standards are generally used to determine inventory values for the
succeeding year.
In periods in which production costs, in particular energy costs, have changed significantly from
the prior period, the updating of standards can have a significant impact on the Corporation’s
operating results (see section Cost Structure on pages 55 through 57).
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-four
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Liquidity
and Cash Flows
Operating Activities
The primary source of the Corporation’s liquidity during the past three years has been cash
generated from its operating activities. Cash provided by operations was $338.2 million in 2006,
compared with $317.8 million in 2005 and $266.8 million in 2004. These cash flows were derived,
substantially, from net earnings before deducting certain noncash charges for depreciation,
depletion and amortization of its properties and intangible assets. Depreciation, depletion and
amortization for the years ended December 31 were as follows:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Depreciation |
$ | 130,608 | $ | 128,160 | $ | 121,477 | ||||||
Depletion |
6,258 | 5,433 | 6,019 | |||||||||
Amortization |
4,563 | 4,658 | 5,363 | |||||||||
Total |
$ | 141,429 | $ | 138,251 | $ | 132,859 | ||||||
The increase in cash provided by operating activities in 2006 as compared with 2005 is due to
higher earnings, partially offset by larger increases in inventories and accounts receivable.
However, inventories and accounts receivable levels were in line with the increased level of
sales. In accordance with FAS 123(R), excess tax benefits attributable to stock-based compensation
transactions
are classified as a financing cash flow as compared with the pre-adoption presentation in operating cash inflows.
The increase in cash provided by operating activities in 2005 as compared with 2004 of $50.9 million was, among other things, due to higher earnings and higher excess tax benefits from stock option exercises.
are classified as a financing cash flow as compared with the pre-adoption presentation in operating cash inflows.
The increase in cash provided by operating activities in 2005 as compared with 2004 of $50.9 million was, among other things, due to higher earnings and higher excess tax benefits from stock option exercises.
Additionally, pension plan contributions, which reduce operating cash flow, were $15.3
million in 2005 compared with $51.2 million in 2004. These factors were partially offset by an
increase in inventories, accounts receivable due to higher sales and higher cash paid for income
taxes.
Investing Activities
Net cash used for investing activities was $213.4 million in 2006, $213.9 million in 2005 and
$123.3 million in 2004.
Cash used for investing activities in 2006 was comparable to 2005. Increased capital expenditures
related to plant capacity and efficiency improvements were offset by the Corporation selling $25.0
million of variable demand rate notes in 2006. These investments were purchased in 2005. The
increase in cash used for investing activities in 2005 as compared with 2004 is due to increased
capital expenditures. Additions to property, plant and equipment, excluding acquisitions, were
$266.0 million in 2006, $221.4 million in 2005 and $163.4 million in 2004. Capital spending by
reportable segment was as follows for 2006, 2005 and 2004:
| (add 000) | 2006 | 2005 | 2004 | |||||||||
Mideast Group |
$ | 66,865 | $ | 66,703 | $ | 67,147 | ||||||
Southeast Group |
55,719 | 67,402 | 23,022 | |||||||||
West Group |
115,726 | 68,607 | 52,097 | |||||||||
Total Aggregates Business |
238,310 | 202,712 | 142,266 | |||||||||
Specialty Products |
12,985 | 8,724 | 8,295 | |||||||||
Corporate |
14,681 | 9,965 | 12,884 | |||||||||
Total |
$ | 265,976 | $ | 221,401 | $ | 163,445 | ||||||
Spending for property, plant and equipment is expected to approximate $235 million in 2007,
including the Hunt Martin Materials joint venture and exclusive of acquisitions. Additionally, in
2007, the Corporation expects to enter into a lease agreement for 50 barges with a total commitment
of approximately $24 million.
Proceeds from divestitures and sales of assets include the cash from the sales of surplus land and
equipment and the divestitures of several Aggregates operations. The divestitures contributed
pretax cash of $30.6 million, $37.6 million and $45.7 million in 2006, 2005 and 2004,
respectively.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-five
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Financing Activities
$169.2 million, $188.8 million and $107.0 million of cash was used for financing activities during
2006, 2005 and 2004, respectively.
In 2006, the Board of Directors approved total cash dividends on the Corporation’s common stock of
$1.01 per share. Regular quarterly dividends were authorized and paid by the Corporation at a rate
of $0.23 per share for the first and second quarters and at a rate of $0.275 per share for the third
and fourth quarters. Total cash dividends were $46.4 million in 2006, $40.0 million in 2005 and
$36.5 million in 2004.
During 2006, the Corporation continued its common stock repurchase plan through open market
purchases pursuant to authority granted by its Board of Directors. In 2006, the Corporation
repurchased 1,874,200 shares at an aggregate price of $172.9 million as compared with 2,658,000
shares at an aggregate price of $175.6 million in 2005 and 2,658,000 shares at an aggregate price
of $74.6 million in 2004.
During 2006, the Corporation issued stock under its stock-based award plans, providing $31.5
million in cash. Comparable cash provided by issuance of common stock was $33.3 million and $3.8
million in 2005 and 2004, respectively.
Excess
tax benefits from stock-based compensation transactions were $17.5 million in 2006, the
first year that such benefits were classified as financing activities in the consolidated
statement of cash flows.
Capital Structure and Resources
Long-term debt, including current maturities, decreased to $705.3 million at the end of 2006, from
$710.0 million at the end of 2005. The Corporation’s debt at December 31, 2006 was principally in
the form of publicly issued long-term, fixed-rate notes and debentures. The unamortized portion of
unwound interest rate swaps, $4.5 million and $6.6 million, is included in the December 31, 2006
and 2005 long-term debt balance, respectively.
Net of available cash and investments, which also includes escrowed cash and the effect of
interest rate swaps, the
Corporation’s debt-to-capitalization ratio was 35% at December 31, 2006 compared with 34% at
December 31, 2005 and is calculated as follows:
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Total debt |
$ | 705,264 | $ | 710,022 | ||||
Adjusted for: |
||||||||
Effect of fair value of
interest rate swaps |
(4,469 | ) | (6,640 | ) | ||||
Net cash in banks |
(23,892 | ) | (69,455 | ) | ||||
Investments |
— | (25,000 | ) | |||||
Cash held in escrow |
— | (878 | ) | |||||
Adjusted debt |
676,903 | 608,049 | ||||||
Shareholders’ equity |
1,253,972 | 1,173,685 | ||||||
Total capital, using adjusted debt |
$ | 1,930,875 | $ | 1,781,734 | ||||
| Debt-to-capitalization, net of available cash and investments |
35% | 34% | ||||||
Debt-to-capitalization, net of available cash and investments represents a non-GAAP measure.
The Corporation calculates the ratio by using adjusted debt, as it believes using available cash
and investments to hypothetically reduce outstanding debt provides a more appropriate evaluation of
the Corporation’s leverage to incur additional debt. The majority of the Corporation’s debt is not
redeemable prior to maturity. The following calculates the Corporation’s debt-to-capitalization
ratio at December 31, 2006 and December 31, 2005 using total debt and total capital per the balance
sheet and also reconciles total capital using adjusted debt to total capital per the balance sheet.
| Debt-to-capitalization ratio | ||||||||
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Total debt |
$ | 705,264 | $ | 710,022 | ||||
Shareholders’ equity |
1,253,972 | 1,173,685 | ||||||
Total capital |
$ | 1,959,236 | $ | 1,883,707 | ||||
Debt-to-capitalization |
36% | 38% | ||||||
| Reconciliation of total capital to total capital, using | ||||||||
| adjusted debt | ||||||||
| December 31 | ||||||||
| (add 000) | 2006 | 2005 | ||||||
Total capital per the balance sheet |
$ | 1,959,236 | $ | 1,883,707 | ||||
Adjusted for: |
||||||||
Effect of fair value of interest rate swaps |
(4,469 | ) | (6,640 | ) | ||||
Net cash in banks |
(23,892 | ) | (69,455 | ) | ||||
Investments |
— | (25,000 | ) | |||||
Cash held in escrow |
— | (878 | ) | |||||
Total capital, using adjusted debt |
$ | 1,930,875 | $ | 1,781,734 | ||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-six
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
In 2005 and 2003, the Corporation terminated its interest rate swap agreements and made
a cash payment of $0.5 million in 2005 and received a cash payment of $12.6 million in 2003, which
represented the fair value of the swaps on the date of termination. In accordance with generally
accepted accounting principles, the carrying amount of the related Notes on the date of
termination, which includes adjustments for changes in the fair value of the debt while the swaps
were in effect, will be accreted back to its par value over the remaining life of the Notes. The
accretion will decrease annual interest expense by approximately $2.2 million until the maturity
of the Notes in 2008.
In September 2006, the Corporation entered into two forward starting interest rate swap agreements
(the “Swap Agreements”) with a total notional amount of $150.0 million. Each of the two Swap
Agreements covers $75.0 million of principal. The Swap Agreements locked in at 5.42% the interest
rate relative to LIBOR related to $150.0 million of the Corporation’s anticipated refinancing of
its $200.0 million 5.875% Notes due in 2008. Each of the Swap Agreements provides for a single
payment at its mandatory termination date, December 1, 2008. If the LIBOR swap rate increases above
5.42% at the mandatory termination date, the Corporation will receive a payment from each of the
counterparties based on the notional amount of each agreement over an assumed 10-year period. If
the LIBOR swap rate falls below 5.42% at the mandatory termination date, the Corporation will be
obligated to make a payment to each of the counterparties on the same basis. In accordance with
Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities (“FAS 133”), the fair values of the Swap Agreements are recorded as an asset or
liability in the consolidated balance sheet. The change in fair value is recorded directly in
shareholders’ equity as other comprehensive earnings or loss, net of tax. At December 31, 2006, the
fair value of the Swap Agreements was a liability of $2.0 million and was included in other
noncurrent liabilities in the Corporation’s consolidated balance sheet with a corresponding loss of
$1.2 million recorded in other comprehensive loss, which is net of a deferred tax asset of $0.8
million.
Shareholders’ equity increased to $1.254 billion at December 31, 2006 from $1.174 billion at
December 31, 2005. In 2006, the Corporation recognized other accumulated comprehensive loss of
$20.7 million, resulting from the adoption of FAS 158, foreign currency translation gains, the
impact of the Swap Agreements and a minimum pension liability. At December 31, 2005, the
Corporation had a minimum pension liability, which resulted in a direct charge to shareholders’
equity of $6.4 million and was recorded as other comprehensive loss at December 31, 2005.
At December 31, 2006, the Corporation had $32.3 million in cash. The cash, along with the
Corporation’s internal cash flows and availability of financing resources, including its access to
capital markets, both debt and equity, and its commercial paper program and revolving credit
agreement, are expected to continue to be sufficient to provide the capital resources necessary to
support anticipated operating needs, cover debt service requirements, meet capital expenditures and
discretionary investment needs and allow for payment of dividends for the foreseeable future. The
Corporation’s ability to borrow or issue securities is dependent upon, among other things,
prevailing economic, financial and market conditions.
The Corporation’s senior unsecured debt has been rated “BBB+” by Standard & Poor’s and “A3” by
Moody’s. The Corporation’s $250 million commercial paper program is rated “A-2” by Standard &
Poor’s and “P-2” by Moody’s. In May 2004, Standard & Poor’s lowered its rating on the Corporation’s
senior unsecured debt from “A-” to “BBB+”. At the same time, Standard and Poor’s revised its
outlook for the Corporation to stable from negative. While management believes its credit ratings
will remain at an investment grade level, no assurance can be given that these ratings will remain
at the aforementioned levels.
Management continuously evaluates the ways it can use available cash to provide benefits to its
shareholders, including dividend payments. The Corporation has targeted an average dividend payout
range of 25 to 30 percent of earnings over the course of an economic cycle. This dividend payout
range is being evaluated as part of the Corporation’s review of its capital structure as outlined
in the section Capital Structure and Resources on pages 76 through 78.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-seven
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
In light of a fundamental shift in the supply/demand dynamics of aggregates in the United
States, management is reviewing the Corporation’s capital structure. Management believes this is an
appropriate time for this review since, in its evaluation, 2006 further established a new
foundation for the performance of the Aggregates business with the impact of pricing outweighing
the impact of volume through the construction cycle. The fourth quarter of 2006 was the third
consecutive quarter of declining aggregates volume, yet earnings and operating margins during the
period achieved record levels. Therefore, given continued supply/demand imbalance, modest economic
growth and inflationary cost increases, management believes its balance sheet can support
additional leverage. Accordingly, management and the Corporation’s Board of Directors are focused
on establishing prudent leverage targets that provide for value creation through strong operational
performance, continued investment in internal growth opportunities, financial flexibility to
support opportunistic and strategic acquisitions, as well as, returning cash to shareholders
through sustainable dividends and share repurchase programs while maintaining an investment grade
rating. Management anticipates providing definitive information on the Corporation’s capital
structure and leverage targets when it reports first quarter earnings in May 2007. The earnings per
share guidance provided in the section Outlook on pages 62 and 63 is based on the current capital
structure and existing share repurchase program. The Corporation currently has an outstanding Board
authorization to repurchase an additional 4.2 million shares. The timing of such repurchases will
be dependent upon availability of shares, the prevailing market prices and any other considerations
that may, in the opinion of management, affect the advisability of purchasing the stock.
Contractual and Off Balance Sheet Obligations
In addition to long-term debt, the Corporation has a $250 million revolving five-year credit
facility, syndicated through a group of commercial domestic and foreign banks, which supports a
$250 million United States commercial paper program. The five-year agreement expires in June 2011
(see Note G to the audited consolidated
financial statements on pages 26 and 27). No borrowings were outstanding under the revolving credit
agreement or commercial paper program at December 31, 2006.
At December 31, 2006, the Corporation’s recorded benefit obligation related to postretirement
benefits totaled $53.0 million. These benefits will be paid from the Corporation’s assets. The
obligation, if any, for retiree medical payments is subject to the terms of the plan.
The Corporation has other retirement benefits related to the SERP. At December 31, 2006, the
Corporation had a total obligation of $25.6 million related to this plan.
In connection with normal, ongoing operations, the Corporation enters into market-rate leases for
property, plant and equipment and royalty commitments principally associated with leased land.
Additionally, the Corporation enters into equipment rentals to meet shorter-term, nonrecurring and
intermittent needs and capital lease agreements for certain machinery and equipment. At December
31, 2006, the Corporation had $0.8 million of capital lease obligations. Amounts due under
operating leases and royalty agreements are expensed in the period incurred. Management anticipates
that in the ordinary course of business, the Corporation will enter into royalty agreements for
land and mineral reserves during 2007.
The Corporation is a minority member of a LLC whereby the majority member is paid preferred
returns. The Corporation does not have the right to acquire the remaining interest of the LLC until
2010.
The Corporation has purchase commitments for property, plant and equipment, which were $27.7
million as of December 31, 2006. The Corporation also has other purchase obligations related to
energy and service contracts, which totaled $11.4 million as of December 31, 2006.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-eight
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
The Corporation’s contractual commitments as of December 31, 2006 are as follows:
| (add 000) | Total | < 1 yr. | 1-3 yrs. | 3-5 yrs. | > 5 yrs. | |||||||||||||||
ON BALANCE SHEET: |
||||||||||||||||||||
Long-term debt |
$ | 700,795 | $ | 125,956 | $ | 199,963 | $ | 249,935 | $ | 124,941 | ||||||||||
Postretirement benefits |
53,031 | 4,000 | 7,147 | 7,231 | 34,653 | |||||||||||||||
SERP |
25,583 | 2,100 | 13,500 | 4,900 | 5,083 | |||||||||||||||
Capital leases |
788 | 168 | 308 | 312 | — | |||||||||||||||
Other commitments |
784 | 29 | 63 | 69 | 623 | |||||||||||||||
OFF BALANCE SHEET: |
||||||||||||||||||||
Interest on noncallable
publicly-traded
long-term debt |
275,780 | 46,335 | 63,659 | 43,286 | 122,500 | |||||||||||||||
Preferred payments to
LLC majority member |
3,830 | 707 | 1,414 | 1,709 | — | |||||||||||||||
Operating leases |
169,767 | 39,895 | 56,066 | 31,120 | 42,686 | |||||||||||||||
Royalty agreements |
57,067 | 9,009 | 14,064 | 9,873 | 24,121 | |||||||||||||||
Purchase commitments —
capital |
27,737 | 27,737 | — | — | — | |||||||||||||||
Other commitments — energy
and services |
11,431 | 10,231 | 800 | 400 | — | |||||||||||||||
Total |
$ | 1,326,593 | $ | 266,167 | $ | 356,984 | $ | 348,835 | $ | 354,607 | ||||||||||
Quantitative and Qualitative Disclosures about Market Risk
As discussed earlier, the Corporation’s operations are highly dependent upon the interest
rate-sensitive construction and steelmaking industries. Consequently, these marketplaces could
experience lower levels of economic activity in an environment of rising interest rates or
escalating costs (see section Business Environment on pages 49 through 51). Since June 30,
2004, the Federal Reserve Board has increased the federal funds rate from 1.00% to 5.25% at January 31, 2007. This
increase could affect the residential construction market, which accounted for
approximately 17 percent of
the Corporation’s
Notes A, G, J, L and N to the audited consolidated financial statements on pages 17 through 24; 26
and 27; 30 through 33; 35; and 36 and 37, respectively, contain additional information regarding
these commitments and should be read in conjunction with the above table.
Contingent Liabilities and Commitments
The Corporation has entered into standby letter of credit agreements relating to workers’
compensation and automobile and general liability self-insurance. On December 31, 2006, the
Corporation had contingent liabilities guaranteeing its own performance under these outstanding
letters of credit of approximately $26.2 million.
In the normal course of business at December 31, 2006, the Corporation was contingently liable for
$119.7 million in surety bonds that guarantee its own performance and are required by certain
states and municipalities and their related agencies. The bonds are principally for certain
construction contracts, reclamation obligations and mining permits. Four of these bonds, totaling
$33.4 million, or 28% of all outstanding surety bonds, relate to specific performance for road
projects currently underway. The Corporation has indemnified the underwriting insurance company
against any exposure under the surety bonds. In the Corporation’s past experience, no material
claims have been made against these financial instruments.
aggregates product line shipments in 2006. Aside from these inherent risks from within its operations, the Corporation’s earnings are affected also by
changes in short-term interest rates, as a result of its temporary cash investments, including
money market funds and overnight investments in Eurodollars; any outstanding commercial paper
obligations; and defined benefit pension plans. Additionally, the Corporation’s earnings are
affected by energy costs. Further, shareholders’ equity is affected by changes in the fair values
of forward starting swap agreements.
Commercial Paper Obligations
The Corporation has a $250 million commercial paper program in which borrowings bear interest at a
variable rate based on LIBOR. At December 31, 2006, there were no outstanding commercial paper
borrowings.
Pension Expense
The Corporation’s results of operations are affected by its pension expense. Assumptions that
affect this expense include the discount rate and, for the defined benefit pension plans only, the
expected long-term rate of return on assets. Therefore, the Corporation has interest rate risk
associated with these factors. The impact of hypothetical
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page seventy-nine
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
changes in these assumptions on the Corporation’s annual pension expense is discussed in the
section Application of Critical Accounting Policies on pages 63 through 74.
Energy Costs
Energy costs, including diesel fuel, natural gas and liquid asphalt, represent significant
production costs for the Corporation. Increases in these costs generally are tied to energy sector
inflation. In 2006, energy costs increased significantly, with fuel price increases lowering
earnings per diluted share by $0.36. A hypothetical 10% change in the Corporation’s energy prices
in 2007 as compared with 2006, assuming constant volumes, would impact 2007 pretax earnings by
approximately $17.8 million.
Aggregate Risk for Interest Rates and Energy Sector Inflation
The pension expense for 2007 is calculated based on assumptions selected at December 31, 2006.
Therefore, interest rate risk in 2007 is limited to the potential effect related to outstanding
commercial paper, none of which was outstanding at December 31, 2006. Additionally, a 10% change
in energy costs would impact annual pretax earnings by approximately $17.8 million.
Forward Starting Interest Rate Swap Agreements
In September 2006, the Corporation entered into forward starting interest rate swap agreements
(the “Swap Agreements”) with a total notional amount of $150.0 million. The Swap Agreements locked
in the interest rate relative to LIBOR related to $150.0 million of the Corporation’s anticipated
refinancing of its $200.0 million 5.875% Notes due in 2008 at 5.42%. Each of the Swap Agreements
provides for a single payment at its mandatory termination date, December 1, 2008. If the LIBOR
swap rate increases above 5.42% at the mandatory termination date, the Corporation will receive a
payment from each of the counterparties based on the notional amount of each
agreement over an assumed 10-year period. If the LIBOR swap rate falls below 5.42% at the
mandatory termination date, the Corporation will be obligated to make a payment to each of the
counterparties on the same basis.
In accordance with FAS 133, the fair values of the Swap Agreements are recorded as an asset or
liability in the consolidated balance sheet. The change in fair value is recorded directly in
shareholders’ equity, net of tax, as other comprehensive earnings or loss. At December 31, 2006,
the fair value of the Swap Agreements was a liability of $2.0 million and was included in other
noncurrent liabilities in the Corporation’s consolidated balance sheet.
As a result of the Swap Agreements, the Corporation’s comprehensive earnings/loss will be affected
by changes in the LIBOR rate. A hypothetical change in interest rates of 1% would change other
comprehensive earnings/loss by approximately $10.0 million.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page eighty
M A N A G E M E N T ’ S D I S C U S S I O N &
A N A L Y S I S O F F I N A N C I A L
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
C O N D I T I O N & R E S U L T S O F O P E R A T I O N S ( C O N T I N U E D )
Forward-Looking Statements — Safe Harbor Provisions
If you are interested in Martin Marietta Materials, Inc. stock, management recommends
that, at a minimum, you read the Corporation’s current annual report and 10-K, 10-Q and 8-K
reports to the SEC over the past year. The Corporation’s recent proxy statement for the annual
meeting of shareholders also contains important information. These and other materials that
have been filed with the SEC are accessible through the Corporation’s web site at
www.martinmarietta.com and are also available at the SEC’s web site at
www.sec.gov. You may also write or call the Corporation’s Corporate Secretary, who will
provide copies of such reports.
Investors are cautioned that all statements in this annual report that relate to the future are
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 and involve risks and uncertainties and
are based on assumptions that the Corporation believes in good faith are reasonable but which
may be materially different from actual results. Forward-looking statements give the investor
management’s expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate only to historical or current facts. They may use words such
as “anticipate,” “expect,” “should be,” “believe,” and other words of similar meaning in
connection with future events or future operating or financial performance. Any or all of
management’s forward-looking statements here and in other publications may turn out to be
wrong.
Factors that the Corporation currently believes could cause actual results to differ materially
from the forward-looking statements include, but are not limited to, the level and timing of
federal and state transportation funding, particularly in North Carolina, one of the
Corporation’s largest and most profitable states, and in South Carolina, the Corporation’s fifth
largest state as measured by 2006 Aggregates business’ net sales; levels of construction
spending in the markets the Corporation serves; the severity of a continued decline in the
residential construction market and the impact, if any, on commercial construction; unfavorable
weather conditions; the volatility of fuel costs, most notably diesel fuel, liquid asphalt and
natural gas; continued increases in the cost of repair and supply parts; logistical issues and
costs, notably barge availability on the Mississippi River system and the availability of
railcars and locomotive power to move trains to supply the Corporation’s Texas and Gulf Coast
markets; the sensitivity of the first quarter’s results due to typically lower production levels
and related profitability; continued strength in the steel industry markets served by the
Corporation’s Magnesia Specialties business; successful development and implementation of the
structural composite technological process and commercialization of strategic products for
specific market segments to generate earnings streams sufficient enough to support the
Structural Composites business’ recorded assets; and other risk factors listed from time to
time found in the Corporation’s filings with the Securities and Exchange Commission. Other
factors besides those listed here may also adversely affect the Corporation, and may be material
to the Corporation. The Corporation assumes no obligation to update any such forward-looking
statements.
For a discussion identifying some important factors that could cause actual results to vary
materially from those anticipated in the forward-looking statements, see the Corporation’s
Securities and Exchange Commission filings including, but not limited to, the discussion of
“Competition” in the Corporation’s Annual Report on Form 10-K, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” on pages 40 through 81 of the 2006
Annual Report and “Note A: Accounting Policies” and “Note N: Commitments and Contingencies” of
the “Notes to Financial Statements” on pages 1 7 through 24 and 36 and 37, respectively, of the
audited consolidated financial statements included in the 2006 Annual Report.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page eighty-one
Q U A R T E R L Y P E R F O R M A N C E
(unaudited)
(unaudited)
(add 000, except per share)
| Total Revenues | Net Sales | Gross Profit | Net Earnings (Loss) | |||||||||||||||||||||||||||||
| Quarter | 2006 | 2005 | 2006 | 2005 | 20062,3 | 20052 | 20064,5,6 | 20054,6 | ||||||||||||||||||||||||
First |
$ | 483,048 | $ | 388,302 | $ | 423,495 | $ | 336,833 | $ | 84,029 | $ | 49,604 | $ | 31,006 | $ | 7,077 | ||||||||||||||||
Second |
587,887 | 541,871 | 517,531 | 475,347 | 153,183 | 129,531 | 75,790 | 61,472 | ||||||||||||||||||||||||
Third |
603,060 | 562,750 | 528,596 | 495,836 | 147,846 | 134,787 | 76,160 | 76,360 | ||||||||||||||||||||||||
Fourth |
532,406 | 501,226 | 473,275 | 437,655 | 137,406 | 110,470 | 62,466 | 47,757 | ||||||||||||||||||||||||
Totals |
$ | 2,206,401 | $ | 1,994,149 | $ | 1,942,897 | $ | 1,745,671 | $ | 522,464 | $ | 424,392 | $ | 245,422 | $ | 192,666 | ||||||||||||||||
| Per Common Share | ||||||||||||||||||||||||||||||||||||||||
| Stock Prices | ||||||||||||||||||||||||||||||||||||||||
| Basic Earnings1 | Diluted Earnings1 | Dividends Paid | High | Low | High | Low | ||||||||||||||||||||||||||||||||||
| Quarter | 20064,5,6 | 20054,6 | 20064,5,6 | 20054,6 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||||||||||||||
First |
$ | 0.68 | $ | 0.15 | $ | 0.66 | $ | 0.15 | $ | 0.230 | $ | 0.20 | $ | 107.75 | $ | 76.26 | $ | 58.37 | $ | 49.72 | ||||||||||||||||||||
Second |
1.66 | 1.32 | 1.63 | 1.30 | 0.230 | 0.20 | $ | 113.69 | $ | 76.90 | $ | 70.16 | $ | 54.09 | ||||||||||||||||||||||||||
Third |
1.68 | 1.65 | 1.65 | 1.62 | 0.275 | 0.23 | $ | 92.10 | $ | 74.05 | $ | 79.04 | $ | 65.02 | ||||||||||||||||||||||||||
Fourth |
1.38 | 1.03 | 1.36 | 1.02 | 0.275 | 0.23 | $ | 106.28 | $ | 83.61 | $ | 81.74 | $ | 70.50 | ||||||||||||||||||||||||||
Totals |
$ | 5.40 | $ | 4.14 | $ | 5.29 | $ | 4.08 | $ | 1.01 | $ | 0.86 | ||||||||||||||||||||||||||||
| 1 | The sum of per-share earnings by quarter may not equal earnings per share for the year due to changes in average share calculations. This is in accordance with prescribed reporting requirements. |
|
| 2 | Gross profit in the fourth quarter included a write up of $13.4 million and $7.1 million for 2006 and 2005, respectively, related to the annual updating of inventory standards. |
|
| 3 | Gross profit in the fourth quarter included a $3.8 million charge related to the exit of the composite truck trailer business. |
|
| 4 | Net earnings and basic and diluted earnings per common share in the fourth quarter included a write up of $8.1 million, or $0.17 per diluted share, for 2006 and $4.2 million, or $0.09 per diluted share, for 2005 related to the annual updating of inventory standards. |
|
| 5 | Net earnings and basic and diluted earnings per common share in the fourth quarter included a charge of $2.3 million, or $0.05 per diluted share, related to the exit of the composite truck trailer business. |
|
| 6 | Net earnings and basic and diluted earnings per common share in the third quarter included the reversal of $2.7 million, or $0.06 diluted share, in 2006 and $5.9 million, or $0.12 per diluted share, in 2005 of
tax reserves upon the expiration of the statute of limitations for federal examination of certain tax years. |
At
February 15, 2007, there were 935 shareholders of record.
The following presents total revenues, net sales, net earnings (loss) and earnings (loss) per
diluted share attributable to discontinued operations:
(add 000, except per share)
| Total Revenues | Net Sales | Net Earnings (Loss) | Earnings (Loss) per Diluted Share | |||||||||||||||||||||||||||||
| Quarter | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||||||||||
First |
$ | 1,025 | $ | 5,962 | $ | 1,011 | $ | 5,478 | $ | 1,102 | $ | (1,414 | ) | $ | 0.02 | $ | (0.03 | ) | ||||||||||||||
Second |
894 | 4,816 | 882 | 4,063 | (14 | ) | (1,179 | ) | — | (0.03 | ) | |||||||||||||||||||||
Third |
1,155 | 4,357 | 1,142 | 3,650 | 558 | 663 | 0.01 | 0.02 | ||||||||||||||||||||||||
Fourth |
1,174 | 3,125 | 1,161 | 2,759 | (28 | ) | (1,117 | ) | — | (0.02 | ) | |||||||||||||||||||||
Totals |
$ | 4,248 | $ | 18,260 | $ | 4,196 | $ | 15,950 | $ | 1,618 | $ | (3,047 | ) | $ | 0.03 | $ | (0.06 | ) | ||||||||||||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page eighty-two
F I V E Y E A R S U M M A R Y
(add 000, except per share)
| 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Consolidated Operating Results |
||||||||||||||||||||
Net sales |
$ | 1,942,897 | $ | 1,745,671 | $ | 1,515,889 | $ | 1,419,931 | $ | 1,346,453 | ||||||||||
Freight and delivery revenues |
263,504 | 248,478 | 204,480 | 203,752 | 184,201 | |||||||||||||||
Total revenues |
2,206,401 | 1,994,149 | 1,720,369 | 1,623,683 | 1,530,654 | |||||||||||||||
Cost of sales, other costs and expenses |
1,567,834 | 1,452,645 | 1,297,530 | 1,227,092 | 1,171,211 | |||||||||||||||
Freight and delivery costs |
263,504 | 248,478 | 204,480 | 203,752 | 184,201 | |||||||||||||||
Cost of operations |
1,831,338 | 1,701,123 | 1,502,010 | 1,430,844 | 1,355,412 | |||||||||||||||
Other operating (income) and expenses, net |
(12,923 | ) | (16,028 | ) | (11,723 | ) | (6,618 | ) | (4,760 | ) | ||||||||||
Earnings from Operations |
387,986 | 309,054 | 230,082 | 199,457 | 180,002 | |||||||||||||||
Interest expense |
40,359 | 42,597 | 42,734 | 42,587 | 44,028 | |||||||||||||||
Other nonoperating (income) and expenses, net |
(2,817 | ) | (1,937 | ) | (606 | ) | 429 | 11,476 | ||||||||||||
Earnings from continuing operations before
taxes on income
and cumulative effect of change in accounting
principle |
350,444 | 268,394 | 187,954 | 156,441 | 124,498 | |||||||||||||||
Taxes on income |
106,640 | 72,681 | 57,739 | 46,948 | 32,867 | |||||||||||||||
Earnings from continuing operations before
cumulative effect of change in accounting
principle |
243,804 | 195,713 | 130,215 | 109,493 | 91,631 | |||||||||||||||
Discontinued operations, net of taxes |
1,618 | (3,047 | ) | (1,052 | ) | (8,996 | ) | 6,184 | ||||||||||||
Earnings before cumulative effect of
change in accounting principle |
245,422 | 192,666 | 129,163 | 100,497 | 97,815 | |||||||||||||||
Cumulative effect of change in accounting
for asset retirement obligations |
— | — | — | (6,874 | ) | — | ||||||||||||||
Cumulative effect of change in accounting
for intangible assets |
— | — | — | — | (11,510 | ) | ||||||||||||||
Net Earnings |
$ | 245,422 | $ | 192,666 | $ | 129,163 | $ | 93,623 | $ | 86,305 | ||||||||||
Basic Earnings (Loss) Per Common Share: |
||||||||||||||||||||
Earnings from continuing operations before
cumulative
effect of change in accounting principle |
$ | 5.36 | $ | 4.21 | $ | 2.70 | $ | 2.23 | $ | 1.88 | ||||||||||
Discontinued operations |
0.04 | (0.07 | ) | (0.02 | ) | (0.18 | ) | 0.13 | ||||||||||||
Earnings before cumulative effect of change
in accounting principle |
5.40 | 4.14 | 2.68 | 2.05 | 2.01 | |||||||||||||||
Cumulative effect of change in accounting
principle |
— | — | — | (0.14 | ) | (0.24 | ) | |||||||||||||
Basic Earnings Per Common Share |
$ | 5.40 | $ | 4.14 | $ | 2.68 | $ | 1.91 | $ | 1.77 | ||||||||||
Diluted Earnings (Loss) Per Common Share: |
||||||||||||||||||||
Earnings from continuing operations before
cumulative
effect of change in accounting principle |
$ | 5.26 | $ | 4.14 | $ | 2.68 | $ | 2.23 | $ | 1.88 | ||||||||||
Discontinued operations |
0.03 | (0.06 | ) | (0.02 | ) | (0.18 | ) | 0.12 | ||||||||||||
Earnings before cumulative effect of change
in accounting principle |
5.29 | 4.08 | 2.66 | 2.05 | 2.00 | |||||||||||||||
Cumulative effect of change in accounting
principle |
— | — | — | (0.14 | ) | (0.23 | ) | |||||||||||||
Diluted Earnings Per Common Share |
$ | 5.29 | $ | 4.08 | $ | 2.66 | $ | 1.91 | $ | 1.77 | ||||||||||
Cash Dividends Per Common Share |
$ | 1.01 | $ | 0.86 | $ | 0.76 | $ | 0.69 | $ | 0.58 | ||||||||||
Condensed Consolidated Balance Sheet Data |
||||||||||||||||||||
Current deferred income tax benefits |
$ | 25,317 | $ | 14,989 | $ | 5,750 | $ | 21,603 | $ | 21,387 | ||||||||||
Current assets — other |
567,037 | 587,052 | 618,503 | 589,048 | 511,782 | |||||||||||||||
Property, plant and equipment, net |
1,295,491 | 1,166,351 | 1,065,215 | 1,042,432 | 1,067,576 | |||||||||||||||
Goodwill |
570,538 | 569,263 | 567,495 | 577,586 | 577,449 | |||||||||||||||
Other intangibles, net |
10,948 | 18,744 | 18,642 | 25,142 | 31,972 | |||||||||||||||
Other noncurrent assets |
37,090 | 76,917 | 80,247 | 63,414 | 55,384 | |||||||||||||||
Total Assets |
$ | 2,506,421 | $ | 2,433,316 | $ | 2,355,852 | $ | 2,319,225 | $ | 2,265,550 | ||||||||||
Current liabilities — other |
$ | 189,116 | $ | 199,259 | $ | 202,843 | $ | 221,683 | $ | 200,936 | ||||||||||
Current maturities of long-term debt and
commercial paper |
125,956 | 863 | 970 | 1,068 | 11,389 | |||||||||||||||
Long-term debt |
579,308 | 709,159 | 713,661 | 717,073 | 733,471 | |||||||||||||||
Pension and postretirement benefits |
106,413 | 98,714 | 88,241 | 76,917 | 101,796 | |||||||||||||||
Noncurrent deferred income taxes |
159,094 | 149,972 | 139,179 | 116,647 | 101,018 | |||||||||||||||
Other noncurrent liabilities |
92,562 | 101,664 | 57,531 | 55,990 | 33,930 | |||||||||||||||
Shareholders’ equity |
1,253,972 | 1,173,685 | 1,153,427 | 1,129,847 | 1,083,010 | |||||||||||||||
Total Liabilities and Shareholders’ Equity |
$ | 2,506,421 | $ | 2,433,316 | $ | 2,355,852 | $ | 2,319,225 | $ | 2,265,550 | ||||||||||
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page eighty-three
C O M M O N S T O C K P E R F O R M A N C E G R A P H
The following graph compares the performance of the Corporation’s common stock to that of
the Standard and Poor’s (“S&P”) 500 Index and the S&P Materials Index.
| Cumulative Total Return1 | ||||||||||||||||||||||||||||||||
| 12/31/01 | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | |||||||||||||||||||||||||||
Martin Marietta Materials, Inc. |
$ | 100.00 | $ | 66.83 | $ | 104.41 | $ | 121.24 | $ | 175.60 | $ | 240.46 | ||||||||||||||||||||
S&P500 Index |
$ | 100.00 | $ | 77.90 | $ | 100.25 | $ | 111.15 | $ | 116.61 | $ | 135.03 | ||||||||||||||||||||
S&P Materials Index |
$ | 100.00 | $ | 94.54 | $ | 130.65 | $ | 147.89 | $ | 154.43 | $ | 183.19 | ||||||||||||||||||||
| 1 | Assumes that the investment in the Corporation’s common stock and each index was $100, with quarterly reinvestment of dividends. |
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page eighty-four
Data for “2006 Net Sales by State of Destination — Aggregates Business” on page 51
Aggregates Production and Sales
| Location | % of Net Sales | ||||
Alabama |
4 | % | |||
Arkansas |
3 | % | |||
Bahamas |
< 1 | % | |||
California |
< 1 | % | |||
Florida |
5 | % | |||
Georgia |
8 | % | |||
Illinois |
< 1 | % | |||
Indiana |
5 | % | |||
Iowa |
6 | % | |||
Kansas |
2 | % | |||
Kentucky |
< 1 | % | |||
Louisiana |
4 | % | |||
Maryland |
< 1 | % | |||
Minnesota |
1 | % | |||
Mississippi |
2 | % | |||
Missouri |
2 | % | |||
Nebraska |
1 | % | |||
Nevada |
< 1 | % | |||
North Carolina |
20 | % | |||
Nova Scotia |
< 1 | % | |||
Ohio |
3 | % | |||
Oklahoma |
2 | % | |||
South Carolina |
5 | % | |||
Tennessee |
< 1 | % | |||
Texas |
19 | % | |||
Virginia |
2 | % | |||
Washington |
< 1 | % | |||
West Virginia |
1 | % | |||
Wisconsin |
< 1 | % | |||
Wyoming |
< 1 | % | |||
Aggregates Sales
| Location | % of Net Sales | ||||
Colorado |
< 1 | % | |||
Pennsylvania |
< 1 | % | |||
South Dakota |
< 1 | % | |||
EXHIBIT 21.01
SUBSIDIARIES OF MARTIN MARIETTA MATERIALS, INC.
AS OF FEBRUARY 27, 2007
AS OF FEBRUARY 27, 2007
| Name of Subsidiary | Percent Owned | |||
Alamo Gulf Coast Railroad Company, a Texas corporation |
99.5 | %1 | ||
Alamo North Texas Railroad Company, a Texas corporation |
99.5 | %2 | ||
American Aggregates Corporation, a Delaware corporation |
100 | % | ||
American Stone Company, a North Carolina corporation |
50 | %3 | ||
Bahama Rock Limited, a Bahamas corporation |
100 | % | ||
Fredonia Valley Railroad, Inc., a Delaware corporation |
100 | % | ||
Granite Canyon Quarry, a Wyoming joint venture |
51 | %4 | ||
Harding Street Corporation, a Delaware corporation |
100 | % | ||
Hunt Martin Materials, LLC, a Delaware limited liability company |
50 | %5 | ||
J.W. Jones Materials, LLC, a Delaware limited liability company |
99 | %6 | ||
Martin Bauerly Materials, LLC |
67 | %7 | ||
Martin Marietta Composites, Inc., a Delaware corporation |
100 | % | ||
| 1 | Alamo Gulf Coast Railroad Company is owned by Martin Marietta Materials Southwest, Ltd. (99.5%) and certain individuals (0.5%). | |
| 2 | Alamo North Texas Railroad Company is owned by Martin Marietta Materials Southwest, Ltd. (99.5%) and certain individuals (0.5%). | |
| 3 | Martin Marietta Materials, Inc. owns a 50% interest in American Stone Company. | |
| 4 | Meridian Granite Company, an indirect wholly owned subsidiary of Martin Marietta Materials, Inc., owns a 51% interest in Granite Canyon Quarry. | |
| 5 | Hunt Martin Materials, LLC is owned 45% by Martin Marietta Materials, Inc. and 5% by Martin Marietta Materials of Missouri, Inc., a wholly owned subsidiary of Martin Marietta Materials, Inc. | |
| 6 | Martin Marietta Materials, Inc. owns a 99% interest in J.W. Jones Materials, LLC. | |
| 7 | Martin Bauerly Materials, LLC is owned 67% by Martin Marietta Materials, Inc. and 33% by Bauerly Brothers, Inc. |
| Name of Subsidiary | Percent Owned | |||
Martin Marietta Employee Relief Foundation, a Delaware Not for Profit
corporation |
100 | % | ||
Martin Marietta Equipment Company, Inc., a Delaware corporation |
100 | % | ||
Martin Marietta Magnesia Specialties, LLC, a Delaware limited liability
company |
100 | % | ||
Martin Marietta Materials Canada Limited, a Nova Scotia, Canada corporation |
100 | % | ||
Martin Marietta Materials of Alabama, LLC, a Delaware limited liability
company |
100 | %8 | ||
Martin Marietta Materials of Florida, LLC, a Delaware limited liability
company |
100 | % | ||
Martin Marietta Materials of Louisiana, Inc., a Delaware corporation |
100 | % | ||
Martin Marietta Materials of Missouri, Inc., a Delaware corporation |
100 | % | ||
Martin Marietta Materials Real Estate Investments, Inc., a Delaware
corporation |
100 | % | ||
Martin Marietta Materials Southwest, Ltd., a Texas limited partnership |
100 | %9 | ||
Material Producers, Inc., an Oklahoma corporation |
100 | %10 | ||
Meridian Aggregates Company, a Limited Partnership, a Delaware limited
partnership |
100 | %11 | ||
Meridian Aggregates Company Northwest, LLC, a Delaware limited liability
company |
100 | %12 | ||
Meridian Aggregates Company Southwest, LLC, a Delaware limited liability |
100 | %13 | ||
Meridian Aggregates Investments, LLC, a Delaware limited liability company |
100 | %14 | ||
Meridian Granite Company, a Delaware corporation |
100 | %15 | ||
Mid South-Weaver Joint Venture, a North Carolina joint venture |
50 | %16 | ||
| 8 | Martin Marietta Materials of Alabama, LLC is a wholly owned subsidiary of American Aggregates Corporation. | |
| 9 | Martin Marietta Materials Southwest, Ltd. is owned 2% by Southwest I, LLC and 98% by Southwest II, LLC. | |
| 10 | Material Producers, Inc. is a wholly owned subsidiary of Martin Marietta Materials Southwest, Ltd. | |
| 11 | Meridian Aggregates Company, a Limited Partnership is owned 98% by Meridian Aggregates Investments, LLC. The remaining 2% is owned by Martin Marietta Materials, Inc. | |
| 12 | Martin Marietta Materials, Inc. is the sole member of Meridian Aggregates Company Northwest, LLC. | |
| 13 | Martin Marietta Materials Southwest, Ltd. is the sole member of Meridian Aggregates Company Southwest, LLC. | |
| 14 | Meridian Aggregates Investments, LLC is owned 99% by Martin Marietta Materials, Inc. and 1% by Martin Marietta Materials Real Estate Investments, Inc. | |
| 15 | Meridian Granite Company is a wholly owned subsidiary of Meridian Aggregates Company, a Limited Partnership. | |
| 16 | Mid South-Weaver Joint Venture is owned 50% by Martin Marietta Materials, Inc. |
| Name of Subsidiary | Percent Owned | |||
Mid-State Construction & Materials, Inc., an Arkansas corporation |
100 | % | ||
MTD Pipeline LLC, a Delaware limited liability company |
50 | %17 | ||
Powderly Transportation, Inc., a Delaware corporation |
100 | %18 | ||
R&S Sand & Gravel, LLC, a Delaware limited liability company |
100 | %19 | ||
Rocky Ridge, Inc., a Nevada corporation |
100 | % | ||
Sha-Neva, LLC, a Nevada limited liability company |
100 | % | ||
Southwest I, LLC, a Delaware limited liability company |
100 | % | ||
Southwest II, LLC, a Delaware limited liability company |
100 | % | ||
Theodore Holding, LLC, a Delaware limited liability company |
60.7 | %20 | ||
Valley Stone LLC, a Virginia limited liability company |
50 | %21 | ||
Wycliff Holding, LLC, a North Carolina limited liability company |
100 | % | ||
| 17 | Martin Marietta Magnesia Specialties, LLC, a wholly owned subsidiary of Martin Marietta Materials, Inc., owns a 50% interest in MTD Pipeline LLC. | |
| 18 | Powderly Transportation, Inc. is a wholly owned subsidiary of Meridian Aggregates Company, a Limited Partnership. | |
| 19 | Martin Marietta Materials, Inc. is the manager of and owns a 90% interest in R&S Sand & Gravel, LLC. The other 10% is owned by Harding Street Corporation, a wholly owned subsidiary of Martin Marietta Materials, Inc. | |
| 20 | Martin Marietta Materials, Inc. is the manager of and owns a 60.7% interest in Theodore Holding, LLC. | |
| 21 | Martin Marietta Materials, Inc. is the manager of and owns a 50% interest in Valley Stone LLC. |
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K) of Martin
Marietta Materials, Inc. of our reports dated February 26, 2007, with respect to the consolidated
financial statements of Martin Marietta Materials, Inc., Martin Marietta Materials, Inc.
management’s assessment of the effectiveness of internal control over financial reporting, and the
effectiveness of internal control over financial reporting of Martin Marietta Materials, Inc.,
included in the 2006 Annual Report to Shareholders of Martin Marietta Materials, Inc.
Our audits also included the financial statement schedule of Martin Marietta Materials, Inc. listed
in Item 15(a). This schedule is the responsibility of the Martin Marietta Materials, Inc.
management. Our responsibility is to express an opinion based on our audits. In our opinion, the
financial statement schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the following Registration Statements:
| (1) | Registration Statement (Form S-8 No. 333-115918) pertaining to the Amended and Restated Martin Marietta Materials, Inc. Common Stock Purchase Plan for Directors, Martin Marietta Materials, Inc., Performance Sharing Plan and the Martin Marietta Materials, Inc. Savings and Investment Plan for Hourly Employees, | ||
| (2) | Registration Statement (Form S-8 No. 333-85608) pertaining to the Martin Marietta Materials, Inc. Common Stock Purchase Plan for Directors, | ||
| (3) | Registration Statement (Form S-8 No. 33-83516) pertaining to the Martin Marietta Materials, Inc. Omnibus Securities Award Plan, as amended, | ||
| (4) | Registration Statement (Form S-8 No. 333-15429) pertaining to the Martin Marietta Materials, Inc. Common Stock Purchase Plan for Directors, Martin Marietta Materials, Inc. Performance Sharing Plan and the Martin Marietta Materials, Inc. Savings and Investment Plan for Hourly Employees, and | ||
| (5) | Registration Statement (Form S-8 No. 333-79039) pertaining to the Martin Marietta Materials, Inc. Stock-Based Award Plan, as amended; |
of our report dated February 26, 2007, with respect to the consolidated financial statements of
Martin Marietta Materials, Inc., our report dated February 26, 2007, with respect to Martin
Marietta Materials, Inc. management’s assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control over financial reporting of Martin
Marietta Materials, Inc. include herein, and our report included in the preceding paragraph with
respect to the financial statement schedule included in this Annual Report (Form 10-K) of Martin
Marietta Materials, Inc.
| /s/ Ernst & Young | ||||
Raleigh, North Carolina
February 26, 2007
February 26, 2007
EXHIBIT 31.01
CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934
RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Stephen P. Zelnak, Jr., certify that:
| 1. | I have reviewed this Form 10-K of Martin Marietta Materials, Inc.; | ||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the |
| effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 27, 2007 | By: | /s/ Stephen P. Zelnak, Jr. | ||
| Stephen P. Zelnak, Jr. | ||||
| Chairman and Chief Executive Officer | ||||
EXHIBIT 31.02
CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934
RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, Anne H. Lloyd, certify that:
| 1. | I have reviewed this Form 10-K of Martin Marietta Materials, Inc.; | ||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; | ||
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the |
| effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
| (b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 27, 2007 | By: | /s/ Anne H. Lloyd | ||
| Anne H. Lloyd | ||||
| Chief Financial Officer | ||||
EXHIBIT 32.01
WRITTEN STATEMENT PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the 2006 Annual Report on Form 10-K (the “Report”) of Martin Marietta
Materials, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission, I,
Stephen P. Zelnak, Jr., the Chief Executive Officer of the Registrant, certify that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | ||
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| /s/ Stephen P. Zelnak, Jr. | ||||
| Stephen P. Zelnak, Jr. | ||||
| Chief Executive Officer | ||||
Date: February 27, 2007
A signed original of this written statement required by Section 906 has been provided to Martin
Marietta Materials, Inc. and will be retained by Martin Marietta Materials, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.02
WRITTEN STATEMENT PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the 2006 Annual Report on Form 10-K (the “Report”) of Martin Marietta
Materials, Inc. (the “Registrant”), as filed with the Securities and Exchange Commission, I, Anne
H. Lloyd, the Chief Financial Officer of the Registrant, certify that:
| (1) | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and | ||
| (2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| /s/ Anne H. Lloyd | ||||
| Anne H. Lloyd | ||||
| Chief Financial Officer | ||||
Date: February 27, 2007
A signed original of this written statement required by Section 906 has been provided to Martin
Marietta Materials, Inc. and will be retained by Martin Marietta Materials, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request.