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< |