Martin Marietta Materials, Inc.
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)
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
             
        Page
PART I     4  
 
           
  BUSINESS     4  
 
           
  RISK FACTORS AND FORWARD-LOOKING STATEMENTS     17  
 
           
  UNRESOLVED STAFF COMMENTS     24  
 
           
  PROPERTIES     24  
 
           
  LEGAL PROCEEDINGS     27  
 
           
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     28  
 
           
    28  
 
           
PART II     29  
 
           
  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     29  
 
           
  SELECTED FINANCIAL DATA     30  
 
           
  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     30  
 
           
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     30  
 
           
  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA     30  
 
           
  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE     31  
 
           
  CONTROLS AND PROCEDURES     31  
 
           
  OTHER INFORMATION     32  
 
           
        32  
 
           
  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     32  
 
           
  EXECUTIVE COMPENSATION     32  
 
           
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     32  
 
           
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     33  

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        Page
  PRINCIPAL ACCOUNTANT FEES AND SERVICES     33  
 
           
        33  
 
           
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     33  
 
           
SIGNATURES     39  
 Exhibit 10.07
 Exhibit 12.01
 Exhibit 13.01
 Exhibit 21.01
 Exhibit 23.01
 Exhibit 31.01
 Exhibit 31.02
 Exhibit 32.01
 Exhibit 32.02

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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.

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     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

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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

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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.

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     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.

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     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

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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

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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.

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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

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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”

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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

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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

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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

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“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

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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

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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

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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.

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     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

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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

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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:

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  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

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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.

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                                                            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 %

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    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

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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    

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            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.

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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

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     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

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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

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     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  

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  (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))

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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)**

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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.

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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

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(c) Financial Statement Schedule
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
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.

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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.

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     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.
 
Stephen P. Zelnak, Jr.
  Chairman of the Board and Chief Executive Officer   February 27, 2007
 
       
/s/ Anne H. Lloyd
 
Anne H. Lloyd
  Senior Vice President, Chief Financial Officer and Treasurer   February 27, 2007
 
       
/s/ Dana F. Guzzo
 
Dana F. Guzzo
  Vice President, Controller and Chief Accounting Officer   February 27, 2007
 
       
/s/ Marcus C. Bennett
 
Marcus C. Bennett
  Director    February 27, 2007
 
       
/s/ Sue W. Cole
 
Sue W. Cole
  Director    February 27, 2007
 
       
/s/ David G. Maffucci
 
David G. Maffucci
  Director    February 27, 2007
 
       
/s/ William E. McDonald
 
William E. McDonald
  Director    February 27, 2007
 
       
/s/ Frank H. Menaker, Jr.
 
Frank H. Menaker, Jr.
  Director    February 27, 2007
 
       
/s/ Laree E. Perez
 
Laree E. Perez
  Director    February 27, 2007

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Signature   Title   Date
/s/ Dennis L. Rediker
 
Dennis L. Rediker
  Director    February 27, 2007
 
       
/s/ Richard A. Vinroot
 
Richard A. Vinroot
  Director    February 27, 2007

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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
 

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
    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
 

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  

 

Exhibit 13.01
 

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.
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.
     
-s- Stephen P. Zelnak, Jr.
  -s- Anne H. Lloyd
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.
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.
-s- ERNST & YOUNG LLP
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.
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.
-s- ERNST & YOUNG LLP
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 

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 )

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 )

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 )

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 )
                                                 
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 )

                         
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<