Martin Marietta Materials, Inc.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
(Mark One)
x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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   (I.R.S. Employer
incorporation or organization)   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 x            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 x
     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 x            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. x
     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 x                      Accelerated filer o                      Non-accelerated filer o                      Smaller reporting company o
(Do not check if a smaller reporting company)
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No x
     As of June 29, 2007, 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 $5,189,050,508 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 15, 2008
Common Stock, $.01 par value per share   41,254,046 shares
DOCUMENTS INCORPORATED BY REFERENCE
     
Document   Parts Into Which Incorporated
Excerpts from Annual Report to Shareholders for the Fiscal Year Ended December 31, 2007 (Annual Report) 
  Parts I, II, and IV
Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2008 (Proxy Statement)
  Part III
 
 

 


 

TABLE OF CONTENTS
             
        Page
 
               
        3  
 
           
  BUSINESS     3  
 
           
  RISK FACTORS AND FORWARD-LOOKING STATEMENTS     16  
 
           
  UNRESOLVED STAFF COMMENTS     23  
 
           
  PROPERTIES     23  
 
           
  LEGAL PROCEEDINGS     26  
 
           
  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS     27  
 
           
    27  
 
           
        28  
 
           
  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES     28  
 
           
  SELECTED FINANCIAL DATA     29  
 
           
  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS     29  
 
           
  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     30  
 
           
  CONTROLS AND PROCEDURES     30  
 
           
  OTHER INFORMATION     31  
 
           
        31  
 
           
  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE     31  
 
           
  EXECUTIVE COMPENSATION     32  
 
           
  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS     32  
 
           
  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE     32  
 
           
  PRINCIPAL ACCOUNTANT FEES AND SERVICES     32  
 
           
        33  
 
           
  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES     33  
 
           
SIGNATURES     39  
 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 a leading 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 2007, 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 2007, the Company disposed of or permanently shut down a number of underperforming 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 underperforming assets during 2008 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, collectively the Aggregates business, and the Specialty Products segment. The Specialty Products segment includes the magnesia-based chemicals and dolomitic lime businesses 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, 2007 is included in “Note O: Business Segments” of the “Notes to Financial Statements” of the Company’s 2007 consolidated financial statements (the “2007 Financial Statements”), which are included under Item 8 of this Form 10-K, and are part of the Company’s 2007 Annual Report to Shareholders (the “2007 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 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 a leading producer of aggregates for the construction industry in the United States. In 2007, the Company’s Aggregates business shipped 182.3 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 $1.8 billion and $431.8 million, respectively.
     The Aggregates business markets its products primarily to the construction industry, with approximately 48% 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 287 quarries, underground mines, distribution facilities, and plants in 28 states, Canada, and the Bahamas. The Company’s five largest revenue-generating states (North

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Carolina, Texas, Georgia, Iowa, and South Carolina) account for approximately 61% of total 2007 net sales for the Aggregates business by state of destination. The Company’s Aggregates business is accordingly 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. The Company did not incur significant damage from hurricanes during 2007. However, during 2007, the West Group, particularly Texas, southern Oklahoma and Kansas, experienced near historic levels of rainfall and flooding, which affected both shipments and operations.
     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 2007, the originating mode of transportation for the Company’s aggregates shipments was 74% by truck, 17% by rail, and 9% 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, a key site in the Company’s long-haul distribution network, is capable of producing more than 8 million tons per year for shipment to 14 states along the Ohio and Mississippi River network. The Company is currently focusing a significant part of its capital spending program on locations along the geological fall line in Georgia and South Carolina, which are part of the rail transportation 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

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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 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 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. Over the last few years, the Company has 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.
     The Company experiences 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. To help alleviate this problem, the Company purchased 50 new barges in 2007.
     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

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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 small to mid-sized 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 6% of revenues of the Aggregates business in 2007. 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. 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 $22.3 million, $25.0 million, and $16.4 million during 2007, 2006, and 2005, respectively.

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Specialty Products Business
     The Company manufactures and markets, through its Specialty Products 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 2007, 66% of Specialty Products’ net sales were attributable to chemical products, 29% to lime, and 2% to stone, with the remaining 3% attributable to the structural composite products line described below.
     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 2007, 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 Specialty Products business is dependent on steel production capacity utilization and the related marketplace. Products used in the steel industry accounted for approximately 70% of the Specialty Products’ net sales in 2007, attributable primarily to the sale of dolomitic lime products. During 2007, softness in housing-related steel products and auto making curtailed demand for steel making. Further, steel production in 2007 was reduced following a record year for steel imports in 2006. Import rates in 2007 adjusted to the domestic market, but the continued downturn in steel-related industries will affect Specialty Products’ revenues.
     Management has shifted the strategic focus of this 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 Specialty Products business.
     The principal raw materials used in the Specialty Products business 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 Specialty Products 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, Specialty Products entered into a long-term processed brine supply agreement with The Dow Chemical Company (“Dow”) pursuant to which Dow purchases processed brine from Specialty Products, at market rates, for use in Dow’s production of calcium chloride products. Specialty Products also entered into a venture with Dow to construct, own, and operate a processed brine supply pipeline between the Specialty Products facility in Manistee, Michigan, and Dow’s facility in Ludington, Michigan. Construction of the pipeline was

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completed in 2003, and Dow began purchasing processed brine from Specialty Products through the pipeline.
     Specialty Products generally delivers its products upon receipt of orders or requests from customers. Accordingly, there is no significant order backlog. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers.
     Approximately 12% of the revenues of the Specialty Products 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 $20.2 million, $17.0 million, and $19.6 million in 2007, 2006, and 2005, respectively. As a result of these foreign market sales, the financial results of the Specialty Products 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 Specialty Products business principally uses the U.S. dollar as the functional currency in foreign transactions.
     The Company also develops structural composite products, through its Specialty Products business and its wholly-owned subsidiary, Martin Marietta Composites (“MMC”). Pursuant to various agreements, MMC has rights to commercialize certain proprietary technologies including those related to flat panel applications. These agreements give 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. MMC continued its commercialization during 2007 of these structural composites technologies and initiated other selected products in related target markets.
     In 2007, MMC narrowed the focus within several market sectors for its composite products: military products, including ballistic and blast panels, transportation products, including rail cars, and other structural panel products. MMC will continue to evaluate a variety of homeland security and commercial uses for composite materials. There can be no assurance that these technologies will become profitable.
Patents and Trademarks
     As of February 15, 2008, 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 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,

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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.
     There are over 3,800 companies in the United States that produce aggregates. The largest five producers account for approximately 31% 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 Company’s Specialty Products segment competes with various companies in different geographic and product areas principally on the basis of quality, price, technological advances, and technical support for its products. The Specialty Products 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 Specialty Products business in 2007, principally in Canada, Mexico, Europe, South America, and the Pacific Rim. Certain of the Company’s competitors in the Specialty Products business have greater financial resources than the Company.
Research and Development
     The Company conducts research and development activities principally for its magnesia-based chemicals 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 2007 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 $0.9 million in 2007, $0.7 million in 2006, and $0.7 million in 2005 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.

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     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 $9.1 million in 2007 and approximately $8.5 million in 2006 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 $4.1 million in 2007 and are expected to be approximately $3 million in each of 2008 and 2009. The Company’s capital expenditures for environmental matters were not material to its results of operations or financial condition in 2007 and 2006. 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 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.

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     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” of the 2007 Financial Statements and the 2007 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” under Item 3 of this Form 10-K, “Note N: Commitments and Contingencies” of the “Notes to Financial Statements” of the 2007 Financial Statements included under Item 8 of this Form 10-K and the 2007 Annual Report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental Regulation and Litigation” included under Item 7 of this Form 10-K and the 2007 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.

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     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.
     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 completed the installation of the remediation system. The Company funded the entire cost of the corrective plan and installation of the remediation system. The groundwater monitoring and reporting, which is the last task required by the Consent Order, will occur over fifteen years. Management believes the future costs to be incurred by the Company associated with the groundwater monitoring 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

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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 completed installation of the remediation system and has been proceeding with required groundwater monitoring and reporting activities which will occur over fifteen to twenty 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 future groundwater monitoring will not have a material adverse effect on the Company’s operations or its financial condition.
     In the vicinity of and beneath the Specialty Products facility in Manistee, Michigan, 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. The Company 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 the Company’s wholly-owned subsidiary, Martin Marietta Magnesia Specialties (“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 Specialty Products business.
Employees
     As of January 31, 2008, the Company has approximately 5,255 employees, of which 3,902 are hourly employees and 1,353 are salaried employees. Included among these employees are 698 hourly employees represented by labor unions (13.3% of the Company’s employees). Of such amount, 12.5% of the Company’s Aggregates business’s hourly employees are members of a labor union, while 90% of the Specialty Products segment’s hourly employees are represented by labor unions. The Company’s principal union contracts cover employees of the Specialty Products business at the

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Manistee, Michigan, magnesia-based chemicals plant and the Woodville, Ohio, lime plant. The Manistee collective bargaining agreement expires in August 2011. The Woodville collective bargaining agreement expires in June 2010.
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 “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.

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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,” “will,” “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 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.
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. The overall economy has been hurt by mortgage security losses and the tightening credit markets. 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.

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     Within the construction industry, we sell our aggregate products for use in both commercial construction and residential construction. Commercial and residential construction levels generally move with economic cycles; when the economy is strong, construction levels rise, and when the economy is weak, construction levels fall. Commercial construction was mixed in 2007, with growth slowing during the year. In some areas we saw declining commercial construction activity, including office and retail space, as developers considered the impact of the current credit markets on construction and development plans. Businesses facing tighter credit conditions often find it difficult to obtain financing for capital investments. The residential construction market declined sharply in 2007 in connection with the housing market downtown. Further, the outlook reflects diminished demand, with recovery not expected prior to late 2009 or 2010. Approximately 12% of our aggregates shipments in 2007 were to the residential construction market.
     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 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 Florida, North Carolina, South Carolina, and Texas will continue in 2008, 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. Severe drought conditions can restrict available water supplies and restrict production. 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

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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 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.

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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. For example, in 2007, increases in fuel prices lowered net earnings for the aggregates business by $0.10 per diluted share when compared with 2006 fuel prices.
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.
     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.

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Labor disputes could disrupt operations of our businesses.
     Labor unions represent 12.7% of the hourly employees of our aggregates business and 90% 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 2011, respectively.
     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 and 2006, following Hurricanes Katrina and Rita, we experienced significant barge transportation problems along the Mississippi River system.
     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. In 2007, dry weather caused low water levels and resulted in reduced tonnage that could be shipped on a barge. Consequently, the per ton cost of transporting material was higher than normal.
     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 were 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.

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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.
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 our accounting policies and changes in our accounting policies in Note A of our 2007 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.
Disruptions in the credit markets could affect our business.
     The current credit environment has negatively affected the economy, and we have considered how it might affect our business. Demand for our products, particularly in the commercial and residential construction markets, could decline if companies and consumers are unable to finance construction projects or if the economic slowdown causes delays or cancellations to capital projects. We may also have difficulty placing our commercial paper in that it may take longer than we have recently experienced and/or may cost more. We experienced such problems in August and September, 2007, but have not had placement problems since that time. We expect we will refinance our $200

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million Notes due December 2008. However, there is no guarantee we will be able to access the capital markets at financially economical interest rates, which could negatively affect our business.
Our specialty products business depends in part on the steel industry and the supply of reasonably priced fuels.
     Our specialty products 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 specialty products 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. We cannot ensure the future profitability of this product line.
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:
   
a classified board of directors;
 
   
the requirement that our shareholders may only remove directors for cause;
 
   
specified requirements for calling special meetings of shareholders; and
 
   
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

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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” under Item 1A of this Form 10-K, the discussion of “Competition” under Item 1 on Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 of this Form 10-K and the 2007 Annual Report, and “Note A: Accounting Policies” and “Note N: Commitments and Contingencies” of the “Notes to Financial Statements” of the 2007 Financial Statements included under Item 8 of this Form 10-K and the 2007 Annual Report.
ITEM 1B.  
UNRESOLVED STAFF COMMENTS
     None.
ITEM 2.    
PROPERTIES
Aggregates Business
     As of December 31, 2007, the Company processed or shipped aggregates from 272 quarries, underground mines, and distribution yards in 28 states and in Canada and the Bahamas, of which 98 are located on land owned by the Company free of major encumbrances, 57 are on land owned in part and leased in part, 113 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 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, 2007, the Company processed and shipped ready mixed concrete and/or asphalt products from 15 properties in 3 states, of which 11 are located on land owned by the Company free of major encumbrances and 4 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

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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 — Critical Accounting Policies and Estimates- Property, Plant and Equipment” under Item 7 of this Form 10-K and the 2007 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 reserves        
            Tonnage of Reserves   Tonnage of Reserves                   located at an   Percentage of    
            for each general   for each general                   existing quarry,   aggregate reserves    
    Number of   type of aggregate   type of aggregate   Change in Tonnage   and reserves not   on land that has   Percent of reserves
    Producing   at 12/31/06   at 12/31/07   from 2006   located at an   not been zoned   owned and
    Quarries   (Add 000)   (Add 000)   (Add 000)   existing quarry.   for quarrying.   percent leased
State   2007   Hard Rock   S & G   Hard Rock   S & G   Hard Rock   S & G   At Quarry   Not at Quarry           Owned   Leased
 
Alabama
    7       46,778       12,113       87,505       11,049       40,727       (1,064 )     100 %     0 %     0 %     42 %     58 %
Arkansas
    3       278,548       0       272,198       0       (6,350 )     0       73 %     27 %     0 %     25 %     75 %
California
    1       23,993       0       24,661       0       668       0       100 %     0 %     0 %     30 %     70 %
Florida
    2       122,769       0       92,013       0       (30,756 )     0       100 %     0 %     0 %     0 %     100 %
Georgia
    9       690,960       0       686,925       0       (4,035 )     0       84 %     16 %     0 %     62 %     38 %
Illinois
    3       1,290,204       0       662,072       0       (628,132 )     0       72 %     28 %     0 %     9 %     91 %
Indiana
    11       514,724       48,566       487,149       36,625       (27,575 )     (11,941 )     90 %     10 %     15 %     43 %     57 %
Iowa
    28       706,501       44,825       673,381       44,197       (33,120 )     (628 )     99 %     1 %     1 %     13 %     87 %
Kansas
    12       227,023       0       221,737       0       (5,286 )     0       100 %     0 %     0 %     35 %     65 %
Kentucky
    3       577,767       46,255       569,979       45,832       (7,788 )     (423 )     100 %     0 %     0 %     15 %     85 %
Louisiana
    1       0       1,536       0       0       0       (1,536 )     100 %     0 %     0 %     0 %     100 %
Maryland
    2       98,862       0       97,460       0       (1,402 )     0       100 %     0 %     0 %     100 %     0 %
Minnesota
    2       365,195       0       348,306       0       (16,889 )     0       100 %     0 %     0 %     84 %     16 %
Mississippi
    2       0       31,492       0       92,238       0       60,746       100 %     0 %     0 %     100 %     0 %
Missouri
    9       581,551       0       526,246       0       (55,305 )     0       78 %     12 %     0 %     40 %     60 %
Montana
    1       50,000       0       50,000       0       0       0       100 %     0 %             100 %     0 %
Nebraska
    3       89,840       0       80,615       0       (9,225 )     0       100 %     0 %     0 %     24 %     76 %
Nevada
    3       167,624       0       161,546       0       (6,078 )     0       100 %     0 %     0 %     0 %     100 %
North Carolina
    40       2,697,214       0       2,971,758       0       274,544       0       86 %     14 %     3 %     68 %     32 %
Ohio
    14       128,396       209,171       192,315       200,111       63,919       (9,060 )     72 %     28 %     3 %     97 %     3 %
Oklahoma
    9       586,939       5,067       648,223       38,790       61,284       33,723       100 %           0 %     45 %     55 %
South Carolina
    5       405,452       0       411,231       0       5,779       0       100 %     0 %     19 %     76 %     24 %
Tennessee
    1       0       14,284       0       13,769       0       (515 )     100 %     0 %     0 %     0 %     100 %
Texas
    13       1,036,996       107,802       1,128,696       113,616       91,700       5,814       63 %     37 %     33 %     60 %     40 %
Virginia
    4       401,910       0       417,958       0       16,048       0       84 %     16 %     1 %     69 %     311 %
Washington
    3       30,588       0       47,252       0       16,664       0       85 %     15 %     0 %     7 %     93 %
West Virginia
    2       97,500       0       59,363       0       (38,137 )     0       100 %     0 %     0 %     20 %     80 %
Wisconsin
    1       3,678       0       3,147       0       (531 )     0       100 %     0 %             0 %     100 %
Wyoming
    1       98,970       0       71,480       0       (27,490 )     0       100 %     0 %     0 %     0 %     100 %
 
                                                                                               
U. S. Total
    195       11,319,982       521,111       10,993,216       596,227       (326,766 )     75,116                       9 %     48 %     52 %
 
                                                                                               
Non-U. S.
    2       933,568       0       923,170       0       (10,398 )     0       100 %     0 %     0 %     97 %     3 %
 
                                                                                               
Grand Total
    197       12,253,550       521,111       11,916,386       596,227       (337,164 )     75,116       80 %     20 %     8 %     52 %     48 %
 

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                            Number of  
                            years of  
                            production  
    Total Annual Production (in tons)     available at  
    (add 000)     December 31,  
    For year ended December 31,     2007  
Reportable Segment   2007     2006     2005          
 
Mideast Group
    63,420       70,939       73,210       76.9  
Southeast Group
    44,710       47,729       48,194       71.2  
West Group
    72,832       76,648       78,203       61.2  
 
                         
Total Aggregates Business
    180,962       195,316       199,607       69.1  
 
                         
Specialty Products Business
     The Specialty Products business currently operates major manufacturing facilities in Manistee, Michigan, and Woodville, Ohio. Both 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 2007, 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 counsel), it is unlikely that the outcome of these claims will have a material adverse effect on the

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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 2007 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” of the 2007 Financial Statements included under Item 8 of this Form 10-K and the 2007 Annual Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Environmental Regulation and Litigation” under Item 7 of this Form 10-K and the 2007 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 2007.
EXECUTIVE OFFICERS OF THE REGISTRANT
     The following sets forth certain information regarding the executive officers of Martin Marietta Materials, Inc. as of February 15, 2008:
                         
                Year Assumed   Other Positions and Other Business
Name   Age   Present Position   Present Position   Experience Within the Last Five Years
 
Stephen P. Zelnak, Jr.
    63     Chairman of the Board of Directors;     1997     President (1993-2006)
 
          Chief Executive Officer;     1993      
 
          President of Aggregates Business;     1993      
 
          Chairman of Magnesia Specialties Business     2005      
 
                       
C. Howard Nye
    45     President and Chief Operating Officer     2006     Executive Vice President, Hanson Aggregates North America (2003-2006);
President, Hanson Aggregates East (2000-2003)*
 
                       
Daniel G. Shephard
    49     Executive Vice President;
Chief Executive Officer of Magnesia Specialties Business
  2005
2005
  Vice President-Business Development and Capital Planning (2002-2005);
Senior Vice President (2004-2005);
Regional Vice President and General Manager-MidAmerica Region (2003-2005);
President of Magnesia Specialties Business (1999-2005);
Vice President-Marketing (2002-2004)
 
                       
Philip J. Sipling
    60     Executive Vice President;
Executive Vice President of Aggregates Business
  1997
1993
  Chairman of Magnesia Specialties Business (1997-2005)
 
                       
Bruce A. Vaio
    47     President — Martin Marietta Materials West;
Executive Vice President
    2006
2005
    President — Southwest Division (1998-2006)
Senior Vice President (2002-2005)

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Roselyn R. Bar
    49     Senior Vice President;
General Counsel;
Corporate Secretary
  2005
2001
1997
  Vice President (2001-2005)
 
                       
Anne H. Lloyd
    46     Treasurer;
Senior Vice President and Chief Financial Officer
  2006
2005
  Vice President and Controller (1998-2005);
Chief Accounting Officer (1999-2006)
 
                       
Jonathan T. Stewart
    59     Senior Vice President,
Human Resources
    2001      
 
 
Prior to his employment with the Company in 2006, Mr. Nye was Executive Vice President of Hanson Aggregates North America, a 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 (“NYSE”) (Symbol: MLM). Information concerning stock prices and dividends paid is included under the caption “Quarterly Performance (Unaudited)” of the 2007 Annual Report, and that information is incorporated herein by reference. There were approximately 859 holders of record of the Company’s Common Stock as of February 15, 2008. As required by Section 3.03A.12(a) of the NYSE listing standards, the Company filed with the NYSE the certification of its Chief Executive Officer that he is not aware of any violation by the Company of NYSE corporate governance listing standards.
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,” of this Form 10-K.

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Issuer Purchases of Equity Securities
                                 
                    Total Number of   Maximum Number of
                    Shares Purchased as   Shares that May Yet
    Total Number   Average   Part of Publicly   be Purchased Under
    of Shares   Price Paid   Announced Plans or   the Plans or
Period   Purchased   per Share   Programs(1)   Programs
 
                               
October 1, 2007 – October 31, 2007
    0     $       0       5,645,998  
 
                               
November 1, 2007 – November 30, 2007
    0     $       0       5,645,998  
 
                               
December 1, 2007 – December 31, 2007
    604,127     $ 132.43       604,127       5,041,871  
 
                               
Total
    604,127     $ 132.43       604,127       5,041,871  
 
(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. The Company announced in a press release dated August 15, 2007 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” of the 2007 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 following is management’s discussion and analysis of certain significant factors that have affected our consolidated financial condition and operating results during the periods included in the accompanying consolidated financial statements and the related notes. You should read the following discussion in conjunction with our audited consolidated financial statements and the related notes, which are included under Item 8 of this Form 10-K.
     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” in the 2007 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 2008” in the 2007 Annual Report is not incorporated herein by reference.

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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” of the 2007 Annual Report, and that information is incorporated herein by reference.
ITEM 8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
     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)” of the 2007 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, 2007, 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, 2007 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, 2007.
     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

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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, 2007. The Company’s independent registered public accounting firm has issued an attestation report that the Company’s internal control over financial reporting was effective at December 31, 2007. Management’s report on the Company’s internal controls and the attestation report of the Company’s independent registered public accounting firm are included in the 2007 Financial Statements, included under Item 8 of this Form 10-K and the 2007 Annual Report. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control and Accounting and Reporting Risk” under Item 7 of this Form 10-K and the 2007 Annual Report.
     Included among the Exhibits to this 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, 2007 (the “2008 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,” 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,” of this Form 10-K.

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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 2008 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
     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 2008 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 2008 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 2008 Proxy Statement, and that information is hereby incorporated by reference in this Form 10-K.

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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 2007 Annual Report and incorporated by reference under Item 8 of this Form 10-K:
Consolidated Statements of Earnings—
     for years ended December 31, 2007, 2006, and 2005
Consolidated Balance Sheets—
     at December 31, 2007 and 2006
Consolidated Statements of Cash Flows—
     for years ended December 31, 2007, 2006, and 2005
Consolidated Statements of Shareholders’ Equity—
     Balance at December 31, 2007, 2006 and 2005
Notes to Financial Statements
     (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) of this Form 10-K.
 
   
Schedule II — Valuation and Qualifying Accounts
 
   
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 is included in the 2007 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.

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     (3)  
Exhibits
 
   
The list of Exhibits on the accompanying Index of Exhibits included in Item 15(b) 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 (incorporated by reference to Exhibit 3.01 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on November 8, 2007) (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 (incorporated by reference to Exhibit 3.01 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on November 8, 2007) (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))

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4.11
 
—Indenture dated as of April 30, 2007 between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee (incorporated by reference to Exhibit 4.1 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on April 30, 2007 (Commission File No. 1-12744)
4.12
 
—First Supplemental Indenture, dated as of April 30, 2007, between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, to that certain Indenture dated as of April 30, 2007 between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, pursuant to which were issued $225,000,000 aggregate principal amount of Floating Rate Senior Notes due 2010 of Martin Marietta Materials, Inc. (incorporated by reference to Exhibit 4.2 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on April 30, 2007 (Commission File No. 1-12744)
4.13
 
—Second Supplemental Indenture, dated as of April 30, 2007, between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, to that certain Indenture dated as of April 30, 2007 between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, pursuant to which were issued $250,000,000 aggregate principal amount of 6 1/4% Senior Notes due 2037 of Martin Marietta Materials, Inc. (incorporated by reference to Exhibit 4.3 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on April 30, 2007 (Commission File No. 1-12744)
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
 
—Amendment to $250,000,000 Five-Year Credit Agreement dated as of April 17, 2007, 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. Quarterly Report on Form 10-Q for the quarter ended March 33, 2007) (Commission File No. 1-12744)
10.05
 
—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)**
10.06
 
—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)**
10.07
 
—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)**

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10.08
 
—Martin Marietta Materials, Inc. Amended and Restated Executive Incentive Plan (incorporated by reference to Exhibit 10.07 to the Martin Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (Commission File No. 1-12744)**
10.09
 
—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)**
10.10
 
—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)**
10.11
 
—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)**
10.12
 
—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)**
10.13
 
—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)**
10.14
 
—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)**
10.15
 
—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)**
10.16
 
—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)**
10.17
 
—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)**
10.18
 
—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)**
10.19
 
—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)**
10.20
 
—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)**
10.21
 
—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)**
10.22
 
—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)**
10.23
 
—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)**

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*12.01
 
—Computation of ratio of earnings to fixed charges for the year ended December 31, 2007
*13.01
 
—Excerpts from Martin Marietta Materials, Inc. 2007 Annual Report to Shareholders, portions of which are incorporated by reference in this Form 10-K. Those portions of the 2007 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 immediately following Signatures)
*31.01
 
—Certification dated February 25, 2008 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 25, 2008 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 25, 2008 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 25, 2008 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 2008 Proxy Statement filed pursuant to Regulation 14A, portions of which are incorporated by reference in this Form 10-K. Those portions of the 2008 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)                
    Balance at     Charged to     Charged to             Balance at  
    beginning     costs and     other accounts     Deductions     end of  
Description   of period     expenses     describe     describe     period  
    (Amounts in Thousands)  
Year ended December 31, 2007
                                       
 
                                       
Allowance for doubtful accounts
  $ 4,905     $     $     $ 1,244 (a)   $ 3,661  
Allowance for uncollectible notes receivable
    853                   853 (a)      
Inventory valuation allowance
    14,221       4,915                     19,136  
Accumulated amortization of intangible assets
    20,670       1,947             3,801 (b)     18,816  
 
                                       
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 (d)     14,221  
 
                            213 (c)        
Accumulated amortization of intangible assets
    29,399       3,858             12,374 (b)     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  
 
                            1,328 (c)        
Accumulated amortization of intangible assets
    29,605       3,964             2,842 (b)     29,399  
 
(a)  
To adjust allowance for change in estimates.
 
(b)  
Write off of fully amortized intangible assets.
 
(c)  
Divestitures.
 
(d)  
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 25, 2008
       
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 25, 2008
/s/ Anne H. Lloyd
 
Anne H. Lloyd
  Senior Vice President, Chief Financial Officer and Treasurer   February 25, 2008
/s/ Dana F. Guzzo
 
Dana F. Guzzo
  Vice President, Controller and Chief Accounting Officer   February 25, 2008
/s/ Marcus C. Bennett
 
Marcus C. Bennett
  Director   February 25, 2008
/s/ Sue W. Cole
 
Sue W. Cole
  Director   February 25, 2008
/s/ David G. Maffucci
 
David G. Maffucci
  Director   February 25, 2008
/s/ William E. McDonald
 
William E. McDonald
  Director   February 25, 2008
/s/ Frank H. Menaker, Jr.
 
Frank H. Menaker, Jr.
  Director   February 25, 2008
/s/ Laree E. Perez
 
Laree E. Perez
  Director   February 25, 2008

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Signature   Title   Date
/s/ Michael J. Quillen
 
Michael J. Quillen
  Director   February 25, 2008
/s/ Dennis L. Rediker
 
Dennis L. Rediker
  Director   February 25, 2008
/s/ Richard A. Vinroot
 
Richard A. Vinroot
  Director   February 25, 2008

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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 (incorporated by reference to Exhibit 3.01 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on November 8, 2007) (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))
4.11
 
—Indenture dated as of April 30, 2007 between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee (incorporated by reference to Exhibit 4.1 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on April 30, 2007 (Commission File No. 1-12744)

 


Table of Contents

     
4.12
 
—First Supplemental Indenture, dated as of April 30, 2007, between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, to that certain Indenture dated as of April 30, 2007 between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, pursuant to which were issued $225,000,000 aggregate principal amount of Floating Rate Senior Notes due 2010 of Martin Marietta Materials, Inc. (incorporated by reference to Exhibit 4.2 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on April 30, 2007 (Commission File No. 1-12744)
4.13
 
—Second Supplemental Indenture, dated as of April 30, 2007, between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, to that certain Indenture dated as of April 30, 2007 between Martin Marietta Materials, Inc. and Branch Banking and Trust Company, Inc., as trustee, pursuant to which were issued $250,000,000 aggregate principal amount of 6 1/4% Senior Notes due 2037 of Martin Marietta Materials, Inc. (incorporated by reference to Exhibit 4.3 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on April 30, 2007 (Commission File No. 1-12744)
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
 
—Amendment to $250,000,000 Five-Year Credit Agreement dated as of April 17, 2007, 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. Quarterly Report on Form 10-Q for the quarter ended March 33, 2007) (Commission File No. 1-12744)
10.05
 
—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)**
10.06
 
—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)**
10.07
 
—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)**
10.08
 
—Martin Marietta Materials, Inc. Amended and Restated Executive Incentive Plan (incorporated by reference to Exhibit 10.07 to the Martin Marietta Materials, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (Commission File No. 1-12744)**

 


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10.09
 
—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)**
10.10
 
—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)**
10.11
 
—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)**
10.12
 
—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)**
10.13
 
—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)**
10.14
 
—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)**
10.15
 
—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)**
10.16
 
—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)**
10.17
 
—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)**
10.18
 
—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)**
10.19
 
—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)**
10.20
 
—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)**
10.21
 
—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)**
10.22
 
—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)**
10.23
 
—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)**

 


Table of Contents

     
*12.01
 
—Computation of ratio of earnings to fixed charges for the year ended December 31, 2007
*13.01
 
—Excerpts from Martin Marietta Materials, Inc. 2007 Annual Report to Shareholders, portions of which are incorporated by reference in this Form 10-K. Those portions of the 2007 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 immediately following Signatures)
*31.01
 
—Certification dated February 25, 2008 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 25, 2008 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 25, 2008 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 25, 2008 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 2008 Proxy Statement filed pursuant to Regulation 14A, portions of which are incorporated by reference in this Form 10-K. Those portions of the 2008 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 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, 2007
         
(add 000, except ratio)
       
 
       
EARNINGS:
       
 
       
Earnings before income taxes
  $ 378,580  
(Earnings) of less than 50%-owned associated companies, net
    (2,748 )
Interest Expense*
    60,893  
Portion of rents representative of an interest factor
    22,244  
 
       
 
       
Adjusted Earnings and Fixed Charges
  $ 458,969  
 
       
FIXED CHARGES:
       
 
       
Interest Expense*
  $ 60,893  
Capitalized Interest
    3,873  
Portion of rents representative of an interest factor
    22,244  
 
       
 
       
Total Fixed Charges
  $ 87,010  
 
       
Ratio of Earnings to Fixed Charges
    5.27  
*Interest Expense excluded interest expense of $12 related to liabilities accrued under Financial Accounting Standards Board Interpretation Number 48, Accounting for Uncertainty in Income Taxes, An Interpretation of FAS 109.

 

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 2007 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, 2007 and 2006, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007, 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, 2007. 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, 2007.
The consolidated financial statements and 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 12, 2008
   
Martin Marietta Materials, Inc. and Consolidated Subsidiaries          page six

 


 

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 Martin Marietta Materials, Inc.’s internal control over financial reporting as of December 31, 2007, 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 included in the accompanying Statement of Financial Responsibility. Our responsibility is to express an opinion on the Corporation’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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, 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, Martin Marietta Materials, Inc., maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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., as of December 31, 2007 and 2006, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007, of Martin Marietta Materials, Inc., and our report dated February 12, 2008, expressed an unqualified opinion thereon.
-s- ERNST & YOUNG LLP
Raleigh, North Carolina
February 12, 2008
Martin Marietta Materials, Inc. and Consolidated Subsidiaries          page seven

 


 

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., as of December 31, 2007 and 2006, and the related consolidated statements of earnings, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. 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., at December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles.
As discussed in Note A to the consolidated financial statements, in 2007, the Corporation adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FAS 109. 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 also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Martin Marietta Materials, Inc.’s internal control over financial reporting as of December 31, 2007, 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 12, 2008, expressed an unqualified opinion thereon.
-s- ERNST & YOUNG LLP
Raleigh, North Carolina
February 12, 2008
Martin Marietta Materials, Inc. and Consolidated Subsidiaries          page eight

 


 

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)   2007   2006   2005
             
Net Sales
  $ 1,967,612     $ 1,929,666     $ 1,728,977  
Freight and delivery revenues
    239,529       261,386       246,311  
             
Total revenues
    2,207,141       2,191,052       1,975,288  
             
Cost of sales
    1,396,649       1,404,373       1,300,042  
Freight and delivery costs
    239,529       261,386       246,311  
             
Total cost of revenues
    1,636,178       1,665,759       1,546,353  
             
Gross Profit
    570,963       525,293       428,935  
Selling, general and administrative expenses
    155,186       146,665       130,703  
Research and development
    869       736       662  
Other operating (income) and expenses, net
    (18,122 )     (12,657 )     (16,231 )
             
Earnings from Operations
    433,030       390,549       313,801  
Interest expense
    60,893       40,359       42,597  
Other nonoperating (income) and expenses, net
    (6,443 )     (2,819 )     (1,483 )
             
Earnings from continuing operations before taxes on income
    378,580       353,009       272,687  
Taxes on income
    116,073       107,632       74,225  
             
Earnings from Continuing Operations
    262,507       245,377       198,462  
Gain (Loss) on discontinued operations, net of related tax expense (benefit) of $537, $185 and $(3,073), respectively
    242       45       (5,796 )
             
Net Earnings
  $ 262,749     $ 245,422     $ 192,666  
             
Net Earnings (Loss) Per Common Share
                       
– Basic from continuing operations
  $ 6.15     $ 5.40     $ 4.26  
– Discontinued operations
    0.01             (0.12 )
             
 
  $ 6.16     $ 5.40     $ 4.14  
             
 
                       
– Diluted from continuing operations
  $ 6.05     $ 5.29     $ 4.20  
– Discontinued operations
    0.01             (0.12 )
             
 
  $ 6.06     $ 5.29     $ 4.08  
             
Reconciliation of Denominators for Basic and Diluted Earnings Per Share Computations
                       
– Basic weighted-average common shares outstanding
    42,653       45,453       46,540  
– Effect of dilutive employee and director awards
    694       914       739  
             
– Diluted weighted-average shares outstanding and assumed conversions
    43,347       46,367       47,279  
             
Cash Dividends Per Common Share
  $ 1.24     $ 1.01     $ 0.86  
             
The notes on pages 13 to 35 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries           page nine

 


 

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)   2007   2006
       
Current Assets:
               
Cash and cash equivalents
  $ 20,038     $ 32,282  
Accounts receivable, net
    245,838       242,399  
Inventories, net
    286,885       256,287  
Current portion of notes receivable
    2,078       2,521  
Current deferred income tax benefits
    44,285       25,317  
Other current assets
    26,886       33,548  
       
Total Current Assets
    626,010       592,354  
       
 
               
Property, plant and equipment, net
    1,433,553       1,295,491  
Goodwill
    574,667       570,538  
Other intangibles, net
    9,426       10,948  
Noncurrent notes receivable
    8,457       10,355  
Other noncurrent assets
    31,692       26,735  
       
Total Assets
  $ 2,683,805     $ 2,506,421  
       
Liabilities and Shareholders’ Equity (add 000, except parenthetical share data)
               
       
Current Liabilities:
               
Bank overdraft
  $ 6,351     $ 8,390  
Accounts payable
    86,868       85,237  
Accrued salaries, benefits and payroll taxes
    21,262       25,010  
Pension and postretirement benefits
    9,120       6,100  
Accrued insurance and other taxes
    25,123       32,297  
Current maturities of long-term debt, commercial paper and line of credit
    276,136       125,956  
Settlement for repurchases of common stock
    24,017        
Other current liabilities
    57,739       32,082  
       
Total Current Liabilities
    506,616       315,072  
       
 
               
Long-term debt
    848,186       579,308  
Pension, postretirement and postemployment benefits
    103,518       106,413  
Noncurrent deferred income taxes
    160,902       159,094  
Other noncurrent liabilities
    118,592       92,562  
       
Total Liabilities
    1,737,814       1,252,449  
       
Shareholders’ Equity:
               
Common stock ($0.01 par value; 100,000,000 shares authorized; 41,318,000 and 44,851,000 shares outstanding at December 31, 2007 and 2006, respectively)
    412       448  
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares outstanding)
           
Additional paid-in capital
    50,955       147,491  
Accumulated other comprehensive loss
    (37,032 )     (36,051 )
Retained earnings
    931,656       1,142,084  
       
Total Shareholders’ Equity
    945,991       1,253,972  
       
Total Liabilities and Shareholders’ Equity
  $ 2,683,805     $ 2,506,421  
       
The notes on pages 13 to 35 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries           page ten

 


 

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)   2007     2006     2005  
                         
Cash Flows from Operating Activities:
                       
Net earnings
  $ 262,749     $ 245,422     $ 192,666  
Adjustments to reconcile net earnings to cash provided by operating activities:
                       
Depreciation, depletion and amortization
    150,338       141,429       138,251  
Stock-based compensation expense
    19,687       13,438       3,702  
Gains on divestitures and sales of assets
    (11,259 )     (7,960 )     (10,670 )
Deferred income taxes
    8,741       17,156       5,711  
Excess tax benefits from stock-based compensation transactions
    (23,278 )     (17,467 )     15,337  
Other items, net
    (7,723 )     (4,872 )     (3,768 )
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
                       
Accounts receivable, net
    (3,315 )     (17,387 )     (5,424 )
Inventories, net
    (31,514 )     (33,681 )     (10,952 )
Accounts payable
    1,494       (8,208 )     3,621  
Other assets and liabilities, net
    29,648       10,322       (10,690 )
                         
Net Cash Provided by Operating Activities
    395,568       338,192       317,784  
 
                       
Cash Flows from Investing Activities:
                       
Additions to property, plant and equipment
    (264,923 )     (265,976 )     (221,401 )
Acquisitions, net
    (12,211 )     (3,036 )     (4,650 )
Proceeds from divestitures and sales of assets
    21,107       30,589       37,582  
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
    (256,027 )     (213,423 )     (213,869 )
 
                       
Cash Flows from Financing Activities:
                       
Borrowings of long-term debt
    471,990       ––        
Repayments of long-term debt
    (125,342 )     (415 )     (532 )
Borrowings on commercial paper and line of credit, net
    71,463       537        
Debt issuance costs
    (807 )     ––        
Change in bank overdraft
    (2,039 )     1,100       (2,237 )
Termination of interest rate swaps
          ––       (467 )
Payments on capital lease obligations
    (177 )     (147 )     (80 )
Dividends paid
    (53,610 )     (46,421 )     (39,953 )
Repurchases of common stock
    (551,164 )     (172,888 )     (178,787 )
Issuances of common stock
    14,623       31,535       33,266  
Excess tax benefits from stock-based compensation transactions
    23,278       17,467        
                         
Net Cash Used for Financing Activities
    (151,785 )     (169,232 )     (188,790 )
                         
Net Decrease in Cash and Cash Equivalents
    (12,244 )     (44,463 )     (84,875 )
Cash and Cash Equivalents, beginning of year
    32,282       76,745       161,620  
                         
Cash and Cash Equivalents, end of year
  $ 20,038     $ 32,282     $ 76,745  
                         
 
                       
Supplemental Disclosures of Cash Flow Information:
                       
Cash paid for interest
  $ 64,034     $ 46,976     $ 46,711  
Cash paid for income taxes
  $ 69,737     $ 77,777     $ 66,106  
The notes on pages 13 to 35 are an integral part of these financial statements.
         
Martin Marietta Materials, Inc. and Consolidated Subsidiaries   page eleven    

 


 

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(2)     Earnings (Loss)     Earnings     Equity  
 
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 benefit of $4,157 
                      (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 share- holders’ equity for FAS 123(R) adoption
                12,339                   12,339  
 
                                               
Net earnings
                            245,422       245,422  
Minimum pension liability, net of tax benefit of $1,013 
                      (1,548 )           (1,548 )
Foreign currency translation gain
                      2,419             2,419  
Change in fair value of forward starting interest rate swap agreements, net of tax benefit of $772  
                      (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 benefit of $13,359 
                      (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  
Increase in reserves for uncertain tax positions for FIN 48 adoption
                            (1,407 )     (1,407 )
 
                                               
Net earnings
                            262,749       262,749  
Amortization of unrecognized actuarial losses, prior service costs and transition assets related to pension and post- retirement benefits, net of tax benefit of $1,085 and minority interest of $82 
                      (1,592 )           (1,592 )
Foreign currency translation gain
                      3,831             3,831  
Change in fair value of forward starting interest rate swap agreements, net of tax benefit of $2,106
                      (3,220 )           (3,220 )
Comprehensive earnings
                                            261,768  
 
                                               
Dividends declared
                            (53,610 )     (53,610 )
Issuances of common stock for stock award plans
    656       6       40,756                   40,762  
Repurchases of common stock(1)
    (4,189 )     (42 )     (156,979 )           (418,160 )     (575,181 )
Stock-based compensation expense
                19,687                   19,687  
 
 
                                               
Balance at December 31, 2007
    41,318     $ 412     $ 50,955     $ (37,032 )   $ 931,656     $ 945,991  
 
(1)  
Repurchases of common stock in excess of the value of additional paid-in capital were recorded against retained earnings.
 
(2)  
Additional paid-in capital at December 31, 2007 represents the pool of excess tax benefits.
The notes on pages 13 to 35 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries           page twelve

 


 

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. Aggregates products are also used in the railroad, environmental and agricultural industries. These aggregates products, along with asphalt products, ready mixed concrete and road paving materials, are sold and shipped from a network of 287 quarries, distribution facilities and plants to customers in 31 states, Canada, the Bahamas and the Caribbean Islands. 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, South Carolina, Virginia and West Virginia. The Southeast Group has operations in Alabama, Florida, Georgia, Illinois, Kentucky, Louisiana, Mississippi, 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. The following states account for approximately 61% of the Aggregates Business’ 2007 net sales: North Carolina, Texas, Georgia, Iowa and South Carolina.
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 risks associated with ownership have passed to unaffiliated customers. Typically, this occurs when finished products are shipped. 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, 2007, cash in the amount of $1,132,000 was held in an unrestricted escrow account on behalf of the Corporation and was reported in other noncurrent assets. No cash was held in an unrestricted escrow account at December 31, 2006.
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. The Corporation writes off customer receivables as bad debt expense when it becomes apparent based upon customer facts and circumstances that such amounts will not be collected.


                 
 
               
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
  page thirteen        

 


 

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 )

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.
Post-production stripping costs, which represent costs of removing overburden and waste materials to access mineral deposits, are recorded as a component of inventory and recognized in cost of sales in the same period as the revenue from the sale of the inventory.
Notes Receivable. Notes receivable are stated at cost. The Corporation records an allowance for notes receivable deemed uncollectible. At December 31, 2007, there were no notes receivable deemed at risk. At December 31, 2006, the allowance for uncollectible notes receivable was $853,000.
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, as determined by the Corporation’s geological and operational staff, and when demand supports investment in the market. Capitalization of these costs ceases when production commences. 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 economically 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, 2007 and 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


     
Martin Marietta Materials, Inc. and Consolidated Subsidiaries page fourteen

 


 

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 )

a portion 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 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 charged or credited to earnings in the same periods as interest expense is incurred on the anticipated debt issuance.
Retirement Plans and Postretirement Benefits. The Corporation sponsors defined benefit retirement plans and also 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. 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 postretirement 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, and 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”).
In accordance with FAS 158, the Corporation recognizes the funded status, defined as the difference between the fair value of plan assets and the benefit obligation, of its
pension plans and other postretirement benefits as an asset or liability in the 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 upon adoption of FAS 158 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 subsequently be 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 accumulated other comprehensive earnings or loss. Those amounts will be subsequently amortized and 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 the year ending December 31, 2008. The Corporation currently uses an annual measurement date of November 30. Management is in the process of evaluating the measurement date transition provisions prescribed by FAS 158 and believes that the change to a December 31 measurement date will not have a material adverse effect on the Corporation’s financial position, but there can be no assurance.
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


         
Martin Marietta Materials, Inc. and Consolidated Subsidiaries   page fifteen    

 


 

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 )

required by FAS 123(R), the Corporation continues 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 year ended December 31, 2005 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.
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.
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.
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:
         
year ended December 31      
(add 000, except per share)   2005  
 
Net earnings, as reported
  $ 192,666  
Add: Stock-based compensation expense included in reported net earnings, net of related tax effects
    2,147  
Deduct: Stock-based compensation expense determined under fair value for all awards, net of related tax effects
    (5,525 )
 
Pro forma net earnings
  $ 189,288  
 
     
 
       
Earnings per share:
       
Basic-as reported
  $ 4.14  
 
Basic-pro forma
  $ 4.07  
 
 
       
Diluted-as reported
  $ 4.08  
 
Diluted-pro forma
  $ 4.00  
 
The Corporation uses 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 2007, 2006 and 2005 were:
                         
    2007   2006   2005
 
Risk-free interest rate
    4.74 %     4.92 %     3.80 %
Dividend yield
    1.10 %     1.10 %     1.60 %
Volatility factor
    31.00 %     31.20 %     30.80 %
Expected term
  6.9 years   6.9 years   6.3 years


         
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   ( C O N T I N U E D )

Based on these assumptions, the weighted-average fair value of each stock option granted was $55.94, $33.21 and $18.72 for 2007, 2006 and 2005, 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 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 estimates 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.
Uncertain Tax Positions. Effective January 1, 2007, the Corporation adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FAS 109 (“FIN 48”). FIN 48 requires the recognition of 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.
In connection with the adoption of FIN 48, the Corporation increased its reserves for uncertain tax positions and reduced retained earnings at January 1, 2007 by $1,407,000, primarily as a result of providing interest accruals on uncertain temporary tax positions related to temporary or timing differences.
The Corporation records interest accrued in relation to unrecognized tax benefits as income tax expense. Penalties, if incurred, are recorded as operating expenses in the consolidated statement of earnings. At December 31, 2007, accrued interest of $2,848,000, net of tax benefits of $1,863,000, was recorded as a current FIN 48 liability in the Corporation’s consolidated balance sheet.
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. 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


         
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 )

forward starting interest rate swap agreements, the amortization of unrecognized amounts related to pension and postretirement benefits and, for years prior to 2006, adjustments to the minimum pension liability.
The components of accumulated other comprehensive loss, which is included in the Corporation’s consolidated statements of shareholders’ equity, consist of the following at December 31:
                         
(add 000)   2007     2006     2005  
 
Unrecognized amounts related to pension and postretirement benefits, net of minority interest
  $ (38,883 )   $ (37,291 )   $  
Foreign currency translation gains
    6,250       2,419        
Changes in fair value of forward starting interest rate swap agreements
    (4,399 )     (1,179 )      
Minimum pension liability
                (15,325 )
 
Accumulated other comprehensive loss
  $ (37,032 )   $ (36,051 )   $ (15,325 )
 
Unrecognized amounts related to pension and postretirement benefits, net of minority interest, at December 31, 2007 and 2006 are net of cumulative noncurrent deferred tax assets of $25,484,000 and $24,399,000, respectively. Changes in fair value of forward starting interest rate swap agreements at December 31, 2007 and 2006 are net of cumulative noncurrent deferred tax assets of $2,878,000 and $772,000, respectively. The minimum pension liability at December 31, 2005 is net of cumulative deferred tax assets of $10,027,000.
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 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. In September 2006, the Financial Accounting Standards Board (“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. Additionally, in February 2008, the FASB issued a statement of position delaying the effective date for all nonfinancial assets and nonfinancial liabilities by one year, or January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (“FAS 141(R)”), along with Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51 (“FAS 160”). FAS 141(R) requires recognizing the full fair value of all assets acquired, liabilities assumed and noncontrolling 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. FAS 160 requires the classification of noncontrolling interests as a separate component of shareholders’ equity and net earnings attributable to noncontrolling interests as a separate line item on the face of the income statement. FAS 141(R) and FAS 160 require prospective application for all business combinations with acquisition dates on or after the effective date, which is January 1, 2009 for the Corporation. FAS 160 also requires retrospective application of its disclosure and presentation requirements for all periods presented. At December 31, 2007, the Corporation had minority interests of $45,997,000.


         
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 )

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)   2007
 
Balance at beginning of period
  $ 106,757     $ 60,494     $ 403,287     $ 570,538  
Acquisitions
                5,132       5,132  
Amounts allocated to divestitures
                (1,003 )     (1,003 )
Transfer of South Carolina District
    9,229       (9,229 )            
 
Balance at end of period
  $ 115,986     $ 51,265     $ 407,416     $ 574,667  
 
 
(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  
 
Intangible assets subject to amortization consist of the following at December 31:
                         
     
    Gross   Accumulated   Net
    Amount   Amortization   Balance
(add 000)   2007
 
Noncompetition agreements
  $ 16,535     $ (13,174 )   $ 3,361  
Trade names
    1,300       (1,192 )     108  
Use rights and other
    10,207       (4,450 )     5,757  
 
Total
  $ 28,042     $ (18,816 )   $ 9,226  
 
 
    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  
 
During 2007, the Corporation acquired $425,000 of other intangibles, consisting of noncompete agreements, which are subject to amortization. The weighted-average amortization period for these agreements was 5 years. During 2006, the Corporation did not acquire any additional intangible assets.
At December 31, 2007 and 2006, 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 its 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.
Total amortization expense for intangible assets for the years ended December 31, 2007, 2006 and 2005 was $1,947,000, $3,858,000 and $3,964,000, respectively.
The estimated amortization expense for intangible assets for each of the next five years and thereafter is as follows:
         
(add 000)        
 
2008
  $ 1,441  
2009
    1,119  
2010
    1,009  
2011
    1,009  
2012
    929  
Thereafter
    3,719  
 
Total
  $ 9,226  
 
Note C: Divestitures
In 2007, the Corporation disposed of or permanently shut down certain underperforming operations in the following markets of the Aggregates business:
     
Reportable Segment   Markets
 
Mideast Group
  Indiana and West Virginia
Southeast Group
  Alabama, Louisiana and Mississippi
West Group
  Iowa, Kansas and Oklahoma
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.


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 )

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)   2007     2006     2005  
 
Net sales
  $ 6,256     $ 17,427     $ 32,644  
 
 
                       
Pretax loss on operations
  $ (1,966 )   $ (2,825 )   $ (8,423 )
Pretax gain (loss) on disposals
    2,745       3,055       (446 )
 
Pretax gain (loss)
    779       230       (8,869 )
Income tax expense (benefit)
    537       185       (3,073 )
 
Net earnings (loss)
  $ 242     $ 45     $ (5,796 )
 
                 
Note D: Accounts Receivable, Net  
December 31            
(add 000)   2007     2006  
 
Customer receivables
  $ 244,611     $ 242,497  
Other current receivables
    4,888       4,807  
 
 
    249,499       247,304  
Less allowances
    (3,661 )     (4,905 )
 
Total
  $ 245,838     $ 242,399  
 
                 
Note E: Inventories, Net            
December 31            
(add 000)   2007     2006  
 
Finished products
  $ 244,568     $ 213,302  
Products in process and raw materials
    18,642       19,271  
Supplies and expendable parts
    42,811       37,935  
 
 
    306,021       270,508  
Less allowances
    (19,136 )     (14,221 )
 
Total
  $ 286,885     $ 256,287  
 
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)   2007     2006  
 
Land and improvements
  $ 430,697     $ 379,925  
Mineral reserves
    191,415       186,001  
Buildings
    95,071       93,310  
Machinery and equipment
    2,126,110       2,000,880  
Construction in progress
    135,068       79,211  
 
 
    2,978,361       2,739,327  
Less allowances for depreciation, depletion and amortization
    (1,544,808 )     (1,443,836 )
 
Total
  $ 1,433,553     $ 1,295,491  
 
At December 31, 2007 and 2006, the net carrying value of mineral reserves was $135,327,000 and $131,249,000, 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)   2007     2006  
 
Machinery and equipment under capital leases
  $ 1,014     $ 1,014  
Less accumulated amortization
    (403 )     (231 )
 
Total
  $ 611     $ 783  
 
Depreciation, depletion and amortization expense related to property, plant and equipment was $147,427,000, $136,866,000 and $133,593,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
Interest cost of $3,873,000, $5,420,000 and $3,045,000 was capitalized during 2007, 2006 and 2005, respectively.
At December 31, 2007 and 2006, $82,365,000 and $80,887,000, 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)   2007     2006  
 
6.875% Notes, due 2011
  $ 249,860     $ 249,829  
5.875% Notes, due 2008
    202,066       204,224  
6.9% Notes, due 2007
          124,995  
7% Debentures, due 2025
    124,331       124,312  
6.25% Senior Notes, due 2037
    247,795        
Floating rate Senior Notes, due 2010, interest rate of 5.51%
    224,388        
Commercial paper, weighted average interest rate of 5.34%
    72,000        
Line of credit, interest rate of 5.83%
          537  
Acquisition notes, interest rates ranging from 2.11% to 8.00%
    662       702  
Other notes
    3,220       665  
 
Total
    1,124,322       705,264  
Less current maturities
    (276,136 )     (125,956 )
 
Long-term debt
  $ 848,186     $ 579,308  
 
On April 25, 2007, the Corporation issued $250,000,000 of 6.25% Senior Notes due in 2037 and $225,000,000 of Floating Rate Senior Notes due in 2010 (collectively, the “Senior Notes”). The 6.25% Senior Notes may be


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 )

redeemed in whole or in part prior to their maturity at a “make whole” redemption price. The Floating Rate Senior Notes bear interest at a rate equal to the three-month LIBOR (5.36% at December 31, 2007) plus 0.15% and may not be redeemed prior to maturity. Upon a change of control repurchase event or a downgrade in its credit ratings, the Corporation will be required to make an offer to repurchase all outstanding Senior Notes at a price in cash equal to 101% of the principal amount of the Senior Notes, plus any accrued and unpaid interest to, but not including, the purchase date.
All Notes, Debentures and Senior Notes are carried net of original issue discount, which is being amortized by the effective interest method over the life of the issue. Except for the Senior Notes, none are redeemable prior to their respective maturity dates. The principal amount, effective interest rate and maturity date for the Corporation’s Notes, Debentures and Senior Notes 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
7% Debentures
  $ 125,000       7.12 %   December 1, 2025
6.25% Senior Notes
  $ 250,000       6.45 %   April 30, 2037
Floating Rate Senior Notes
  $ 225,000       5.65 %   April 30, 2010
The Corporation repaid its $125,000,000 6.9% Notes that matured in August 2007 with proceeds from the April 2007 sale of the Senior Notes and issuances of commercial paper.
At December 31, 2007 and 2006, the unamortized value of terminated interest rate swaps was $2,187,000 and $4,469,000, 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 2008 interest expense by $2,187,000, at which time the 5.875% Notes will mature.
In September 2006, the Corporation entered into two forward starting interest rate swap agreements (the “Swap Agreements”) with a total notional amount of $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 sheets. The change in fair value is recorded, net of tax, directly in shareholders’ equity as other comprehensive earnings/ loss. At December 31, 2007, the fair value of the Swap Agreements was a liability of $7,277,000 and was included in other current liabilities in the Corporation’s consolidated balance sheet. At December 31, 2006, the $1,951,000 fair value of the Swap Agreements was recorded in other noncurrent liabilities. Other comprehensive earnings/ loss for the years ended December 31, 2007 and 2006 included a loss of $3,220,000 (net of a deferred tax asset of $2,106,000) and $1,179,000 (net of a deferred tax asset of $772,000), respectively, for the change in fair value of the Swap Agreements.
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 and expires on June 30, 2011. Borrowings under the Credit Agreement are unsecured and bear interest, at the Corporation’s option, 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.


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 )

On April 17, 2007, the Corporation entered into an amendment of the Credit Agreement, which modified the leverage ratio covenant in the agreement. As modified, the covenant requires the Corporation’s ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), as defined, for the trailing twelve months (the “Ratio”) to not exceed 2.75 to 1.00 as of the end of any fiscal quarter. Furthermore, the covenant allows the Ratio to exclude debt incurred in connection with an acquisition for a period of 180 days, provided that the Ratio does not exceed 3.25 to 1.00. The Corporation was in compliance with the Ratio at December 31, 2007.
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, 2007 and 2006, the Corporation had $1,650,000 of outstanding letters of credit issued under the Credit Agreement. The Corporation pays an annual loan commitment fee to the bank group. No borrowings were outstanding under the Credit Agreement at December 31, 2007 and 2006.
The Credit Agreement supports a $250,000,000 commercial paper program, of which $72,000,000 was outstanding at December 31, 2007. No borrowings were outstanding under the commercial paper program at December 31, 2006.
At December 31, 2006, $537,000 was outstanding under a $10,000,000 short-term line of credit. No amounts were outstanding under this line of credit at December 31, 2007.
Excluding the unamortized value of the terminated interest rate swaps, the Corporation’s long-term debt maturities for the five years following December 31, 2007, and thereafter are:
         
(add 000)        
 
2008
  $ 273,949  
2009
    217  
2010
    224,606  
2011
    250,081  
2012
    224  
Thereafter
    373,058  
 
Total
  $ 1,122,135  
 
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, 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.
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.
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, 2007 was approximately $1,050,141,000, compared with a carrying amount of $1,046,253,000 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 $75,882,000 at December 31, 2007 approximates its carrying amount.


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 carrying values and fair values of the Corporation’s financial instruments at December 31 are as follows:
                 
    2007
   
 
(add 000)   Carrying Value   Fair Value
 
Cash and cash equivalents
  $ 20,038     $ 20,038  
Accounts receivable, net
  $ 245,838     $ 245,838  
Notes receivable, net
  $ 10,535     $ 10,535  
Bank overdraft
  $ 6,351     $ 6,351  
Long-term debt, excluding interest rate swaps
  $ 1,122,135     $ 1,126,023  
Forward starting interest rate swap agreement liabilities
  $ 7,277     $ 7,277  
 
    2006
   
 
(add 000)   Carrying Value   Fair Value
 
Cash and cash equivalents
  $ 32,282     $ 32,282  
Accounts receivable, net
  $ 242,399     $ 242,399  
Notes receivable, net
  $ 12,876     $ 12,876  
Bank overdraft
  $ 8,390     $ 8,390  
Long-term debt, excluding interest rate swaps
  $ 700,795     $ 724,123  
Forward starting interest rate swap agreement liabilities
  $ 1,951     $ 1,951  
Note I: Income Taxes
The components of the Corporation’s tax expense (benefit) on income from continuing operations are as follow:
                         
years ended December 31                  
(add 000)   2007     2006     2005  
 
Federal income taxes:
                       
Current
  $ 96,509     $ 80,520     $ 55,505  
Deferred
    4,416       12,767       7,610  
 
Total federal income taxes
    100,925       93,287       63,115  
 
State income taxes:
                       
Current
    14,144       9,627       12,175  
Deferred
    796       3,996       (1,874 )
 
Total state income taxes
    14,940       13,623       10,301  
 
Foreign income taxes:
                       
Current
    (14 )     669       788  
Deferred
    222       53       21  
 
Total foreign income taxes
    208       722       809  
 
Total provision
  $ 116,073     $ 107,632     $ 74,225  
 
For the years ended December 31, 2007, 2006 and 2005, income tax benefits attributable to stock-based compensation transactions that were recorded to shareholders’ equity amounted to $27,209,000, $24,112,000 and $15,337,000, 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   2007     2006     2005  
 
Statutory tax rate
    35.0 %     35.0 %     35.0 %
Increase (reduction) resulting from:
                       
Effect of statutory depletion
    (6.3 )     (6.4 )     (8.3 )
State income taxes
    2.0       1.9       2.1  
Other items
                (1.6 )
 
Effective tax rate
    30.7 %     30.5 %     27.2 %
 
The principal components of the Corporation’s deferred tax assets and liabilities at December 31 are as follows:
                 
    Deferred Assets  
    (Liabilities)  
(add 000)   2007     2006  
 
Property, plant and equipment
  $ (192,404 )   $ (187,913 )
Goodwill and other intangibles
    (33,631 )     (24,725 )
Employee benefits
    43,918       37,426  
Valuation and other reserves
    12,201       11,854  
Inventories
    29,580       4,966  
Net operating loss carryforwards
    7,866       7,194  
Valuation allowance on deferred tax assets
    (7,405 )     (6,821 )
Other items, net
    (5,104 )     (929 )
 
Total
  $ (144,979 )   $ (158,948 )
 
Additionally, the Corporation had a net deferred tax asset of $28,362,000 and $25,171,000 for certain items recorded in accumulated other comprehensive loss at December 31, 2007 and 2006, respectively.
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 and stock-based compensation transactions. For financial reporting purposes, such amounts are expensed in accordance with FAS 87 and FAS 123(R), respectively. For income tax purposes,


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 )

amounts related to pension and postretirement obligations are deductible as funded. Amounts related to stock-based compensation transactions are deductible for income tax purposes upon vesting or exercise of the underlying award.
The Corporation had state net operating loss carryforwards of $117,832,000 and $112,720,000 at December 31, 2007 and 2006, respectively. These losses have various expiration dates. At December 31, 2007 and 2006, respectively, the deferred tax assets associated with these losses were $7,866,000 and $7,194,000, for which valuation allowances of $7,405,000 and $6,821,000 were recorded.
Effective January 1, 2007, the Corporation adopted FIN 48. The following table summarizes the Corporation’s FIN 48 unrecognized tax benefits, excluding interest and correlative effects, for the year ended December 31, 2007:
         
(add 000)        
 
Unrecognized tax benefits at January 1, 2007
  $ 29,277  
Gross increases — tax positions in prior years
    9,954  
Gross decreases — tax positions in prior years
    (4,127 )
Gross increases — tax positions in current year
    5,246  
Settlements with taxing authorities
     
Lapse of statute of limitations
    (8,929 )
 
Unrecognized tax benefits at December 31, 2007
  $ 31,421  
 
In addition to these gross unrecognized tax benefits, the Corporation’s FIN 48 liability also includes $447,000 of net federal tax benefits and other indirect benefits at December 31, 2007.
Unrecognized tax benefits of $8,074,000, net of federal tax benefits and related to interest accruals and permanent income tax differences, would favorably affect the Corporation’s effective tax rate if recognized.
The Corporation’s open tax years that are subject to examination are 2004 through 2007. The Internal Revenue Service is currently auditing the Corporation’s consolidated federal income tax returns for the years ended December 31, 2005 and 2004. The Corporation anticipates that it is reasonably possible that unrecognized tax benefits may
significantly change within the next twelve months ended December 31, 2008 as a result of the settlement of the Internal Revenue Service audits for the 2004 and 2005 tax years. The Corporation estimates that these events could result in a reasonably possible change in unrecognized tax benefits ranging from $0 to $24,819,000.
Unrecognized tax benefits 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 effective settlement with federal or state tax authorities. Management believes these unrecognized tax benefits are sufficient to cover any uncertain tax positions reviewed during any audit by taxing authorities. For the year ended December 31, 2007, $4,781,000, or $0.11 per diluted share, was reversed into income when the statute of limitations for federal examination of the 2003 tax year expired. For the year ended December 31, 2006, $2,700,000, or $0.06 per diluted share, was reversed into income when the statute of limitations for federal examination of the 2002 tax year expired.
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 attributable to domestic production activities 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 was 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 $4,644,000, or $0.11 per diluted share in 2007, $2,263,000, or $0.05 per diluted share, in 2006 and $2,300,000, or $0.05 per diluted share, in 2005.


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 )

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. When these benefits payments exceed the sum of the service and interest costs for the SERP during a year, the Corporation recognizes a pro-rata portion of the SERP’s unrecognized actuarial loss as settlement expense.
The net periodic retirement benefit cost of defined benefit plans included the following components:
                         
years ended December 31                  
(add 000)   2007     2006     2005  
 
Components of net periodic
                       
benefit cost:
                       
Service cost
  $ 12,363     $ 12,225     $ 10,878  
Interest cost
    19,741       18,112       16,472  
Expected return on assets
    (22,474 )     (19,638 )     (17,713 )
Amortization of:
                       
Prior service cost
    679       742       662  
Actuarial loss
    4,473       2,860       2,100  
Transition asset
    (1 )     (1 )     (1 )
Settlement charge
    742              
 
Net periodic benefit cost
  $ 15,523     $ 14,300     $ 12,398  
 
In addition to recognizing net periodic benefit cost of $15,523,000 for the year ended December 31, 2007, the Corporation also recognized the following amounts in other comprehensive earnings:
         
(add 000)        
 
Actuarial loss
  $ 11,838  
Amortization of:
       
Prior service cost
    (679 )
Actuarial loss
    (4,473 )
Transition asset
    1  
Settlement charge
    (742 )
 
Total
  $ 5,945  
 
Accumulated other comprehensive loss included the following amounts that have not yet been recognized in net periodic benefit cost at December 31:
                                 
    2007     2006  
(add 000)   Gross     Net of tax     Gross     Net of tax  
 
Prior service cost
  $ 4,859     $ 2,938     $ 5,606     $ 3,389  
Actuarial loss
    70,527       42,639       63,836       38,589  
Transition asset
    (16 )     (10 )     (17 )     (11 )
 
Total
  $ 75,370     $ 45,567     $ 69,425     $ 41,967  
 
The prior service cost, actuarial loss and transition asset expected to be recognized in net periodic benefit cost during 2008 are $679,000 (net of a deferred tax asset of $269,000), $4,006,000 (net of a deferred tax asset of $1,584,000) and $1,000, respectively, and are included in accumulated other comprehensive loss at December 31, 2007.


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 )

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)   2007   2006
 
Change in projected benefit obligation:
               
Net projected benefit obligation at beginning of year
  $ 333,103     $ 302,581  
Service cost
    12,363       12,225  
Interest cost
    19,741       18,112  
Actuarial loss
    1,191       8,919  
Plan amendments
          1,585  
Gross benefits paid
    (14,395 )     (10,319 )
 
Net projected benefit obligation at end of year
  $ 352,003     $ 333,103  
 
                 
years ended December 31        
(add 000)   2007   2006
 
Change in plan assets:
               
Fair value of plan assets at beginning of year
  $ 275,044     $ 242,859  
Actual return on plan assets, net
    11,839       30,329  
Employer contributions
    15,275       12,175  
Gross benefits paid
    (14,395 )     (10,319 )
 
Fair value of plan assets at end of year
  $ 287,763     $ 275,044  
 
                 
December 31        
(add 000)   2007   2006
 
Funded status of the plan at end of year
  $ (64,240 )   $ (58,059 )
Employer contributions subsequent to measurement date
    4       2  
 
Net accrued benefit cost
  $ (64,236 )   $ (58,057 )
 
                 
December 31        
(add 000)   2007   2006
 
Amounts recognized in consolidated balance sheets consist of:
               
Current liability
  $ (4,120 )   $ (2,100 )
Noncurrent liability
    (60,116 )     (55,957 )
 
Net amount recognized at end of year
  $ (64,236 )   $ (58,057 )
 
The accumulated benefit obligation for all defined benefit pension plans was $313,592,000 and $296,817,000 at December 31, 2007 and 2006, 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 $351,339,000, $313,592,000 and $287,076,000, respectively, at December 31, 2007 and
$333,103,000, $296,817,000 and $274,429,000, respectively, at December 31, 2006.
Weighted-average assumptions used to determine benefit obligations as of December 31 are:
                 
    2007   2006
 
Discount rate
    6.09 %     5.70 %
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:
                         
    2007   2006   2005
 
Discount rate
    5.70 %     5.83 %     6.00 %
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 a building-block approach, whereby the components are weighted based on the allocation of pension plan assets.
At December 31, 2007 and 2006, 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, 2007 and 2006 and target allocation for 2008 by asset category are as follows:
                         
    Percentage of Plan Assets
            December 31
    Target        
Asset Category   Allocation   2007   2006
 
Equity securities
    60 %     59 %     62 %
Debt securities
    39 %     39 %     37 %
Cash
    1 %     2 %     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.


         
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 )

In 2007, the Corporation made pension contributions of $15,275,000, of which $12,042,000 was voluntary. The Corporation’s 2006 contribution of $12,175,000 was also voluntary. The Corporation’s estimate of contributions to its pension and SERP plans in 2008 is approximately $17,000,000, of which $12,000,000 is voluntary.
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)        
 
2008
  $ 16,739  
2009
  $ 17,986  
2010
  $ 19,513  
2011
  $ 21,374  
2012
  $ 23,141  
Years 2013-2017
  $ 120,614  
Postretirement Benefits. The net periodic postretirement benefit cost of postretirement plans included the following components:
                         
years ended December 31            
(add 000)   2007   2006   2005
 
Components of net periodic benefit cost:
                       
Service cost
  $ 639     $ 551     $ 567  
Interest cost
    2,802       2,677       2,978  
Amortization of:
                       
Prior service credit
    (1,294 )     (1,294 )     (1,294 )
Actuarial gain
    (95 )     (238 )     (147 )
 
Total net periodic benefit cost
  $ 2,052     $ 1,696     $ 2,104  
 
In addition to recognizing net periodic benefit cost of $2,052,000 for the year ended December 31, 2007, the Corporation also recognized the following amounts in other comprehensive earnings:
         
(add 000)
 
Actuarial gain
  $ (2,994 )
Prior service credit
    (1,581 )
Amortization of:
       
Prior Service Credit
    1,294  
Actuarial gain
    95  
 
Total
  $ (3,186 )
 
Accumulated other comprehensive loss included the following amounts that have not yet been recognized in net periodic benefit cost at December 31:
                                 
      2007   2006
       
(add 000)   Gross   Net of tax   Gross   Net of tax
 
Prior service credit
  $ (11,317 )   $ (6,841 )   $ (11,030 )   $ (6,668 )
Actuarial loss
    396       239       3,295       1,992  
 
Total
  $ (10,921 )   $ (6,602 )   $ (7,735 )   $ (4,676 )
 
The prior service credit and actuarial gain expected to be recognized in net periodic benefit cost during 2008 are $1,490,000 and $138,000, respectively, and are included in accumulated other comprehensive loss. At December 31, 2007, the prior service credit and actuarial loss components recorded in accumulated other comprehensive loss were net of deferred tax liabilities of $589,000 and $55,000, 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)   2007   2006
 
Change in benefit obligation:
               
Net benefit obligation at beginning of year
  $ 53,316     $ 51,613  
Service cost
    639       551  
Interest cost
    2,802       2,677  
Participants’ contributions
    1,350       767  
Actuarial (gain) loss
    (4,345 )     2,548  
Plan amendments
    (1,581 )      
Gross benefits paid
    (5,317 )     (5,480 )
Federal subsidy on benefits paid
    395       640  
 
Net benefit obligation at end of year
  $ 47,259     $ 53,316  
 
                 
years ended December 31            
(add 000)   2007     2006  
 
Change in plan assets:
               
Fair value of plan assets at beginning of year
  $     $  
Employer contributions
    3,572       4,073  
Participants’ contributions
    1,350       767  
Gross benefits paid
    (5,317 )     (5,480 )
Federal subsidy on benefits paid
    395       640  
 
Fair value of plan assets at end of year
  $     $  
 
                 
December 31            
(add 000)   2007     2006  
 
Funded status of the plan at end of year
  $ (47,259 )   $ (53,316 )
Employer contributions subsequent to measurement date
    482       285  
 
Accrued benefit cost
  $ (46,777 )   $ (53,031 )
 


         
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 )

                 
December 31        
(add 000)   2007   2006
 
Amounts recognized in consolidated balance sheets consist of:
               
Current liability
  $ (5,000 )   $ (4,000 )
Noncurrent liability
    (41,777 )     (49,031 )
 
Net amount recognized at end of year
  $ (46,777 )   $ (53,031 )
 
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 post-retirement benefit obligations as of December 31 are:
                 
    2007   2006
 
Discount rate
    5.96 %     5.63 %
Weighted-average assumptions used to determine net post-retirement benefit cost for the years ended December 31 are:
                         
    2007   2006   2005
 
Discount rate
    5.63 %     5.72 %     6.00 %
   
At December 31, 2007 and 2006, 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:
                 
    2007   2006
 
Health care cost trend rate assumed for next year
    8.5 %     9.1 %
Rate to which the cost trend rate gradually declines
    5.5 %     5.5 %
Year the rate reaches the ultimate rate
    2013       2013  
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
  $ 104     $ (87 )
Postretirement benefit obligation
  $ 1,922     $ (1,619 )
The Corporation’s estimate of its contributions to its post-retirement health care plans in 2008 is $5,000,000.
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
 
2008
  $ 5,000     $ 535  
2009
  $ 3,707     $ 595  
2010
  $ 3,932     $ 661  
2011
  $ 4,052     $ 745  
2012
  $ 4,106     $ 834  
Years 2013-2017
  $ 17,759     $ 5,921  
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 $5,405,000 in 2007, $5,215,000 in 2006 and $4,969,000 in 2005.
Postemployment Benefits. The Corporation has accrued postemployment benefits of $1,625,000 and $1,425,000 at December 31, 2007 and 2006, respectively.
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.


         
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 )

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 154,695 employee stock options during 2007. Options granted in years subsequent to 2005 become exercisable in four annual installments beginning one year after date of grant and expire eight years from such date. Options granted prior to January 1, 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 2007, the Corporation granted 24,000 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, 2007:
                                 
                    Weighted-    
            Weighted-   Average   Aggregate
            Average   Remaining   Intrinsic
    Number of   Exercise   Contractual   Value
    Options   Price   Life (years)   (add 000)
 
Outstanding at January 1, 2007
    1,466,336     $ 49.78                  
Granted
    178,695     $ 151.92                  
Exercised
    (720,036 )   $ 43.81                  
Terminated
    (3,380 )   $ 70.65                  
                 
Outstanding at December 31, 2007
    921,615     $ 74.17       6.1     $ 53,854  
 
 
                               
Exercisable at December 31, 2007
    610,075     $ 53.42       5.8     $ 48,308  
 
The weighted-average grant-date exercise price of options granted during 2007, 2006 and 2005 was $151.92, $89.02 and $61.06, respectively. The aggregate intrinsic values of options exercised during the years ended December 31, 2007, 2006 and 2005 were $61,363,000, $58,960,000 and $35,912,000, 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, 2007 was based on the closing price of the Corporation’s common stock at December 31, 2007, which was $132.60.
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 unrestricted shares of common stock in an amount equal to their respective units generally at the end of a 34-month period of additional employment from the date of award or at retirement beginning at age 62. All rights of ownership of the common stock convey to the participants upon the issuance of their respective shares at the end of the ownership-vesting period, 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, 2007:
                                 
    Incentive Stock   Restricted Stock
            Weighted-           Weighted-
            Average           Average
    Number of   Grant-Date   Number of   Grant-Date
    Awards   Fair Value   Awards   Fair Value
 
January 1, 2007
    60,752               378,047          
Awarded
    21,083     $ 117.56       121,115     $ 142.89  
Distributed
    (34,855 )             (53,828 )        
Forfeited
    (32 )             (5,537 )        
 
December 31, 2007
    46,948               439,797          
 
The weighted-average grant-date fair value of incentive compensation awards granted during 2007, 2006 and 2005 was $117.56, $91.05 and $55.15, respectively. The weighted-average grant-date fair value of restricted stock awards granted during 2007, 2006 and 2005 was $142.89, $88.85 and $60.63, respectively.


         
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 )

The aggregate intrinsic values for incentive compensation awards and restricted stock awards at December 31, 2007 were $2,408,000 and $58,317,000, respectively, and were based on the closing price of the Corporation’s common stock at December 31, 2007, which was $132.60. The aggregate intrinsic values of incentive compensation awards distributed during the years ended December 31, 2007, 2006 and 2005 were $2,587,000, $1,664,000 and $2,184,000, respectively. The aggregate intrinsic values of restricted stock awards distributed during the years ended December 31, 2007, 2006 and 2005 were $4,394,000, $390,000 and $1,774,000, respectively. The aggregate intrinsic values for distributed awards were based on the closing prices of the Corporation’s common stock on the dates of distribution.
At December 31, 2007, there are approximately 1,222,000 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, 2007, 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 3,672, 7,263 and 9,838 shares of the Corporation’s common stock under this plan during 2007, 2006 and 2005, respectively.
The following table summarizes stock-based compensation expense for the years ended December 31, 2007, 2006 and 2005, unrecognized compensation cost for non-vested awards at December 31, 2007 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 :
2007
  $ 7,740     $ 10,897     $ 493     $ 557     $ 19,687  
2006
  $ 5,897     $ 6,410     $ 474     $ 657     $ 13,438  
2005
  $ 255     $ 2,505     $ 314     $ 628     $ 3,702  
 
Unrecognized compensation cost at December 31, 2007:
  $ 5,485     $ 15,541     $ 329     $     $ 21,355  
 
Weighted-average period over which unrecognized compensation cost to be recognized:
 
  2.1 years   2.6 years   1.6 years            
 
For the years ended December 31, 2007, 2006 and 2005, the Corporation recognized a tax benefit related to stock-based compensation of $27,209,000, $24,112,000 and $15,337,000, respectively.
The following presents expected stock-based compensation expense in future periods for outstanding awards as of December 31, 2007:
         
(add 000)
 
2008
  $ 10,157  
2009
    6,801  
2010
    3,344  
2011
    1,053  
 
Total
  $ 21,355  
 
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 $64,717,000, $72,248,000 and $61,468,000 for the years ended December 31, 2007, 2006 and 2005, respectively. The Corporation’s operating leases generally contain renewal and/or purchase options with varying terms. The Corporation has royalty agreements that generally require


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)

royalty payments based on tons produced or total sales dollars and also contain minimum payments. Total royalties, principally for leased properties, were $40,673,000, $43,751,000 and $40,377,000 for the years ended December 31, 2007, 2006 and 2005, 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, 2007 are as follows:
                 
(add 000)   Capital Leases     Operating Leases  
 
2008
  $ 213     $ 92,294  
2009
    137       61,856  
2010
    308       52,967  
2011
          43,544  
2012
          36,890  
Thereafter
            176,152  
 
Total
    658     $ 463,703  
 
             
Less imputed interest
    (48 )        
         
Present value of minimum lease payments
    610          
Less current capital lease obligations
    (188 )        
         
Long-term capital lease obligations
  $ 422          
         
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, 2007, approximately 3,044,000 common shares were reserved for issuance under stock-based plans. At December 31, 2007 and 2006, there were 868 and 945, respectively, shareholders of record.
Pursuant to authority granted by its Board of Directors, the Corporation can repurchase common stock through open purchases. The Corporation repurchased 4,189,100 shares at an aggregate price of $575,181,000 in 2007, 1,874,200 shares at an aggregate price of $172,888,000 in 2006 and 2,658,000 shares at an aggregate price of $175,570,000 in 2005. The Corporation settled $24,017,000 of the 2007 repurchases in January 2008. In August 2007, the Board authorized the Corporation to repurchase an additional 5,000,000 shares of its com-
mon stock. At December 31, 2007, 5,041,900 shares of common stock were remaining under the Corporation’s repurchase authorization.
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 Rights Agreement that expired by its own terms on October 21, 2006. Upon its expiration, the Board of Directors adopted a new Rights Agreement (the “Rights Agreement”) and reserved 200,000 shares of Junior Participating Class B Preferred Stock for issuance. In accordance with the Rights Agreement, the 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 Agreement 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.


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  (CONTINUED)

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 2007, 2006 and 2005 were $2,042,000, $2,033,000 and $2,144,000, 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)   2007     2006  
 
Balance at January 1
  $ 25,234     $ 22,965  
Accretion expense
    1,363       1,190  
Liabilities incurred
    2,576       1,822  
Liabilities settled
    (811 )     (894 )
Revisions in estimated cash flows
    10,786       151  
 
Balance at December 31
  $ 39,148     $ 25,234  
 
During 2007, the Corporation revised its estimates for plant removal costs based on recent experience with such activities for fully reclaimed locations.
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 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. During 2007, the Corporation decreased its accrual for incurred but not reported casualty claims based on the Corporation’s recent claims experience. The change in estimate increased net earnings by $1,981,000, or $0.05 per diluted share. At December 31, 2007 and 2006 reserves of approximately $28,661,000 and $30,301,000, 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 in the amount of $24,910,000 at December 31, 2007.


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 )

Surety Bonds. In the normal course of business, at December 31, 2007, the Corporation was contingently liable for $105,074,000 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. Three of these bonds, totaling $27,036,000, or 26% 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 $16,148,000 as of December 31, 2007. The Corporation also had other purchase obligations related to energy and service contracts of $12,288,000 as of December 31, 2007. The Corporation’s contractual purchase commitments as of December 31, 2007 are as follows:
         
(add 000)        
 
2008
  $ 24,204  
2009
    2,157  
2010
    2,075  
 
Total
  $ 28,436  
 
Employees. The Corporation had approximately 5,300 employees at December 31, 2007. Approximately 13% of the Corporation’s employees are represented by a labor union. All such employees are hourly employees.
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 produces magnesia-based chemicals products, dolomitic lime and structural composite products. 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 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 is 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 $5,513,000 in 2007 and $2,095,000 in 2005 for the West Group. During 2006, the Corporation did not purchase any property, plant and equipment through acquisitions. Property additions in 2007 also include $2,897,000 of land acquired through the issuance of notes payable for the Mideast Group.
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, 2007. Prior year information has been reclassified to conform to the presentation of the Corporation’s current reportable segments.


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 )

Selected Financial Data by Business Segment
years ended December 31
(add 000)
                         
Total revenues   2007   2006   2005
 
Mideast Group
  $ 727,482     $ 716,722     $ 639,064  
Southeast Group
    533,140       543,022       475,661  
West Group
    774,847       764,747       716,005  
 
Total Aggregates Business
    2,035,469       2,024,491       1,830,730  
Specialty Products
    171,672       166,561       144,558  
 
Total
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
 
 
                       
Net sales
                       
 
Mideast Group
  $ 682,458     $ 662,127     $ 587,018  
Southeast Group
    457,926       455,741       400,597  
West Group
    672,803       661,083       610,747  
 
Total Aggregates Business
    1,813,187       1,778,951       1,598,362  
Specialty Products
    154,425       150,715       130,615  
 
Total
  $ 1,967,612     $ 1,929,666     $ 1,728,977  
 
 
                       
Gross profit
                       
 
Mideast Group
  $ 287,850     $ 259,886     $ 205,117  
Southeast Group
    107,923       96,389       74,935  
West Group
    136,419       143,315       132,378  
 
Total Aggregates Business
    532,192       499,590       412,430  
Specialty Products
    43,374       33,512       21,445  
Corporate
    (4,603 )     (7,809 )     (4,940 )
 
Total
  $ 570,963     $ 525,293     $ 428,935  
 
 
                       
Selling, general and administrative expenses
     
 
Mideast Group
  $ 45,748     $ 43,565     $ 43,374  
Southeast Group
    25,900       24,047       22,296  
West Group
    46,156       44,959       43,346  
 
Total Aggregates Business
    117,804       112,571       109,016  
Specialty Products
    10,316       10,954       11,271  
Corporate
    27,066       23,140       10,416  
 
Total
  $ 155,186     $ 146,665     $ 130,703  
 
 
                       
Earnings from operations
                       
 
Mideast Group
  $ 246,628     $ 223,946     $ 167,200  
Southeast Group
    84,189       73,090       53,427  
West Group
    101,013       102,531       99,070  
 
Total Aggregates Business
    431,830       399,567       319,697  
Specialty Products
    32,888       22,528       9,522  
Corporate
    (31,688 )     (31,546 )     (15,418 )
 
Total
  $ 433,030     $ 390,549     $ 313,801  
 
                         
Assets employed   2007   2006   2005
 
Mideast Group
  $ 780,074     $ 729,200     $ 687,939  
Southeast Group
    519,681       475,941       449,516  
West Group
    1,072,808       1,020,572       931,548  
 
Total Aggregates Business
    2,372,563       2,225,713       2,069,003  
Specialty Products
    98,718       95,511       84,138  
Corporate
    212,524       185,197       280,175  
 
Total
  $ 2,683,805     $ 2,506,421     $ 2,433,316  
 
 
                       
Depreciation, depletion and amortization
 
Mideast Group
  $ 51,038     $ 49,257     $ 48,322  
Southeast Group
    31,032       27,268       25,819  
West Group
    49,539       46,053       46,973  
 
Total Aggregates Business
    131,609       122,578       121,114  
Specialty Products
    6,906       7,692       6,387  
Corporate
    11,823       11,159       10,750  
 
Total
  $ 150,338     $ 141,429     $ 138,251  
 
 
                       
Property additions
                       
 
Mideast Group
  $ 94,491     $ 71,332     $ 77,119  
Southeast Group
    58,637       51,252       56,986  
West Group
    90,446       115,726       70,702  
 
Total Aggregates Business
    243,574       238,310       204,807  
Specialty Products
    10,508       12,985       8,724  
Corporate
    19,251       14,681       9,965  
 
Total
  $ 273,333     $ 265,976     $ 223,496  
 
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   2007   2006   2005
 
Aggregates
  $ 1,913,908     $ 1,906,171     $ 1,715,672  
Asphalt
    56,285       56,612       49,706  
Ready Mixed Concrete
    41,126       35,421       33,446  
Road Paving
    13,453       17,657       21,048  
Other
    10,697       8,630       10,858  
 
Total Aggregates Business
    2,035,469       2,024,491       1,830,730  
Specialty Products
    171,672       166,561       144,558  
 
Total
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
 
 
                       
Net sales
                       
 
Aggregates
  $ 1,705,835     $ 1,670,127     $ 1,490,993  
Asphalt
    47,569       48,832       44,421  
Ready Mixed Concrete
    41,126       35,421       33,446  
Road Paving
    13,453       17,657       21,048  
Other
    5,204       6,914       8,454  
 
Total Aggregates Business
    1,813,187       1,778,951       1,598,362  
Specialty Products
    154,425       150,715       130,615  
 
Total
  $ 1,967,612     $ 1,929,666     $ 1,728,977  
 


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 presents domestic and foreign total revenues for the years ended December 31:
                         
(add 000)   2007   2006   2005
 
Domestic
  $ 2,164,658     $ 2,149,021     $ 1,939,298  
Foreign
    42,483       42,031       35,990  
 
Total
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
 
Note P: Supplemental Cash Flow Information
The following table presents supplemental cash flow information for the years ended December 31:
                         
(add 000)   2007   2006   2005
 
Noncash investing and financing activities:
                       
Issuance of notes payable for acquisition of land
  $ 2,897     $     $  
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)   2007   2006   2005
 
Other current and noncurrent assets
  $ (3,029 )   $ (9,297 )   $ (3,565 )
Notes receivable
    327       5,833       1,178  
Accrued salaries, benefits and payroll taxes
    (3,747 )     951       1,348  
Accrued insurance and other taxes
    (7,174 )     (7,285 )     3,678  
Accrued income taxes
    18,448       14,679       (14,541 )
Accrued pension, postretirement and postemployment benefits
    125       (281 )     (5,182 )
Other current and noncurrent liabilities
    24,698       5,722       6,394  
 
Total
  $ 29,648     $ 10,322     $ (10,690 )
 


Martin Marietta Materials, Inc. and Consolidated Subsidiaries   page thirty-five    

 


 

M A N A G E M E N T ‘ S  D I S C U S S I O N  &  A N A L Y S I S  O F  F I N A N C I A L
C O N D I T I O N  &  R E S U L T S  O F  O P E R A T I O N S

INTRODUCTORY OVERVIEW
Martin Marietta Materials, Inc., (the “Corporation”) is a leading producer of construction aggregates. The Aggregates business includes the following reportable segments, primary markets and primary product lines:

                   
 
AGGREGATES BUSINESS
 
                   
Reportable     Mideast     Southeast     West
Segments     Group     Group     Group
                   
 
                Arkansas,
 
                California,
 
          Alabama,     Iowa,
 
    Indiana,     Florida,     Kansas,
 
    Maryland,     Georgia,     Minnesota,
 
    North     Illinois,     Missouri,
Primary
    Carolina,     Kentucky,     Nebraska,
Markets
    Ohio,     Louisiana,     Nevada,
 
    South     Mississippi,     Oklahoma,
 
    Carolina,     Tennessee,     Texas,
 
    Virginia and     Nova Scotia     Washington,
 
    West Virginia     and the     Wisconsin
 
          Bahamas     and
 
                Wyoming
                   
 
                 
 
                Aggregates
 
                (stone, sand
Primary
    Aggregates     Aggregates     and gravel),
Product
    (stone, sand     (stone, sand     asphalt,
Lines
    and gravel)     and gravel)     ready mixed
 
                concrete and
 
                road paving
The Corporation’s Specialty Products segment produces magnesia-based chemicals products used in industrial, agricultural and environmental applications and dolomitic lime used in the steel industry, and engages in targeted activity in structural composites.
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 2007 operating results include:
 
Return, assuming reinvestment of dividends, of 28.8% on the Corporation’s common stock price in 2007 compared with a return of 5.5% for the S&P 500 Index;
 
 
Return on shareholders’ equity of 23.9% in 2007;
 
 
Record earnings per diluted share of $6.06;
 
 
Gross margin improvement and operating margin improvement in the core aggregates business as a result of:
   
heritage aggregates product line pricing increase of 10.3%, partially offset by a volume decrease of 7.6%;
 
   
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 $629 million in cash to shareholders, inclusive of $575 million for the repurchase of 4,189,100 shares of the Corporation’s common stock at an average price of $137.30 along with $54 million in dividends;
 
 
Issuance of $250 million of 6.25% Senior Notes due in 2037 and $225 million of Floating Rate Senior Notes due in 2010 (collectively the “Senior Notes”);
 
 
Consolidated debt-to-consolidated EBITDA, as defined in the Corporation’s $250 million five-year revolving credit agreement, of 1.86 for the trailing twelve months ended December 31, 2007; ratio was nearly 2.0 in January 2008 after the Corporation issued additional commercial paper to fund $24 million of share repayments that were completed in December 2007 but settled in January 2008;
 
 
Capital expenditures of $265 million focused on capacity expansion and efficiency improvement projects in high-growth areas and at fixed-based quarries serving long-haul high-growth markets, along with a continuing investment in land with long-term mineral reserves to serve high-growth markets;
 
 
Continued maximization of transportation and materials options created by the Corporation’s long-haul distribution network;
 
 
Strong financial results by the Specialty Products segment;


Martin Marietta Materials, Inc. and Consolidated Subsidiaries   page thirty-six    

 


 

M A N A G E M E N T ‘ S  D I S C U S S I O N  &  A N A L Y S I S  O F  F I N A N C I A L
C O N D I T I O N  &  R E S U L T S  O F  O P E R A T I O N S  ( C O N T I N U E D )

 
Improvement in employee safety performance as measured by total injury incidence and lost-time incidence rates; 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, 2007.
In 2008, management will emphasize, among other things, the following initiatives:
 
Effectively serving high-growth markets, 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;
 
 
Investing in acquisitions of value-added aggregates operations;
 
 
Focusing a significant part of the growth capital spending program on locations along the geological fall line in Georgia and South Carolina;
 
 
Increasing the number of quarries using enhanced plant automation;
 
 
Continuing the strong performance and operating results of the Specialty Products segment;
 
 
Increasing the Corporation’s gross margin and operating margin toward its targeted goal of a 1,000-basis-point improvement in operating margin over the 5-year period ending December 31, 2010;
 
 
Maximizing return on invested capital consistent with the successful long-term operation of the Corporation’s business;
 
 
Returning cash to shareholders through sustainable dividends and share repurchases; and
 
 
Continuing to improve the Corporation’s safety performance.
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 construction (e.g., manufacturing and distribution facilities, energy facilities including windfarms and ethanol plants, office buildings, large retailers and wholesalers, and malls); and residential construction (housing). Aggregates products are also used in the railroad, environmental and agricultural industries as illustrated by the following examples. Ballast is an aggregates product used to line trackbeds of railroads. High-calcium limestone is used as a supplement in animal feed, to neutralize soil acidity and enhance agricultural growth, and also as a filler in glass, plastic, paint, rubber, adhesives, grease and paper. Chemical-grade calcium limestone is used as a desulfurization material in utility plants. Limestone can also be used to absorb moisture and dry up areas around building foundations. Stone is used as a stabilizing material to control erosion at ocean beaches, inlets, rivers and streams.
As discussed further under the section Aggregates Industry and Corporation Trends on pages 45 through 47, 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. 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 2007 and the outlook for 2008 is positive, although rising construction and materials prices have made projects more costly.
Commercial and residential construction levels are interest rate-sensitive and typically move in a direct correlation with economic cycles. The commercial construction market was mixed in 2007, with the rate of growth slowing over the course of the year. Management believes certain commercial construction, notably office and retail space, is declining in some areas as developers consider the impact of the current credit markets on construction and development


Martin Marietta Materials, Inc. and Consolidated Subsidiaries   page thirty-seven    

 


 

M A N A G E M E N T ’ S   D I S C U S S I O N   &    A N A L Y S I S   O F   F I N A N C I A L
C O N D I T I O N   &   R E S U L T S   O F   O P E R A T I O N S   ( C O N T I N U E D )

plans. Tighter credit conditions may result in businesses finding it difficult to obtain financing for capital investments. The residential construction market, which accounted for approximately 12 percent of the Corporation’s aggregates shipments in 2007, declined significantly in 2007 in connection with the housing market downturn. Further, the outlook reflects diminished demand with recovery not expected prior to late 2009 or 2010. In response to a weak economic outlook and increasing downside risks to growth, the Federal Reserve cut the federal funds rate by 125 basis points to 3.00 percent in January, 2008. Typically, the economy feels the effects of a significant cut in the federal funds rate 6 to 12 months later.
In 2007, the Corporation shipped 182.3 million tons of aggregates to customers in 31 states, Canada, the Bahamas and the Caribbean Islands from 272 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 61% of its 2007 net sales by state of destination, while the top ten revenue-generating states accounted for approximately 81% of its 2007 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, wet weather and other weather-related conditions, such as droughts or hurricanes, significantly affect the aggregates industry by impacting shipments, 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.
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 at locations that qualify for regulatory permits and are in 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 for mining. The Corporation’s management continues to meet this challenge through strategic planning to identify site locations in advance of economic expansion;
                       
      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  
                       
 
Louisiana
    22     41     26  
                       
 
Indiana
    14     31     18  
                       
 
Alabama
    23     35     24  
                       
 
Ohio
    7     47     9  
                       
Source: United States Census Bureau
Martin Marietta Materials, Inc. and Consolidated Subsidiaries          page thirty-eight

 


 

M A N A G E M E N T ’ S   D I S C U S S I O N   &    A N A L Y S I S   O F   F I N A N C I A L
C O N D I T I O N   &   R E S U L T S   O F   O P E R A T I O N S   ( C O N T I N U E D )

acquire land around existing quarry sites to increase mineral reserve capacity and lengthen quarry life or add a site buffer; 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 to operating results as discussed more fully under the sections Analysis of Gross Margin and Transportation Exposure on pages 44 and 45 and pages 54 through 56, respectively.
The construction aggregates industry has been consolidating, as evidenced by several large domestic and international vertically-integrated companies acquiring three of the top ten companies in the industry in 2007. 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. Management expects the industry consolidation trend to slow as the number of suitable small to mid-sized acquisition targets in high-growth markets declines. During the recent period of fewer acquisition opportunities, 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 52 through 54. Operating results and financial performance are sensitive to volume changes. However, the shift in pricing dynamics within the industry, beginning in 2005, has provided management with the opportunity to increase prices at a higher rate and/or with greater frequency than historical averages. This pricing improvement has more than offset the impact of the 8.1% decline in volume in the aggregates product line in 2007.
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 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, through its Specialty Products segment, also produces dolomitic lime, magnesia-based chemicals and a limited number of structural composites products.
The dolomitic lime business is dependent on the highly cyclical steel industry and 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 volumes 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. Therefore, fluctuations in their pricing directly affect operating results.
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. During 2007, the Corporation’s management continued to emphasize delivering value to shareholders through the return of $629 million via share repurchases and dividends. Certain of the 2007 share repurchases were financed by the issuance of $475 million of Senior Notes. Additionally, the Corporation invested $265 million in internal capital projects ($150 million of maintenance capital and $115 million of growth capital) and made a voluntary $12 million contribution to its pension plan.


Martin Marietta Materials, Inc. and Consolidated Subsidiaries          page thirty-nine

 


 

M A N A G E M E N T ’ S   D I S C U S S I O N   &    A N A L Y S I S   O F   F I N A N C I A L
C O N D I T I O N   &   R E S U L T S   O F   O P E R A T I O N S   ( C O N T I N U E D )
FINANCIAL OVERVIEW
 
Highlights of 2007 Financial Performance
     
 
   
Record earnings per diluted share of $6.06, up 15% from 2006 earnings of $5.29 per diluted share
   
Net sales of $1.968 billion, a 2% increase compared with net sales of $1.930 billion in 2006
   
Heritage aggregates product line pricing increase of 10.3%, partially offset by heritage volume decrease of 7.6%
Results of Operations
The discussion and analysis that follows 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 6 through 35. As discussed in more detail herein, the Corporation’s operating results are highly
dependent upon activity within the construction marketplace, 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 2007. The following comparative analysis and discussion should be read within 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:


                                                 
years ended December 31           % of             % of             % of  
(add 000)   2007     Net Sales     2006     Net Sales     2005     Net Sales  
 
Net sales
  $ 1,967,612       100.0 %   $ 1,929,666       100.0 %   $ 1,728,977       100.0 %
Freight and delivery revenues
    239,529               261,386               246,311          
     
Total revenues
    2,207,141               2,191,052               1,975,288          
 
Cost of sales
    1,396,649       71.0       1,404,373       72.8       1,300,042       75.2  
Freight and delivery costs
    239,529               261,386               246,311          
     
Total cost of revenues
    1,636,178               1,665,759               1,546,353          
 
Gross profit
    570,963       29.0       525,293       27.2       428,935       24.8  
Selling, general and administrative expenses
    155,186       7.9       146,665       7.6       130,703       7.6  
Research and development
    869       0.0       736       0.0       662       0.0  
Other operating (income) and expenses, net
    (18,122 )     (0.9 )     (12,657 )     (0.6 )     (16,231 )     (0.9 )
 
Earnings from operations
    433,030       22.0       390,549       20.2       313,801       18.1  
Interest expense
    60,893       3.1       40,359       2.1       42,597       2.5  
Other nonoperating (income) and expenses, net
    (6,443 )     (0.3 )     (2,819 )     (0.2 )     (1,483 )     (0.2 )
 
Earnings from continuing operations before taxes on income
    378,580       19.2       353,009       18.3       272,687       15.8  
Taxes on income
    116,073       5.9       107,632       5.6       74,225       4.3  
 
Earnings from continuing operations
    262,507       13.3       245,377       12.7       198,462       11.5  
Discontinued operations, net of taxes
    242       0.1       45       0.0       (5,796 )     (0.4 )
 
Net earnings
  $ 262,749       13.4 %   $ 245,422       12.7 %   $ 192,666       11.1 %
 
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 )

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 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)   2007     2006     2005  
       
Gross profit
  $ 570,963     $ 525,293     $ 428,935  
         
Total revenues
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
         
Gross margin
    25.9 %     24.0 %     21.7 %
     
                         
Gross Margin Excluding Freight and Delivery Revenues  
(add 000)   2007     2006     2005  
 
Gross profit
  $ 570,963     $ 525,293     $ 428,935  
         
Total revenues
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
Less: Freight and delivery revenues
    (239,529 )     (261,386 )     (246,311 )
         
Net sales
  $ 1,967,612     $ 1,929,666     $ 1,728,977  
     
Gross margin excluding freight and delivery revenues
    29.0 %     27.2 %     24.8 %
     
                         
Operating Margin in Accordance with GAAP  
(add 000)   2007     2006     2005  
       
Earnings from operations
  $ 433,030     $ 390,549     $ 313,801  
         
Total revenues
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
         
Operating margin
    19.6 %     17.8 %     15.9 %
         
                         
Operating Margin Excluding Freight and Delivery Revenues  
(add 000)   2007     2006     2005  
       
Earnings from operations
  $ 433,030     $ 390,549     $ 313,801  
     
Total revenues
  $ 2,207,141     $ 2,191,052     $ 1,975,288  
Less: Freight and delivery revenues
    (239,529 )     (261,386 )     (246,311 )
     
Net sales
  $ 1,967,612     $ 1,929,666     $ 1,728,977  
     
Operating margin excluding freight and delivery revenues
    22.0 %     20.2 %     18.1 %
     
Net Sales
Net sales by reportable segment for the years ended December 31 were as follows:
                         
(add 000)   2007     2006     2005  
       
Mideast Group
  $ 682,458     $ 662,127     $ 587,018  
Southeast Group
    457,926       455,741       400,597  
West Group
    672,803       661,083       610,747  
       
Total Aggregates Business
    1,813,187       1,778,951       1,598,362  
Specialty Products
    154,425       150,715       130,615  
       
Total
  $ 1,967,612     $ 1,929,666     $ 1,728,977  
 
Aggregates. Net sales growth in the aggregates product line resulted primarily from strong pricing improvement. Heritage and total aggregates product line average sales price increases were as follows for the years ended December 31:
                         
    2007     2006     2005  
 
Mideast Group
    15.0 %     14.2 %     7.3 %
Southeast Group
    12.2 %     11.4 %     11.0 %
West Group
    4.9 %     13.4 %     7.3 %
Heritage Aggregates Operations
    10.3 %     13.4 %     7.9 %
Aggregates Business
    10.4 %     13.5 %     8.1 %
Heritage aggregates operations exclude acquisitions that were not included in prior-year operations for a full year and divestitures.
The average sales price increase in the West Group is lower when compared to the other groups primarily due to product mix, which reflects a higher percentage of lower-priced products being sold in 2007. The average annual aggregates product line price increase for the ten and twenty years ended December 31, 2007 was 5.1% and 3.5%, respectively. Aggregates sales price increases in 2007, 2006 and 2005 reflect a tightening of supply and demand in high-growth markets (see Section Aggregates Industry and Corporation Trends on pages 45 through 47).


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 )

Aggregates product line shipments of 182.3 million tons in 2007 decreased 8.1% compared with 198.5 million tons shipped in 2006. The decline in the residential construction market contributed to this reduction. Other contributing factors included the increase in the cost of construction materials in 2007 and 2006 and the near historic levels of rainfall in Texas, southern Oklahoma and Kansas during the first nine months of 2007. 2006 aggregates product line shipments decreased 2.3% compared with 203.2 million tons shipped in 2005. The following presents heritage and total aggregates product line shipments for each reportable segment for the Aggregates business:
                         
Shipments (tons in thousands)   2007     2006     2005  
       
Heritage Aggregates Product Line:
                       
Mideast Group
    66,512       74,170       74,977  
Southeast Group
    43,124       48,023       46,820  
West Group
    71,563       73,959       77,020  
       
Heritage Aggregates Operations
    181,199       196,152       198,817  
Acquisitions
    349              
Divestitures1
    777       2,338       4,412  
       
Aggregates Business
    182,325       198,490       203,229  
 
1  
Divestitures represent tons related to divested operations up to the date of divestiture.
Heritage and total aggregates product line volume variance by reportable segment is as follows for the year ended December 31:
                         
    2007     2006     2005  
 
Mideast Group
    (10.3 %)     (1.1 %)     1.9 %
Southeast Group
    (10.2 %)     2.6 %     7.2 %
West Group
    (3.2 %)     (4.0 %)     16.0 %
Heritage Aggregates Operations
    (7.6 %)     (1.3 %)     8.3 %
Total Aggregates Business
    (8.1 %)     (2.3 %)     6.1 %
Specialty Products. Specialty Products 2007 net sales of $154.4 million increased 2% over 2006 net sales of $150.7 million. An increase in the sales of chemical products to a variety of users was partially offset by a reduction in sales of dolomitic lime due to softness in the steel industry. Specialty Products net sales in 2006 increased 15% over 2005.
Freight and Delivery Revenues and Costs
Freight and delivery revenues and costs represent pass-through transportation costs incurred when the Corporation arranges for a third-party carrier to deliver aggregates products to customers (see section Transportation Exposure on pages 54 through 56). These third-party freight costs are then fully billed to the customer. The reduction in these revenues
and costs in 2007 reflects a reduction in aggregates shipments. The increase in these revenues and costs in 2006 is due to higher transportation costs primarily caused by higher energy costs.
Cost of Sales
Cost of sales decreased slightly in 2007 as compared with 2006, primarily related to lower freight costs on transported materials resulting from the decline in shipments (see section Transportation Exposure on pages 54 through 56). 2006 cost of sales increased primarily due to rising costs for energy, particularly diesel fuel and natural gas, and repair and supply parts. Additionally, embedded freight costs increased 24% during 2006. These cost increases were somewhat moderated by plant automation and productivity improvement initiatives, as well as control of headcount and employee benefit costs.
The Corporation’s operating leverage can be substantial due to the high fixed and semi-fixed costs associated with aggregates production. As a result of inventory control measures, production at heritage locations declined 7.2% and 1.8% in 2007 and 2006, respectively, when compared with the prior year.
Gross Profit
The Corporation defines gross margin excluding freight and delivery revenues as gross profit divided by net sales and is a measure of a company’s efficiency during the production process. The Corporation’s gross margin excluding freight and delivery revenues increased 180 basis points to 29.0% during 2007 and 240 basis points in 2006 as pricing improvements and productivity gains outpaced shipment volume declines and increases in production costs.
Gross margin excluding freight and delivery revenues for the Mideast Group and the Southeast Group improved in 2007 and 2006. Gross margin excluding freight and delivery revenues for the West Group declined slightly in 2007, primarily due to weather-related issues which negatively affected production costs and shipments. 2006 gross margin excluding freight and delivery revenues for the West Group was flat with pricing increases being offset by higher embedded freight costs and a decline in aggregates product line shipments. The following presents gross margin excluding freight and delivery revenues by reporting segment for the Aggregates business:


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 )

                         
    2007     2006     2005  
 
Mideast Group
    42.2 %     39.3 %     34.9 %
Southeast Group
    23.6 %     21.1 %     18.7 %
West Group
    20.3 %     21.7 %     21.7 %
Total Aggregates Business
    29.4 %     28.1 %     25.8 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of net sales, were 7.9%, 7.6% and 7.6% for the years ended December 31, 2007, 2006 and 2005, respectively. The absolute dollar increase in 2007 selling, general and administrative expenses reflects higher stock-based compensation expense of $6.2 million. Excluding the increase in these costs, the increase in selling, general and administrative expenses was 1.7% for 2007. The increase of $16.0 million in 2006 reflects a $9.7 million increase in stock-based compensation expense, which includes the initial expensing of stock options in accordance with Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (“FAS 123R”) and increased performance-based incentive compensation costs.
Other Operating Income and Expenses, Net
Among other items, other operating income and expenses, net, include gains and losses on the sale of assets; gains and losses related to certain amounts receivable; rental, royalty and services income; and the accretion and depreciation expenses related to Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. The increase in 2007 compared with 2006 resulted from higher gains on sales of assets, primarily excess land. The decrease in 2006 when compared with 2005 reflects lower gains on sales of assets partially offset by a lower loss on receivables.
Earnings from Operations