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, 2018
OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-12744
MARTIN MARIETTA MATERIALS, INC.
(Exact name of registrant as specified in its charter)
North Carolina | 56-1848578 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
2710 Wycliff Road, Raleigh, North Carolina | 27607-3033 | |
(Address of principal executive offices) | (Zip Code) |
(919) 781-4550
(Registrants 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 |
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Common Stock (par value $.01 per share) | 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 [ ]
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 [ ] 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 [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes [X] No [ ]
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 registrants 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, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] |
Accelerated filer [ ] |
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Non-accelerated filer [ ] |
Smaller reporting company [ ] |
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Emerging growth company [ ] |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 29, 2018, the last business day of the registrants most recently completed second fiscal quarter, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $11,000,435,608.61 based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of each of the issuers classes of common stock on the latest practicable date.
Class |
Outstanding at February 15, 2019 |
|
Common Stock, $.01 par value per share | 62,430,548 shares |
DOCUMENTS INCORPORATED BY REFERENCE
Document |
Parts Into Which Incorporated | |
Excerpts from Annual Report to Shareholders for the Fiscal Year Ended December 31, 2018 (Annual Report) |
Parts I, II, and IV | |
Proxy Statement for the Annual Meeting of Shareholders to be held May 9, 2019 (Proxy Statement) |
Part III |
General
Martin Marietta Materials, Inc. (the Company or Martin Marietta) is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of more than 300 quarries, mines and distribution yards to customers in 31 states, Canada, the Bahamas and the Caribbean Islands. In the western United States, Martin Marietta also provides cement and downstream products, namely, ready mixed concrete, asphalt and paving services in markets where the Company has a leading aggregates position. Specifically, the Company has two cement plants in Texas, and ready mixed concrete and asphalt operations in Texas, Colorado, Louisiana and Arkansas. Paving services are exclusively in Colorado. The Companys heavy-side building materials are used in infrastructure, nonresidential and residential construction projects. Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast. The aggregates, cement, ready mixed concrete, asphalt and paving product lines are reported collectively as the Building Materials business. The Company also operates a Magnesia Specialties business with production facilities in Michigan and Ohio. The Magnesia Specialties business produces magnesia-based chemicals products which are used in industrial, agricultural and environmental applications. It also produces dolomitic lime sold primarily to customers in the steel and mining industries. Magnesia Specialties products are shipped to customers worldwide.
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 Companys Common Stock was completed in 1994, followed by a tax-free exchange transaction in 1996 that resulted in 100% of the Companys Common Stock being publicly traded.
The Company completed over 90 smaller acquisitions from the time of its initial public offering until the present, which allowed the Company to enhance and expand its aggregates-led presence in the building materials marketplace. This included an exchange of certain assets in 2011 with Lafarge North America Inc. (Lafarge), pursuant to which it received aggregates quarry sites, ready mixed concrete and asphalt plants, and a road paving business in and around the metropolitan Denver, Colorado, and the I-25 corridor, in exchange for which Lafarge received properties consisting of quarries, an asphalt plant and distribution yards operated by the Company along the Mississippi River (called the Companys River District Operations) and a cash payment.
The business has developed further through the following transactions over the past five years.
In 2014, the Company completed the acquisition of Texas Industries, Inc. (TXI), further augmenting its position as a leading supplier of aggregates and heavy building materials. TXI, as a stand-alone entity, was a leading supplier of heavy construction materials in the southwestern United States and a major supplier of natural aggregates and ready mixed concrete in Texas, northern Louisiana and, to a lesser extent, in Oklahoma and Arkansas. TXI was the largest supplier of cement, ready mixed concrete, and concrete products in Texas. TXI enhanced the Companys position as an aggregates-led, low-cost operator in large and fast-growing geographies in the United States and provided high-quality assets in cement and ready mixed concrete.
In addition to the cement operations, the Company acquired as part of the TXI acquisition nine quarries and six aggregates distribution terminals located in Texas, Louisiana and Oklahoma. The Company also acquired approximately 120 ready mixed concrete plants, situated primarily in three areas of Texas (the Dallas/Fort Worth/Denton area of north Texas; the Austin area of central Texas; and from Beaumont to Texarkana in east Texas), in north and central Louisiana and in Southwestern Arkansas. As part of an agreement in conjunction with the United States Department of Justices review of the transaction, the Company divested its North Troy Quarry in Oklahoma and two related rail distribution yards in Dallas and Frisco, Texas.
TXI was also a cement producer in California. In 2015, the Company divested its California cement operations acquired from TXI. These operations were not in close proximity to aggregates and other core assets of the Company and, unlike other marketplace competitors, were not vertically integrated with ready mixed concrete production. The divestiture primarily included a cement plant, two distribution terminals, mobile equipment, intangible assets and inventory. The Company also completed the integration of the TXI operations in 2015, and completed three smaller acquisitions, which included three aggregates operations and related assets.
In 2016, the Company acquired aggregates, ready mixed concrete and asphalt and paving operations in southern Colorado that provided more than 500 million tons of mineral reserves and expanded the Companys presence along the Front Range of the Rocky Mountains, home to 80% of Colorados population. The Company also acquired the remaining interest it had not previously owned in a ready mixed concrete company that serves the I-35 corridor in central Texas between Dallas and Austin, which enhanced the Companys position and provided additional vertical integration benefits with the Companys cement product line.
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In 2018, the Company completed the acquisition of Bluegrass Materials Company (Bluegrass), the largest privately held, pure-play aggregates business in the United States. With a portfolio of 22 active sites acquired by the Company, the operations provided more than 2.2 billion tons, or 125 years, of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Companys existing southeastern footprint in its Mid-America and Southeast Groups and provide a new growth platform within Maryland and Kentucky. The Company has surpassed its $15 million run rate synergy target.
Between 2001 and 2018, the Company disposed of or idled a number of underperforming operations, including aggregates, ready mixed concrete, trucking, and asphalt and road paving operations of its Building Materials 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. During 2015, the Company disposed of certain non-core asphalt operations in San Antonio, Texas and divested its California cement operations. Divestitures in 2018 also included those required as part of the governmental approval associated with the acquisition of Bluegrass, consisting of one site owned by Bluegrass and one site operated by the Company. The Company will continue to evaluate opportunities to divest underperforming assets, if appropriate, during 2019 consistent with its strategic plan and in an effort to redeploy capital for other opportunities.
Business Segment Information
The Company conducts its Building Materials business through three reportable segments, organized by geography: Mid-America Group, Southeast Group and West Group. The Mid-America and Southeast Groups provide aggregates products only. The West Group provides aggregates, cement and downstream products. Our top 10 states accounted for 85% of the Building Materials business total revenues in 2018: Texas, Colorado, North Carolina, Georgia, Iowa, Florida, South Carolina, Indiana, Maryland and Nebraska. The Company also has the Magnesia Specialties segment, which includes its magnesia-based chemicals and dolomitic lime businesses.
Building Materials Business
This section describes the product lines of the Building Materials business undertaken by the Company within its Mid-America Group, Southeast Group, and West Group. The Company operates its aggregates product line of business in all of these geographic segments within its Building Materials business. In 2018, the aggregates product line represented 61% of the Companys consolidated total revenues. The Companys cement, ready mixed concrete, and asphalt and paving operations are conducted within the Companys West Group, with its two cement plants in Texas, and the remaining ready mixed concrete and asphalt product lines in Texas, Colorado, Louisiana, and Arkansas. Paving services are exclusively in Colorado. The Companys cement product line is described below and in greater detail in the next section.
The Building Materials business serves customers in the construction marketplace. The business profitability is sensitive to national, regional and local economic conditions and cyclical swings in construction spending, which are in turn affected by fluctuations in levels of public-sector infrastructure funding; interest rates; access to capital markets; and demographic, geographic, employment and population dynamics. The heavy-side construction business, inclusive of much of the Companys operations, is conducted outdoors. Therefore, precipitation and other weather-related conditions, including flooding, hurricanes, snowstorms and droughts, can significantly affect production schedules, shipments, costs, efficiencies and profitability. Generally, the financial results for the first and fourth quarters are subject to the impacts of winter weather, while the second and third quarters are subject to the impacts of heavy precipitation.
Aggregates are an engineered, granular material consisting of crushed stone, sand and gravel of varying mineralogies, manufactured to specific sizes, grades and chemistry for use primarily in construction applications. The Companys operations consist primarily of open pit quarries; however, the Company is the largest operator of underground aggregates mines in the United States with 14 active underground mines located in the Mid-America Group. On average, the Companys aggregates reserves exceed 75 years based on normalized production levels and approximate 100 years at current production rates.
Cement is the basic binding agent used to bind water, aggregates and sand, in the production of ready mixed concrete. The Company has a strategic and leading cement position in Texas, with production facilities in Midlothian, Texas, south of Dallas/Fort Worth, and Hunter, Texas, north of San Antonio. These plants produce Portland and specialty cements, have a combined annual capacity of 4.5 million tons, and operated at 75% to 80% utilization in 2018. The Midlothian plant permit allows the Company to expand production by up to 800,000 additional tons. In addition to the two production facilities, the Company operates four cement distribution terminals. Calcium carbonate in the form of limestone is the principal raw material used in the production of cement. The Company owns more than 600 million tons of limestone reserves adjacent to its cement production plants.
Ready mixed concrete, a mixture primarily of cement, water, aggregates, and sand, is measured in cubic yards and specifically batched or produced for customers construction projects and then transported and poured at the project site. The aggregates used for ready
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mixed concrete is a washed material with limited amounts of fines (such as dirt and clay). The Company operates 140 ready mix plants in Texas, Colorado, Louisiana and Arkansas. Asphalt is most commonly used in surfacing roads and parking lots and consists of liquid asphalt, or bitumen, the binding medium, and aggregates. Similar to ready mixed concrete, each asphalt batch is produced to customer specifications. The Companys asphalt operations are located primarily in Colorado; additionally, paving services are offered in Colorado. Market dynamics for these downstream product lines include a highly competitive environment and lower barriers to entry compared with aggregates and cement.
The Building Materials business markets its products primarily to the construction industry, with 39% of the aggregates product line shipments in 2018 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 nonresidential and residential construction projects. The Company believes public-works projects have historically accounted for approximately 50% of the total annual aggregates and cement consumption in the United States. Therefore, these businesses benefit from public-works construction projects. The Company also believes exposure to fluctuations in nonresidential and residential, or private-sector, construction spending is lessened by the business mix of public sector-related shipments.
As a result of dependence upon the construction industry, the profitability of aggregates and cement 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 federal highway bill provides annual funding for public-sector highway construction projects. After a decade of 36 short-term funding provisions since the expiration of the prior federal highway bill, Moving Ahead for Progress in the 21 st Century (MAP-21), the five-year, $305 billion highway bill, Fixing Americas Surface Transportation Act (the FAST Act or the Act), was signed into law on December 4, 2015. The FAST Act reauthorizes federal highway and public transportation programs and stabilizes the Highway Trust Fund. The FAST Act retains the programs supported under the predecessor bill, MAP-21, but with some changes. Specifically, Transportation Infrastructure and Innovation Act (TIFIA), a U.S. Department of Transportation (DOT) alternative funding mechanism, which under MAP-21 provided three types of federal credit assistance for nationally or regionally significant surface transportation projects, now allows more diversification of projects. TIFIA is designed to fill market gaps and leverage substantial private co-investment by providing projects with supplemental or subordinate debt that is not subject to national debt ceiling challenges or sequestration. Since inception, TIFIA has provided more than $25 billion of credit assistance to over 50 projects representing over $90 billion in infrastructure investment. Under the FAST Act, TIFIA annual funding ranges from $275 million to $300 million and no longer requires the 20% matching funds from state DOTs. Consequently, states can advance construction projects immediately with potentially zero upfront outlay of local state DOT dollars. TIFIA requires projects to have a revenue source to pay back the credit assistance within a 30 to 40 year period. The TIFIA program has the ability to significantly leverage construction dollars. Private investment in transportation projects funded through the TIFIA program is particularly attractive, in part due to the subordination of public investment to private. Management believes TIFIA could provide a substantial boost for state DOT construction programs well above what is currently budgeted. As of January 2019, TIFIA financed projects for the Companys top five sales-generating states (Texas, Colorado, North Carolina, Georgia, and Iowa) exceeded $30 billion since the inception of the program, with TIFIA assistance for such projects exceeding $8 billion, according to TIFIA.
Public infrastructure activity has not yet experienced the anticipated benefits from funding provided by the FAST Act and the TIFIA program. State and local initiatives that support infrastructure funding, including gas tax increases and other ballot initiatives, are increasing in size and number as these governments recognize the need to play an expanded role in public infrastructure funding. Management believes that funding at the state level will grow at a faster rate than federal funding. State spending on infrastructure generally leads to increased growth opportunities for the Company. The pace of construction should accelerate and shipments to the public infrastructure market should return to historical levels as monies from both the federal government and state and local governments become available. A return to historical shipment volumes should be facilitated by state DOTs and contractors as they address their respective labor constraints. The level of state public-works spending is varied across the nation and dependent upon individual state economies. The degree to which the Company could be affected by a reduction or slowdown in infrastructure spending varies by state. The state economies of the Building Materials business five largest sales-generating states may disproportionately affect the Companys financial performance.
The federal highway bill provides spending authorizations, which represent the maximum financial obligation that will result from the immediate or future outlays of federal funds for highway and transit programs. The federal governments surface transportation programs are financed mostly through the receipts of highway user taxes placed in the Highway Trust Fund, which is divided into the Highway Account and the Mass Transit Account. Revenues credited to the Highway Trust Fund are primarily derived from a federal gas
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tax, a federal tax on certain other motor fuels and interest on the accounts accumulated balances. Of the currently imposed federal gas tax of $0.184 per gallon, which has been static since 1993, $0.15 is allocated to the Highway Account of the Highway Trust Fund.
Transportation investments generally boost the national economy by enhancing mobility and access and by creating jobs, which is a priority of many of the governments economic plans. According to the Federal Highway Administration, every $1 billion in federal highway investment creates approximately 28,000 jobs. The number of jobs created is often dependent on the nature and aggregates intensity of the projects. Approximately half of the Building Materials business total revenues from the infrastructure end-use market come from federal funding authorizations, including matching funds from the states. For each dollar spent on road, highway and bridge improvements, the Federal Highway Administration estimates an average benefit of $5.20 is recognized in the form of reduced vehicle maintenance costs, reduced delays, reduced fuel consumption, improved safety, reduced road and bridge maintenance costs and reduced emissions as a result of improved traffic flow.
The Companys Building Materials business covers a wide geographic area. The five largest sales-generating states (Texas, Colorado, North Carolina, Georgia, and Iowa) for the Building Materials business accounted for 72% of total revenues by state of destination in 2018. The Companys Building Materials 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. Recent improvements in the national economy and in some of the states in which the Company operates have led to improvements in profitability in the Companys Building Materials business.
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 Companys 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 businesses.
Product shipments are moved by rail, water and truck through the Companys long-haul distribution network. The Companys rail network primarily serves its Texas, Florida, Colorado and Gulf Coast markets while the Companys Bahamas and Nova Scotia locations transport materials via oceangoing ships. The Companys strategic focus includes expanding inland and offshore capacity and acquiring distribution facilities and port locations to offload transported material. At December 31, 2018, the distribution network available to the Company consisted of 98 distribution facilities. The long-haul distribution network can diversify market risk for locations that engage in long-haul transportation of their aggregates products. Particularly where a producing quarry serves a local market and transports products via rail, water and/or truck to be sold in other markets, the risk of a downturn in one market may be somewhat mitigated by other markets served by the location.
The Company generally acquires contiguous property around existing quarry locations. This property can serve as buffer property or additional mineral reserve capacity, assuming the underlying geology supports economical aggregates mining. In either instance, the acquisition of additional property around an existing quarry allows the expansion of the quarry footprint and extension of quarry life. Some locations having limited reserves may be unable to expand.
A long-term capital focus for the Company, primarily in the midwestern United States due to the nature of its indigenous aggregates supply, is underground limestone aggregates mines. The Company operates 14 active underground mines, located in the Mid-America Group, and is the largest operator of underground limestone aggregate mines in the United States. Production costs are generally higher at underground mines than surface quarries since the depth of the aggregate deposits and the access to the reserves result in higher costs related to development, explosives and depreciation costs. However, these locations often possess transportation advantages that can lead to higher average selling prices than more distant surface quarries.
The Companys acquisitions and capital projects have expanded its ability to move material by rail. The Company has added additional capacity in a number of locations that can now accommodate larger unit train movements. These expansion projects have enhanced the Companys long-haul distribution network. The Companys process improvement efforts have 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 Companys 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, internal freight costs are expected to reduce gross margin. This typically occurs where the Company transports aggregates from a production location to a distribution location by rail or water, and the
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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 of the materials. Moreover, the Companys expansion of its rail-based distribution network, coupled with the extensive use of rail service in the Southeast and West Groups, increases the Companys dependence on and exposure to railroad performance, including track congestion, crew availability, railcar availability, and locomotive availability, and the ability to renegotiate favorable railroad shipping contracts. The waterborne distribution network, primarily located within the Southeast Group, also increases the Companys exposure to certain risks, including, among other items, meeting minimum tonnage requirements of shipping contracts, demurrage costs, fuel costs, ship availability and weather disruptions. The Company has long-term agreements with shipping companies to provide ships to transport the Companys aggregates to various coastal ports.
The Companys long-term shipping contracts for shipment by water are generally take-or-pay contracts with minimum and maximum shipping requirements. These contracts have varying expiration dates ranging from 2023 to 2027 and generally contain renewal options. However, there can be no assurance that these contracts can be renewed upon expiration or that terms will continue without significant increases. If the Company fails to ship the annual minimum tonnages under the agreement, it is still obligated to pay the shipping company the contractually-stated minimum amount for that year. In 2018, the Company did not incur these freight costs; however a charge is possible in 2019 if shipment volumes do not meet the contractually-stated minimums.
From time to time, the Company has experienced rail transportation shortages, particularly in the Southwest and Southeast. These shortages were caused by the downsizing in personnel and equipment by certain railroads during economic downturns. Historically, in response to these issues, rail transportation providers focused on increasing the number of cars per unit train under transportation contracts and generally required 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. Certain of the Companys sales yards 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 order to better accommodate unit train unloadings. Rail availability is seasonal and can impact aggregates shipments depending on competing demands for rail service.
More recently some railroads have begun emphasizing Precision Scheduled Railroading(PSR), which is focused on minimizing railcar dwell time and utilizing general purpose trains by blending existing train services. The Company does not expect the railroads shift to PSR to materially impact its operations in 2019. However, if the railroads do not efficiently execute on this change, it could disrupt shipment volumes for the Company.
From time to time, we have also experienced rail and trucking shortages due to competition from other products. If there are material changes in the availability or cost of rail or trucking services, we may not be able to arrange alternative and timely means to ship our products at a reasonable cost, which could lead to interruptions or slowdowns in our businesses or increases in our costs.
The Companys management expects the multiple transportation modes that have been developed with various rail carriers and via deep-water ships should provide the Company with the flexibility to effectively serve customers in the Southwest and Southeast coastal markets.
The construction aggregates industry has been consolidating, and the Company has actively participated in the consolidation of the industry. When acquired, new locations sometimes do not satisfy the Companys internal safety, maintenance and pit development standards, and may require additional resources before benefits of the acquisitions are fully realized. Industry consolidation slowed several years ago as the number of suitable small- to mid-sized acquisition targets in high-growth markets declined. During that period of fewer acquisition opportunities, the Company focused on investing in internal expansion projects in high-growth markets. The number of acquisition opportunities has increased in the last few years as the economy recovered from the protracted recession. Opportunities include public and larger private, family-owned businesses, as well as asset swaps and divestitures from companies executing their strategic plans, rationalizing non-core assets, and repairing financially-constrained balanced sheets. The Companys Board of Directors and management continue to review and monitor the Companys strategic long-term plans, which include assessing business combinations and arrangements with other companies engaged in similar businesses, increasing the Companys presence in its core businesses, investing in internal expansion projects in high-growth markets, and pursuing new opportunities related to the Companys existing markets.
The Company became more vertically integrated through various acquisitions, including the 2014 TXI acquisition, in the West Group, pursuant to which the Company acquired cement, ready mixed concrete, asphalt and paving construction operations, trucking, and other businesses, which complement the Companys aggregates operations. The Company reports vertically-integrated operations within the Building Materials business segment, and their results are affected by volatile factors, including fuel costs, operating efficiencies, and weather, to an even greater extent than the Companys aggregates operations. Liquid asphalt and cement serve as key raw materials in the production of hot mix asphalt and ready mixed concrete, respectively. Therefore, fluctuations in prices for these
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raw materials directly affect the Companys operating results. During 2018, prices for liquid asphalt were higher than 2017. Liquid asphalt prices may not always follow other energy products (e.g., oil or diesel fuel) because of complexities in the refining process which converts a barrel of oil into other fuels and petrochemical products. We expect the Companys gross margin to continue to improve for the legacy TXI aggregates-related downstream operations, similar to the pattern experienced at the Colorado aggregates-related downstream operations.
While aggregates-led, the Company continues to review its operational portfolio to determine if there are opportunities to divest underperforming assets in an effort to redeploy capital for other opportunities. The Company also reviews other independent Building Materials operations to determine if they might present attractive acquisition opportunities in the best interest of the Company, either as part of their own independent operations or operations that might be vertically integrated with other operations owned by the Company. Based on these assessments, the Company completed the acquisitions described under General above, which included ready mixed concrete and asphalt and paving businesses in the Denver, Colorado, and San Antonio, Texas, markets. The 2014 business combination with TXI further expanded the Companys downstream operations with the addition of TXIs aggregates and ready mixed concrete operations. The TXI combination also added the cement operations, included in the West Group as the cement product line of the Company. The 2016 transactions described under General above further added ready mixed concrete and asphalt and paving operations along the Front Range in Colorado and ready mixed concrete operations in central Texas. The 2018 acquisition of Bluegrass provided the Company an attractive opportunity to acquire the largest privately-held, pure-play aggregates business in the United States.
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 Companys existing mineral reserves.
Management believes the aggregates product lines 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 product line. The Companys aggregates reserves on the average exceed 75 years, based on normalized levels of production. 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 its aggregates, ready mixed concrete and asphalt products upon receipt of orders or requests from customers. The Company generally maintains inventories of aggregates products in sufficient quantities to meet the requirements of customers.
Cement Product Line
The cement product line of the Building Materials business produces Portland and specialty cements. Cement is the basic binding agent for concrete, a primary construction material. The principal raw material used in the production of cement is calcium carbonate in the form of limestone. The Company owns more than 600 million tons of limestone reserves adjacent to its two cement production plants in Texas. Similar to aggregates, cement is used in infrastructure projects, nonresidential and residential construction, and the railroad, agricultural, utility and environmental industries. Consequently, the cement industry is cyclical and dependent on the strength of the construction sector.
The Company has a strategic cement position in Texas, with production facilities in Midlothian, Texas, south of Dallas/Fort Worth, and in Hunter, Texas, north of San Antonio. These plants have a combined annual capacity of 4.5 million tons, as well as a current permit that would allow the Company to expand production by up to 800,000 additional tons at the Midlothian plant. In addition to these production facilities, the Company also operates, directly or through third parties, four cement distribution terminals in Texas.
Cement consumption is dependent on the time of year and prevalent weather conditions. According to the Portland Cement Association, nearly two-thirds of U.S. cement consumption occurs in the six months between May and October. Approximately 75% of all cement shipments are sent to ready-mix concrete operators. The rest are shipped to manufacturers of concrete related products, contractors, materials dealers, oil well/mining/drilling companies, as well as government entities.
Energy, including electricity and fossil fuels, accounted for approximately 23% of the cement production cost profile in 2018. Therefore, profitability of the cement product line is affected by changes in energy prices and the available supply of these products. The Company currently has fixed-price supply contracts for coal but also consumes natural gas, alternative fuel and petroleum coke. Further, profitability of the cement product line is also subject to kiln maintenance. This process typically requires a plant to be shut down for a period of time as repairs are made.
The limestone reserves used as a raw material for cement are located on property, owned by the Company, adjacent to each of the cement plants. Management believes that its reserves of limestone are sufficient to permit production at the current operational levels for the foreseeable future.
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The cement product line generally delivers its products upon receipt of orders or requests from customers. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers .
Magnesia Specialties Business
The Magnesia Specialties business produces and sells dolomitic lime from its Woodville, Ohio facility. Additionally, at its Manistee, Michigan facility, Magnesia Specialties manufactures magnesia-based chemical products for industrial, agricultural and environmental applications. These chemical products have varying uses, including flame retardants, wastewater treatment, pulp and paper production and other environmental applications. In 2018, 70% of Magnesia Specialties total revenues were attributable to chemical products, 29% to lime, and 1% to stone sold as construction materials.
In 2018, 81% of the lime produced was sold to third-party customers, while the remaining 19% 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. Products used in the steel industry, either directly as dolomitic lime or indirectly as a component of other industrial products, accounted for 33% of the Magnesia Specialties total revenues in 2018, attributable primarily to the sale of dolomitic lime products. Accordingly, a portion of the revenues and profitability of the Magnesia Specialties business is affected by production and inventory trends in the steel industry. These trends are guided by the rate of consumer consumption, the flow of offshore imports, and other economic factors. The dolomitic lime business runs most profitably at 70% or greater steel capacity utilization; domestic capacity utilization averaged 78% in 2018, according to the American Iron and Steel Institute. Average steel production in 2018 increased 6.2% versus 2017.
In the Magnesia Specialties business, a significant portion of costs is of a fixed or semi-fixed nature. The production process requires the use of natural gas, coal and petroleum coke. Therefore, fluctuations in their pricing directly affect operating results. To help mitigate this risk, the Magnesia Specialties business has fixed price agreements for 100% of its 2019 coal needs, approximately 50% of its 2019 natural gas needs and 100% of its 2019 petroleum coke needs. For 2018, the Companys average cost per MCF (thousand cubic feet) for natural gas decreased 4% versus 2017.
Given high fixed costs, low capacity utilization can negatively affect the segments results from operations. Management expects future organic profit growth to result from increased pricing, rationalization of the current product portfolio and/or further cost reductions. Management has shifted the strategic focus of the magnesia-based business to specialty chemicals that can be produced at volume levels that support efficient operations. Accordingly, that product line is not as dependent on the steel industry as the dolomitic lime product line.
The principal raw materials used in the Magnesia Specialties business are dolomitic limestone and magnesium-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 raw materials are combined to make magnesium hydroxide, the Magnesia Specialties business must dispose of the processed brine. In the past, the business did this by reinjecting the processed brine back into its underground brine reserve network around its facility in Manistee, Michigan. The business has also sold a portion of this processed brine to third parties. In 2003, Magnesia Specialties entered into a long-term processed brine supply agreement with The Dow Chemical Company (Dow) pursuant to which Dow purchases processed brine from Magnesia Specialties, at market rates, for use in Dows production of calcium chloride products. Magnesia Specialties also entered into a joint venture with Dow to construct, own and operate a processed brine supply pipeline between the Magnesia Specialties facility in Manistee, Michigan, and Dows facility in Ludington, Michigan. Construction of the pipeline was completed in 2003, and Dow began purchasing processed brine from Magnesia Specialties through the pipeline. In 2010, Dow sold the assets of its facility in Ludington, Michigan to Occidental Chemical Corporation (Occidental) and assigned to Occidental its interests in the long-term processed brine supply agreement and the pipeline venture with Magnesia Specialties.
Magnesia Specialties generally delivers its products upon receipt of orders or requests from customers. Inventory for products is generally maintained in sufficient quantities to meet rapid delivery requirements of customers. A significant portion of the 275,000 ton dolomitic lime capacity from a lime kiln completed in 2012 at Woodville, Ohio is committed under a long-term supply contract.
The Magnesia Specialties business is highly dependent on rail transportation, particularly for movement of dolomitic lime from Woodville to Manistee and direct customer shipments of dolomitic lime and magnesia chemicals products from both Woodville and Manistee. The segment can be affected by the specific transportation and other risks and uncertainties outlined under Item IA., Risk Factors, of this Form 10-K.
Patents and Trademarks
As of February 8, 2019, the Company owns, has the right to use, or has pending applications for approximately 23 patents pending or granted by the United States and various countries and approximately 96 trademarks related to business. The Company believes that its
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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 Companys 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 Companys products are sold principally to commercial customers in private industry. Although large amounts of construction materials are used in public works projects, relatively insignificant sales are made directly to federal, state, county, or municipal governments, or agencies thereof.
Competition
Because of the impact of transportation costs on the aggregates industry, competition in the aggregates product line tends to be limited to producers in proximity to each of the Companys facilities. Although all of the Companys locations experience competition, the Company believes that it is generally a leading producer in 90% of 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 5,000 companies in the United States that produce construction aggregates. These include active crushed stone companies and active sand and gravel companies. The largest ten producers account for approximately 35% of the total market. The Companys ready mixed concrete and asphalt and paving operations are also in markets with numerous operators. A national trade association estimates there are about 5,500 ready mixed concrete plants in the United States owned by over 2,200 companies, with approximately 55,000 mixer trucks delivering ready mixed concrete. Similarly, a national trade association estimates there are approximately 4,000 asphalt plants in the United States owned by over 800 companies. The Company, with its Building Materials business, including its ready mixed concrete and asphalt and paving operations, competes with a number of other large and small producers. The Company believes that its ability to transport materials by ocean vessels and rail have enhanced the Companys ability to compete in the building materials industry.
The largest U.S. aggregates producers, including global companies, other than the Company, include:
Cemex S.A.B. de C.V.
CRH PLC
Heidelberger Druckmaschinen AG/Heidelberg USA
LafargeHolcim Ltd.
Luck Stone Company
MDU Resources Group, Inc.
Summit Materials, Inc.
Rogers Group
Vulcan Materials Company
The Companys Magnesia Specialties business 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. While the revenues of the Magnesia Specialties business in 2018 were predominantly from North America, a small but growing amount was derived from customers located outside the United States.
According to the Portland Cement Association, United States cement production is widely dispersed with the operation of 97 cement plants in 34 states. The top five companies collectively operate 59.5% of U.S. clinker capacity with the largest company representing 18.7% of all domestic clinker capacity. An estimated 86% of U.S. clinker capacity is owned by companies headquartered outside of the United States. In reviewing these figures for cement plants, capacity is often stated in terms of clinker capacity. Clinker is the initial product of cement production. Cement producers mine materials such as limestone, shale, or other materials, crush and screen the materials, and place them in a cement kiln. After being heated to extremely high temperatures, these materials form marble-sized balls or pellets called clinker that are then very finely ground to produce Portland cement.
The Companys cement product line competes with various companies in different geographic and product areas principally on the basis of proximity, quality and price for its products, but level of customer service is also a factor. The cement product line also competes with imported cement because of the higher value of the product and the existence of major ports in some of our markets. Certain of the Companys competitors in the cement product line have greater financial resources than the Company.
The nature of the Companys competition varies among its product lines due to the widely differing amounts of capital necessary to build production facilities. Crushed stone production from stone quarries or mines, or sand and gravel production by dredging, is
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moderately capital intensive. The Companys major competitors in the aggregates markets are typically large, vertically-integrated companies, with international operations. Ready mixed concrete production requires relatively small amounts of capital to build a concrete batching plant and acquire delivery trucks. Accordingly, economics can lead to lower barriers to entry in some markets. As a result, depending on the local market, the Company may face competition from small producers as well as large, vertically-integrated companies with facilities in many markets. Construction of cement production facilities is highly capital intensive and requires long lead times to complete engineering design, obtain regulatory permits, acquire equipment and construct a plant. Most domestic producers of cement are owned by large foreign companies operating in multiple international markets. Many of these producers maintain the capability to import cement from foreign production facilities.
Research and Development
The Company conducts research and development activities, principally for its magnesia-based chemicals business, at its plant in Manistee, Michigan. In general, the Companys research and development efforts are directed to applied technological development for the use of its chemicals products.
Environmental and Governmental Regulations
The Companys operations are subject to and affected by federal, state, and local laws and regulations relating to zoning, land use, air emissions (including greenhouse gases) and water discharges, waste management, noise and dust exposure control, reclamation and other environmental, health and safety, regulatory matters. Certain of the Companys 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 Companys operations, and such permits are subject to modification, renewal and revocation.
The Company records an accrual for environmental remediation liabilities in the period in which it is probable that a liability has been incurred and the amounts can be reasonably estimated. Such accruals are adjusted as further information develops or circumstances change. The accruals are not discounted to their present value or offset for potential insurance or other claims or potential gains from future alternative uses for a site.
The Company regularly monitors and reviews its operations, procedures, and policies for compliance with existing laws and regulations, changes in interpretations of existing laws and enforcement policies, new laws that are adopted, and new laws that the Company anticipates will be adopted that could affect its operations. The Company has a full time staff of environmental engineers and managers that perform these responsibilities. The direct costs of ongoing environmental compliance were approximately $25.3 million in 2018 and $23.4 million in 2017 and are related to the Companys environmental staff, ongoing monitoring costs for various matters (including those matters disclosed in this Form 10-K), and asset retirement costs. Capitalized costs related to environmental control facilities were approximately $14 million in 2018 and are expected to be approximately $15 million in 2019 and 2020. The Companys capital expenditures for environmental matters were not material to its results of operations or financial condition in 2018 and 2017. 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 Companys businesses, and environmental liabilities could have a material adverse effect on the Company in the future.
Many of the applicable requirements of 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, in the 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 attributable only 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 to which type of operations they will apply and the manner in which they will be implemented is more accurately defined. This process often takes years to finalize, and the rules often change significantly from the time they 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 or amended 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 Companys obligations or financial condition.
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. Future reclamation costs are estimated using statutory reclamation requirements and managements 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. For additional information regarding compliance with legal requirements, see Note O: Commitments and Contingencies of the Notes to Financial Statements of the Companys 2018 consolidated financial statements (the 2018 Financial Statements), which are included in the Companys 2018 Annual Report to Shareholders (2018 Annual Report) filed as Exhibit 13.01 to this Form 10-K. The Company performs activities on an ongoing basis, as an integral part of the normal quarrying process, that may reduce the ultimate reclamation obligations. 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 from time to time 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 Companys operations or financial condition. See Legal Proceedings under Item 3 of this Form 10-K, Note O: Commitments and Contingencies of the Notes to Financial Statements of the 2018 Financial Statements included in the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K, and Managements Discussion and Analysis of Financial Condition and Results of Operations Environmental Regulation and Litigation included in the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K. 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, mining and production facilities for cement, ready mixed concrete, and asphalt 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 and production facilities are located and acquired, the Company works closely with local authorities during the zoning and permitting processes to design new quarries, mines and production facilities 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 Companys ability to transport material by rail and ship allows it to locate its facilities further away from residential areas. The Company has established policies designed to minimize disturbances to surrounding property owners from its operations.
As is the case with other companies in the same industry, some of the Companys 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.
As is the case with others in the cement industry, the Companys cement operations produce varying quantities of cement kiln dust (CKD). This production by-product consists of fine-grained, solid, highly alkaline material removed from cement kiln exhaust gas by air pollution control devices. Because much of the CKD is actually unreacted raw materials, it is generally permissible to recycle the CKD back into the production process, and large amounts often are treated in such manner. CKD that is not returned to the production process or sold as a product itself is disposed in landfills. CKD is currently exempted from federal hazardous waste regulations under Subtitle C of the Resource Conservation and Recovery Act.
Amid concerns that greenhouse gas (GHG) emissions are contributing to climate change, a number of governmental bodies, including the U.S. Congress and various U.S. states, have proposed, enacted or are contemplating legislative and regulatory changes to mitigate or address the potential impacts of climate change, including provisions for emissions reporting or reductions, the use of
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alternative fuels, carbon credits (such as a cap and trade system) and a carbon tax. For example, in the U.S., the United States Environmental Protection Agency (the USEPA) promulgated a rule mandating that sources considered to be large emitters of GHGs report those emissions. The manufacturing operations of the Companys Magnesia Specialties business release carbon dioxide, methane and nitrous oxides during the production of lime, magnesium oxide and hydroxide products. The Companys two magnesia-based chemicals facilities, as well as its two cement plants in Texas, file annual reports of their GHG emissions in accordance with the USEPA reporting rule. The primary operations of the Company, however, including its aggregates, ready mixed concrete and asphalt and paving product lines, are not major sources of GHG emissions. In fact, most of the GHG emissions from aggregates plant operations are tailpipe emissions from mobile sources, such as heavy construction and earth-moving equipment.
In 2010, the USEPA also issued a GHG emissions permitting rule, referred to as the Tailoring Rule, which may require some industrial facilities to obtain permits for GHG emissions under the U.S. Clean Air Acts Prevention of Significant Deterioration (PSD) and Title V operating permit programs. The U.S. Supreme Court ruled in June 2014 that the USEPA exceeded its statutory authority in issuing the Tailoring Rule but upheld the Best Available Control Technology (BACT) requirements for GHGs emitted by sources already subject to PSD or Title V permitting requirements for other pollutants. Both of our cement plants, as well as our Magnesia Specialties plants, hold Title V Permits, and each (other than the Manistee, Michigan facility) is also subject to PSD requirements. It is not known whether the USEPA will proceed with revisions of its rules in response to the Courts decision or what the USEPA would require as BACT. In fact, no technologies or methods of operation for reducing or capturing GHGs have been proven successful in large scale applications, other than improvements in fuel efficiency. Thus, if future modifications to our facilities require PSD review for other pollutants, GHG BACT requirements could be triggered and may require significant additional costs. It is not possible, however, to estimate the cost of any such future requirements at this time.
The Company believes that climate change legislation is not a priority item in a divided Congress in the near future and that the primary method that GHGs will be regulated is through the USEPA using its rule-making authority. Various states where the Company has operations are also considering climate change initiatives, and the Company may be subject to state regulations in addition to any federal laws and rules that are passed.
If and when Congress passes additional legislation on GHGs, the Woodville, Ohio and Manistee, Michigan Magnesia Specialties operations, as well as the Companys two cement plants in Texas, which use carbon-based fuels for power equipment, kilns and the Companys mobile fleet, will likely be subject to any new requirements. The Company anticipates that any increased operating costs or taxes relating to GHG emission limitations at the Woodville or cement operations facilities would be passed on to customers. The magnesium oxide products produced at the Manistee operation, however, compete against other products that emit a lower level of GHGs in their production. These other products include natural magnesites produced around the world by calcining magnesium carbonate, and also naturally occurring and mined magnesium hydroxide powder (brucite) products. Production of magnesium products from these other sources requires less energy, resulting in the generation of fewer GHGs per ton of production. Therefore, the Manistee facility may be required to absorb additional costs due to the regulation of GHG emissions in order to remain competitive in pricing in that market. In light of the various regulatory uncertainties, the Company at this time cannot reasonably predict what the costs of any future compliance requirements may be, but does not believe it will have a material adverse effect on the financial condition or results of the operations of either the Magnesia Specialties or Building Materials businesses. The Company continues to monitor GHG regulations and legislation and its potential impact on our cement business, financial condition and product demand.
In addition to impacts from increased regulation, climate change may result in physical and financial impacts which could have adverse effects on the Companys operations or financial condition. Physical impacts may include disruptions in production and/or regional supply or product distribution networks due to major storm events, shifts in regional rainfall and temperature patterns and intensities, as well as flooding from sea level changes. In addition, production and shipment levels for the Building Materials business and cement product line correlate with general construction activity, which occurs outdoors and, as a result, is affected by erratic weather patterns, seasonal changes and other unusual or unexpected weather-related conditions, which can significantly affect that business. Excessive rainfall and other severe weather jeopardize production, shipments and profitability in all markets served by the Company. In addition, climate and inclement weather can reduce the useful life of an asset. In particular, the Companys operations in the southeastern and Gulf Coast regions of the United States and the Bahamas are at risk for hurricane activity, most notably in August, September and October. The last few years brought an unprecedented amount of precipitation to the United States and particularly to Texas and the southeastern United States, notably the Carolinas, Florida, and Georgia, where they impacted the Companys facilities. For example, according to the National Oceanic and Atmospheric Administration (NOAA), Hurricane Florence in the third quarter of 2018 caused catastrophic flooding in portions of North Carolina and South Carolina. NOAA also reported that 2018 marked the wettest year for nine states, including North Carolina, Maryland, Virginia, West Virginia, and Tennessee. These events, along with significant precipitation in Texas, adversely impacted our aggregates production and shipments, as well as our other businesses, in those areas during the year.
Our businesses also are dependent on reliable sources of electricity and fuels. We could incur increased costs or disruptions in our operations if climate change legislation and regulation or severe weather impacts the price or availability of purchased electricity or fuels
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or other materials used in our operations. These and other climate-related risks also could impact our customers, such as a downturn in the construction sector, which could lead to reduced demand for our products. The Company may not be able to pass on to its customers all the costs relating to these risks.
Notwithstanding the foregoing risks and uncertainties relating to climate change, there may also be opportunities for the Company to increase its business or revenues. For example, warm and/or moderate temperatures in March and November allows the construction season to start earlier and end later, respectively, which could have meaningful positive impacts on the Companys first- and fourth-quarter results, respectively. In fact, 2018 marked the 22nd consecutive warmer-than-average year for the contiguous United States, and five states, including North Carolina and South Carolina, had a record warmest year. The extended warmer periods helped the Company deliver record revenues and profitability for the full year. In addition, the Companys magnesium hydroxide products are used to increase fuel efficiency in various industries, including both coal- and gas-fired electricity generation, which has a direct impact on reducing energy use and GHG emissions by more GHG-intense companies.
In an effort to mitigate the risks to the Company associated with GHG emissions while ensuring and improving financial sustainability, the Company has adopted a corporate-wide management strategy that has resulted in multiple operating initiatives to implement or evaluate GHG reduction processes and technologies that also improve operational efficiencies, including: using alternative fuels such as biodiesel; reducing overall fuel use by converting from quarry trucks to conveyor belt systems, right-sizing quarry trucks to marry the appropriately sized truck with the size of production to reduce the number of required trips, and by replacing older rail cars with more efficient, high-capacity models that reduce the number of required trips; adding rail capacity in lieu of truck movements; and installing emissions monitoring equipment and real-time fleet management software. For example, in 2015, the Companys Midlothian cement plant was recognized by the USEPA as a high-performing, energy-efficient facility following investments in innovative air pollution control technologies and usage of alternative fuels.
Employees
As of January 31, 2019, the Company has approximately 8,714 employees, of which 6,625 are hourly employees and 2,089 are salaried employees. Included among these employees are 929 hourly employees represented by labor unions (10.7% of the Companys employees). Of such amount, 10.1% of our Building Materials business hourly employees are members of a labor union and 100% of the Magnesia Specialties segments hourly employees are represented by labor unions. The Companys principal union contracts for the Magnesia Specialties business cover employees at the Manistee, Michigan, magnesia-based chemicals plant and the Woodville, Ohio, lime plant. The Woodville collective bargaining agreement expires in June 2022. The Manistee collective bargaining agreement expires in August 2019. The Company believes it has good relations with all of its employees, including its unionized employees. While the Companys management does not expect significant difficulties in renewing these labor contracts, there can be no assurance that a successor agreement will be reached at any of these locations.
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 Securities Exchange Act of 1934 (the Exchange Act). These reports and any amendments are accessed via the Companys 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 Companys 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 Ethical Business Conduct that applies to all of its directors, officers, and employees. The Companys code of ethics is available on the Companys web site at www.martinmarietta.com. The Company will 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 committees 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 Companys web site at www.martinmarietta.com.
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The Companys 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 Companys public disclosure of its financial condition. The annual certifications are included as exhibits to this Form 10-K. The Companys 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.
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 Companys 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.
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 Company has listed the known material risks it considers relevant in evaluating the Company and its operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These forward-looking statements are made as of the date hereof based on managements 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 factors listed below, along with the discussion of Competition under Item 1 of this Form 10-K, Managements Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Form 10-K and the 2018 Annual Report, and Note A: Accounting Policies and Note O: Commitments and Contingencies of the Notes to Financial Statements of the 2018 Financial Statements included in the 2018 Annual Report, filed as Exhibit 13.01 to this Form 10-K.
General Risk Factors
Our business is cyclical and depends on activity within the construction industry.
Economic and political uncertainty can impede growth in the markets in which we operate. Demand for our products, particularly in the private nonresidential and residential construction markets, could fall if companies and consumers are unable to get credit for construction projects or if an economic slowdown causes delays or cancellations of capital projects. State and federal budget issues may also hurt the funding available for infrastructure spending. The lack of available credit may limit the ability of states to issue bonds to finance construction projects. As a result of these issues, several of our top sales generating states, from time-to-time, stop bidding or slow bid projects in their transportation departments.
We sell most of our aggregates products, our primary business, and our cement products, to the construction industry, so our results depend on the strength of the construction industry. Since our businesses depend on construction spending, which can be cyclical, our profits are sensitive to national, regional, and local economic conditions and the intensity of the underlying spending on aggregates and cement products. 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 products. The Great Recession was an example, and our shipment volumes were significantly reduced. Construction spending can also be disrupted by terrorist activity and armed conflicts.
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While our business 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 sales-generating states of our Building Materials business of Texas, Colorado, North Carolina, Georgia, and Iowa our profitability will decrease. We experienced this situation with the Great Recession.
The Great Recession of 2008 resulted in large declines in shipments of aggregates products in our industry. Recent years, however, have shown a slow but steady turnaround in this trend. The United States is currently experiencing the second-longest economic recovery since the Great Depression.
While historical spending on public infrastructure projects has been comparatively more stable as governmental appropriations and expenditures are typically less interest rate-sensitive than private sector spending, we experienced a slight retraction in aggregates product line shipments to the infrastructure market after uncertainty regarding the passage of the federal highway bill in 2014. Contractors were not able to get any certainty on the availability of federal infrastructure funding until late 2015 with the enactment of a new federal highway bill.
Our Building Materials business is seasonal and subject to the weather, which can significantly impact operations.
Since the heavy-side construction business is conducted outdoors, erratic weather patterns, seasonal changes and other weather-related conditions affect our business. Adverse weather conditions, including hurricanes and tropical storms, cold weather, snow, and heavy or sustained rainfall, reduce construction activity, restrict the demand for our products, and impede our ability to efficiently transport material. 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 Building Materials product lines production and shipment levels follow activity in the construction industry, which typically are strongest in the spring, summer and fall. Because of the weathers effect on the construction industrys activity, the production and shipment levels for the Companys Building Materials business, including all of its aggregates-related downstream operations, vary by quarter. The second and third quarters are generally subject to heavy precipitation, and thus are more profitable if precipitation is lighter, while the first and fourth quarters are subject to the impacts of winter weather, and thus are generally the least profitable. Weather-related hindrances were exacerbated over the last few years by record precipitation in many of our key markets, notably the eastern seaboard and Texas. Importantly, inclement weather was most significant during the second and third quarters, which represents the height of the construction season. These weather events reduced the Companys overall profitability in the last few years, so our results for those years, or in comparison to other years, may not be indicative of our future operating results.
The Companys operations in the southeastern and Gulf Coast regions of the United States and the Bahamas are at risk for hurricane activity, most notably in August, September and October. In September 2018, Hurricane Florence, the second-wettest storm in 70 years and ranking only behind Hurricane Harvey, made landfall in the Carolinas as a Category 4 storm, bringing with it 13 trillion gallons of rain. In Texas, Hurricane Harvey, a Category 4 storm that made landfall in Houston in August 2017, brought nearly 20 trillion gallons of precipitation. In the Southeast, Hurricane Irma, also a Category 4 storm, made landfall in Florida in September 2017 and brought excessive rainfall to the southeastern United States, notably Florida and Georgia. In October 2016, rainfall along the eastern seaboard of the United States from Hurricane Matthew, a Category 5 hurricane, approximated 14 trillion gallons. Hurricane Matthew was the first major hurricane on record to make landfall in the Bahamas, where the Company has a facility. These hurricanes generated winds, rainfall, and flooding which disrupted operations in Texas, Louisiana, Florida, Georgia, the Carolinas, and the Bahamas.
Competition and Growth Risk Factors
Our Building Materials business depends on the availability of aggregate reserves or deposits and our ability to mine them economically.
Our challenge is to find aggregates deposits that we can mine economically, with appropriate permits, near either growing markets or long-haul transportation corridors that economically serve growing markets. As communities have grown, they have taken up attractive quarrying locations and have imposed restrictions on mining. We try to meet this challenge by identifying and permitting sites prior to economic expansion, buying more land around our existing quarries to increase our mineral reserves, developing underground mines, and developing a distribution network that transports aggregates products by various methods, including rail and water. While our distribution network allows us to transport our products longer distances than would normally be considered economical, we can give no assurances that we will be successful.
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Item 1A - Risk Factors ◆ Part I
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 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. As other examples, our aggregates, ready mix concrete, and asphalt and paving product lines may compete with recycled asphalt and concrete products that could be used instead of new products and our cement product line may compete with international competitors who are importing products to the United States with lower production and regulatory costs.
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. We will continue to look for strategic businesses to acquire, like our acquisition of TXI in 2014 and our acquisition of Bluegrass in 2018. In the past, we have made acquisitions to strengthen our existing locations, expand our operations and enter new geographic markets. We will continue to pursue 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 an appropriate 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. For example, we used our common stock for our acquisition of TXI. 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 existing shareholders at that time will be diluted and the price of our stock could decline. We operate our businesses with the objective of maximizing long-term shareholder return.
Our integration of the acquisition of or business combination with other businesses may not be as successful as projected.
We have a successful history of business combinations and integration of these businesses into our heritage operations. Our largest business acquisition was TXI, which closed in July 2014. In 2015, we completed the integration of TXIs operations into our own operations ahead of schedule, which allowed us to achieve and exceed the synergies, cost savings, and operating efficiencies we had forecasted at the time of the acquisition. In 2018, we completed the integration of the operations of Bluegrass into our own operations in a manner that surpassed the publicly stated synergy estimates provided at the closing of the transaction. However, in connection with the integration of any other business that we acquire, it is a risk factor that we will not be able to achieve such integration in a successful manner or on the time schedule we have projected or in a way that will achieve the level of synergies, cost savings, or operating efficiencies we forecast from the acquisition.
Any other significant business acquisition or combination we might choose to do, similar to the acquisition of TXI or Bluegrass, would require that we devote significant management attention and resources to preparing for and then integrating our business practices and operations. Based on our history, we believe we would be successful in this integration process. Nevertheless, we may fail to realize some of the anticipated benefits of any potential acquisition or other business combination that we pursue in the future, if the integration process takes longer than expected or is more costly than expected. Potential difficulties we may encounter in the integration process include:
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the inability to successfully combine operations in a manner that permits us to achieve the cost savings and revenue synergies anticipated to result from the proposed acquisition or business combination, which would result in the anticipated benefits of the acquisition or business combination not being realized partly or wholly in the time frame currently anticipated or at all; |
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lost sales and customers as a result of certain customers of either the Company or former customers of the acquired or combined company deciding not to do business with the Company; |
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complexities associated with managing the combined operations; |
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integrating personnel; |
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creation of uniform standards, internal controls, procedures, policies and information systems; |
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potential unknown liabilities and unforeseen increased expenses, delays or regulatory issues associated with integrating the remaining operations; and |
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performance shortfalls at business units as a result of the diversion of management attention caused by completing the remaining integration of the operations. |
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Our acquisitions could harm our results of operations.
In pursuing our business strategy, we conduct discussions, evaluate opportunities and enter into acquisition agreements. Acquisitions involve significant challenges and risks, including risks that:
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We may not realize a satisfactory return on the investment we make; |
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We may not be able to retain key personnel of the acquired business; |
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We may experience difficulty in integrating new employees, business systems and technology; |
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Our due diligence process may not identify compliance issues or other liabilities that are in existence at the time of our acquisition; |
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We may not be able to bring the acquired business up to our expected levels of safety standards as soon as anticipated; |
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We may have difficulty entering into new geographic markets in which we are not experienced; or |
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We may be unable to retain the customers and partners of acquired businesses following the acquisition. |
Our cement product line and Magnesia Specialties business may become capacity constrained.
If our cement product line or Magnesia Specialties business becomes capacity constrained, they may be unable to satisfy on a timely basis the demand for some of their products, and any resulting changes in customers would introduce volatility to the earnings of these segments. We can address capacity needs by enhancing our manufacturing productivity, increasing the operational availability of equipment, reducing machinery down time and extending machinery useful life. Future demand for our products may require us to expand further our manufacturing capacity, particularly through the purchase of additional manufacturing equipment. However, we may not be able to increase our capacity in time to satisfy increases in demand that may occur from time to time. Capacity constraints may prevent us from satisfying customer orders and result in a loss of sales to competitors that are not capacity constrained. In addition, we may suffer excess capacity if we increase our capacity to meet actual or anticipated demand and that demand decreases or does not materialize. While we are permitted to expand production by up to 800,000 additional tons at our Midlothian plant, it could take us a significant period of time before such production expansion could come to fruition.
Our cement product line could suffer if cement imports from other countries significantly increase or are sold in the U.S. in violation of U.S. fair trade laws.
The cement industry has in the past obtained antidumping orders imposing duties on imports of cement and clinker from other countries that violated U.S. fair trade laws. Currently, an antidumping order against cement and clinker from Japan is set to expire but is under review for extension by the Federal Trade Commission. As has always been the case, cement operators with import facilities can purchase cement from other countries, such as those in Latin America and Asia, which could compete with domestic producers. In addition, if environmental regulations increase the costs of domestic producers compared to foreign producers that are not subject to similar regulations, imported cement could achieve a significant cost advantage over domestically produced cement. An influx of cement or clinker products from countries not subject to antidumping orders, or sales of imported cement or clinker in violation of U.S. fair trade laws, could adversely affect our cement product line.
Economic, Political and Legal Risk Factors
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, air emissions (including greenhouse gases) and water discharges, waste management, noise and dust control, reclamation and other environmental, health safety regulatory matters govern our operations. Some of our operations require permits, which may impose additional operating standards, and are subject to modification renewal and revocation. Despite our extensive efforts to remain in strict compliance at all times with all applicable laws and regulations, the risk of liabilities, particularly environmental liabilities, is inherent in the operation of our businesses. These potential liabilities could result in material costs, including for fines or damages claims, which could have an adverse impact on our operations and profitability.
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 may result in additional or unanticipated compliance and other costs. We could be required to invest in preventive or remedial action, like pollution control facilities, which could be substantial or which could result in restrictions on our operations or delays in obtaining required permits or other approvals.
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Item 1A - Risk Factors ◆ Part I
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, an unexpected and material adverse outcome in a pending or future legal action could potentially have a negative effect on our Company.
Climate change and climate change legislation or regulations may adversely impact our business, including potential physical and financial impacts.
Amid concerns that GHG emissions are contributing to climate change, a number of governmental bodies, including the U.S. Congress and various U.S. states, have proposed, enacted or are contemplating legislative and regulatory changes to mitigate or address the potential impacts of climate change, including provisions for emissions reductions or the use of alternative fuels, carbon credits (such as a cap and trade system) and a carbon tax. For example, in the U.S., the USEPA promulgated a mandatory reporting rule covering GHG emissions from sources considered to be large emitters. The USEPA has also promulgated a GHG emissions permitting rule, referred to as the Tailoring Rule, which may require some industrial facilities to obtain operating permits for GHG emissions under the U.S. Clean Air Act. Although the U.S. Supreme Court subsequently ruled in June 2014 that the USEPA exceeded its statutory authority in issuing the Tailoring Rule, the Court upheld the so-called Best Available Control Technology requirements for GHGs emitted by sources that already require Title V operating permits or are subject to PSD requirements for other pollutants. Thus, if future modifications to our Magnesia Specialties or cement facilities require review of the applicability of permitting requirements due to other pollutants, GHG permitting requirements may also be triggered, which could require us to incur significant additional costs.
Although the operations of the Companys aggregates, ready mixed concrete and asphalt and paving product lines are not major sources of GHG emissions, any additional regulatory restrictions on emissions of GHGs imposed by the USEPA will likely impact the Companys magnesia-based chemicals operations in Woodville, Ohio and Manistee, Michigan, as well as its two cement plants in Texas, each of which file annual reports of GHG emissions as required by the USEPA reporting rule. It is not possible, however, to estimate the cost of any such future requirements at this time. In addition, the Company may not be able to recover any increased operating costs or taxes relating to GHG emission limitations at those plants from its customers in order to remain competitive in pricing in the relevant markets.
In addition to impacts from increased weather-related regulation, climate change may result in physical and financial impacts which could have adverse effects on the Companys operations or financial condition. Given the nature of our operations, physical impacts may include disruptions in production and/or regional supply or product distribution networks due to major storm events, shifts in regional rainfall and temperature patterns and intensities, as well as flooding from sea level changes. In addition, production and shipment levels for the Building Materials business and cement operations correlate with general construction activity, most of which occurs outdoors and, as a result, is affected by erratic weather patterns, seasonal changes and other unusual or unexpected weather-related conditions, which can significantly affect that business. Excessive rainfall and other severe weather events also jeopardize production, shipments and profitability in all markets served by the Company. In particular, the Companys operations in the Southeastern and Gulf Coast regions of the United States and the Bahamas are at risk for hurricane activity, most notably in August, September and October. The last few years brought an unprecedented amount of precipitation to the United States and particularly to Texas and the southeastern United States. In addition, climate and inclement weather can reduce the useful life of an asset.
Our businesses also are dependent on reliable sources of electricity and fuels. We could incur increased costs or disruptions in our operations if climate change legislation and regulation or severe weather impacts the price or availability of purchased electricity or fuels or other materials used in our operations. These and other climate-related risks also could impact our customers, such as a downturn in the construction sector, which could lead to reduced demand for our products. The Company may not be able to pass on to its customers all the costs relating to mitigating these risks.
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The overall impacts of climate change on our operations and the Company are highly uncertain and difficult to estimate. However, climate change legislation and regulation concerning GHGs could have a material adverse effect on our future financial position, results of operations or cash flows.
Our business is dependent on funding from a combination of federal, state and local sources.
Our products are used in public infrastructure projects, which include the construction, maintenance, and improvement of highways, streets, roads, bridges, schools, and similar projects. Accordingly, our business is dependent on the level of federal, state, and local spending on these projects. The visibility into future federal infrastructure funding was clarified near the end of 2015 with the passage of the current federal highway bill, the FAST Act, which reauthorizes federal highway and transportation funding programs. The FAST Act also changes the Transportation Infrastructure and Innovation Act (TIFIA) funding, a federal alternative funding mechanism for transportation projects. Under the FAST Act, TIFIA funding ranges from $275 million to $300 million, and no longer requires the 20% matching funds from state DOTs. While the total value of United States overall public-works spending increased in 2018, federal funding through the FAST Act did not impact highway spending in any meaningful way. Lettings accelerated during the year, but weather, contractor capacity, and logistics dampened construction activity during the year. The increase in overall public works spending in 2018 demonstrates the commitment of states to address the underlying demand for infrastructure investment. We expect to see increased infrastructure spending at the state level in 2019. At the federal level, we expect to see some increased infrastructure spending in 2019 resulting from the FAST Act funding, but greater impact from the FAST Act funding or an enhanced federal infrastructure bill is not expected until 2020 or later. Any enhanced federal infrastructure bill will require Congressional approval. We cannot be assured, however, of such approval or of the existence, amount, and timing of appropriations for spending on future projects.
Federal highway bills provide spending authorizations that represent maximum amounts. Each year, an appropriation act is passed establishing the amount that can actually be used for particular programs. The annual funding level is generally tied to receipts of highway user taxes placed in the Highway Trust Fund. Once the annual appropriation is passed, funds are distributed to each state based on formulas (apportionments) or other procedures (allocations). Apportioned and allocated funds generally must be spent on specific programs as outlined in the federal legislation. The Highway Trust Fund has experienced shortfalls in recent years, due to high gas prices, fewer miles driven and improved automobile fuel efficiency. These shortfalls created a significant decline in federal highway funding levels. In response to the projected shortfalls, money has been transferred from the General Fund into the Highway Trust Fund over the past several years. Timely Congressional action is needed to address the funding mechanism for the Highway Trust Fund. We cannot be assured of the existence, timing or amount of federal highway funding levels in the future. We also cannot be assured of the impact of the recent sharp reduction in gasoline prices on the levels of highway user taxes that might be collected in the future and the corresponding levels of funding to the Highway Trust Fund.
At the state level, 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. Many states after the Great Recession experienced state-level funding pressures caused by lower tax revenues and an inability to finance approved projects. For example, North Carolina was among the states that experienced these pressures, and this state disproportionately affects our revenues and profits. Most state budgets, including North Carolina, improved in 2014 and later years as increased tax revenues helped resolve budget constraints.
During the past several years, many states have taken on a significantly larger role in funding infrastructure investment, including initiating special-purpose taxes and raising gas taxes. We anticipate further growth in state-level funding initiatives, such as bond issues, toll roads, and special purpose taxes, as states address infrastructure needs, particularly in periods of federal funding uncertainty. Nevertheless, it is a continuing risk to our business that sufficient funding from federal, state, and local sources will not be available to address infrastructure needs.
Our businesses could be impacted by rising interest rates.
As discussed previously, our operations are highly dependent upon the interest rate-sensitive construction and steelmaking industries. Therefore, business in these industries and for us may decline if interest rates rise and costs increase.
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Item 1A - Risk Factors ◆ Part I
For example, demand in the residential construction market in which we sell our aggregate products is affected by interest rates. In 2018, the Federal Reserve raised the federal funds rate to 2.5 percent. The residential construction market accounted for 22% of our aggregates product line shipments in 2018.
Aside from these inherent risks from within our operations, our earnings are also affected by changes in short-term interest rates. However, rising interest rates are not necessarily predictive of weaker operating results. Historically, our profitability has increased during periods of rising interest rates. In essence, our underlying business generally serves as a natural hedge to rising interest rates.
Rising interest rates could also result in disruptions in the credit markets, which could affect our business, as described in greater detail under Disruptions in the credit markets could affect our business below.
Increases in our effective income tax rate may harm our results of operations.
A number of factors may increase our future effective income tax rate, including:
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Governmental authorities increasing taxes or eliminating deductions, particularly the depletion deduction; |
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The jurisdictions in which earnings are taxed; |
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The resolution of issues arising from tax audits with various tax authorities; |
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Changes in the valuation of our deferred tax assets and liabilities; |
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Adjustments to estimated taxes upon finalization of various tax returns; |
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Changes in available tax credits; |
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Changes in stock-based compensation; |
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Other changes in tax laws, and |
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The interpretation of tax laws and/or administrative practices. |
Any significant increase in our future effective income tax rate could reduce net earnings and free cash flow for future periods.
Personnel Risks
Labor disputes could disrupt operations of our businesses.
Labor unions represent approximately 10% of the hourly employees of our Building Materials business and 100% of the hourly employees of our Magnesia Specialties business. Our collective bargaining agreements for employees of our Magnesia Specialties business at the Manistee, Michigan magnesia chemicals plant and the Woodville, Ohio, lime plant expire in August 2019 and June 2022, 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 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.
Financial, Accounting and Cost Management Risk Factors
Our business is a capital-intensive business.
The property and machinery needed to produce our products are very expensive. Therefore, we require large amounts of cash to operate our businesses. We believe that our cash on hand, along with our projected internal cash flows and our available financing resources, is adequate to support our anticipated operating and capital needs. Our ability to generate sufficient cash flow depends on future performance, which will be subject to general economic conditions, industry cycles and financial, business, and other factors affecting our operations, many of which are beyond our control. If we are unable to generate sufficient cash to operate our business, we may be required, among other things, to further reduce or delay planned capital or operating expenditures.
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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 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 Managements 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, either positively or negatively, affect results reported for periods after adoption of the standards as compared to the prior periods, or require retrospective application changing results reported for prior periods. We urge you to read about our accounting policies in Note A of our 2018 Financial Statements.
Reports from the Public Company Accounting Oversight Boards (PCAOB) inspections of public accounting firms continue to outline findings and recommendations which could require these firms to perform additional work as part of their financial statement audits. The Companys costs to respond to these additional requirements may increase.
Disruptions in the credit markets could affect our business.
We have considered the current economic environment and its potential impact to the Companys business. Demand for aggregates products, particularly in the infrastructure construction market, had been negatively affected by federal and state budget and deficit issues and the uncertainty over future highway funding levels. Further, delays or cancellations to capital projects in the nonresidential and residential construction markets could occur if companies and consumers are unable to obtain financing for construction projects or if consumer confidence continues to be eroded by economic uncertainty.
A recessionary construction economy can also increase the likelihood we will not be able to collect on all of our accounts receivable with our customers. We are protected in part, however, by payment bonds posted by many of our customers or end-users. Nevertheless, we experienced a delay in payment from some of our customers during the construction downturn, which can negatively affect operating cash flows. Historically, our bad debt write-offs have not been significant to our operating results, and we believe our allowance for doubtful accounts is adequate.
The credit environment could impact the Companys ability to borrow money in the future. Additional financing or refinancing might not be available and, if available, may not be at economically favorable terms. Further, an increase in leverage could lead to deterioration in our credit ratings. A reduction in our credit ratings, regardless of the cause, could also limit our ability to obtain additional financing and/or increase our cost of obtaining financing. There is no guarantee we will be able to access the capital markets at financially economical interest rates, which could negatively affect our business.
We may be required to obtain financing in order to fund certain strategic acquisitions, if they arise, or to refinance our outstanding debt. Any large strategic acquisition would require that we issue both newly issued equity and debt securities in order to maintain our investment grade credit rating and could result in a ratings downgrade notwithstanding our issuance of equity securities to fund the transaction. We are also exposed to risks from tightening credit markets, through the interest payable on our outstanding variable-rate debt and the interest cost on future borrowings under our credit facilities. While management believes our credit ratings will remain at a composite investment-grade level, we cannot be assured these ratings will remain at those levels. While management believes the Company will continue to have credit available to it adequate to meet its needs, there can be no assurance of that.
Our Magnesia Specialties business faces currency risks from its overseas operations.
Our Magnesia Specialties business sells some of its products to companies located outside the United States. Therefore the operations of the Magnesia Specialties business are affected from time to time by the fluctuating values of the currency exchange rates of the countries in which it does business in relation to the value of the U.S. Dollar. The business tries to mitigate the short-term effects of currency exchange rates by primarily denominating sales in the U.S. Dollar. This still leaves the business subject to certain risks, depending on the strength of the U.S. Dollar. In 2018, the strength of the U.S. Dollar in foreign markets negatively affected the overall price of the products of the Magnesia Specialties business when compared to foreign-domiciled competitors.
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Item 1A - Risk Factors ◆ Part I
Unexpected equipment failures, catastrophic events and scheduled maintenance may lead to production curtailments or shutdowns.
Our manufacturing processes are dependent upon critical pieces of equipment, such as our kilns and finishing mills. This equipment, on occasion, may be out of service as a result of failures or damage during accidents. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. We have one- to two-week scheduled outages at least once a year to refurbish our cement and dolomitic lime production facilities. In 2018, the cement product line incurred shutdown costs of $17.3 million during the year. In 2018, the Magnesia Specialties business incurred shutdown costs of $5.8 million during the year. Any significant interruption in production capability may require us to make significant capital expenditures to remedy problems or damage as well as cause us to lose revenue due to lost production time.
Our paving operations present additional risks to our business.
Our paving operations face challenges when our contracts have penalties for late completion. In some instances, including many of our fixed-price contracts, we guarantee that we will complete a project by a certain date. If we subsequently fail to complete the project as scheduled, we may be held responsible for costs resulting from the delay, generally in the form of contractually agreed-upon liquidated damages. Under these circumstances, the total project cost could exceed our original estimate, and we could experience a loss of profit or a loss on the project. In our paving operations, we also have fixed price and fixed unit price contracts where our profits can be adversely affected by a number of factors beyond our control, which can cause our actual costs to materially exceed the costs estimated at the time of our original bid. These same issues and risks can also impact some of our contacts in our asphalt and ready mixed concrete operations. These risks are somewhat mitigated by the fact that a majority of our road paving contracts are for short duration projects.
Our ready mixed concrete and asphalt and paving product lines have lower profit margins and operating results can be more volatile.
Our ready mixed concrete and asphalt and paving businesses typically generate lower profit margins than our aggregates and cement product lines due to potentially volatile input costs, highly competitive market dynamics, and lower barriers to entry. Therefore, if we expand these operations, our consolidated gross margin would likely be adversely affected. Our overall ready mixed concrete and asphalt and paving operations gross margin was 10.3% for 2018 and 12.7% for 2017. The overall gross margin of our Building Materials business will continue to be reduced by the lower gross margins for our ready mixed concrete and asphalt and paving product lines.
Suppliers, Raw Materials, and Energy Costs Risk Factors
Short supplies and high costs of fuel, energy and raw materials 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 by the short supply or high costs of these fuels and energy. Changes in energy costs also affect the prices that the Company pays for related supplies, including explosives, conveyor belting and tires. While we can contract for some fuels and sources of energy, such as fixed-price supply contracts for coal and petroleum coke, significant increases in costs or reduced availability of these items have and may in the future reduce our financial results. Moreover, fluctuations in the supply and costs of these fuels and energy can make planning for our businesses more difficult. Because of the fluctuating trends in diesel fuel prices, we may enter into fixed-price fuel agreements from time to time for a portion of our diesel fuel to reduce our diesel fuel price risk. Our last fixed-price commitment for a portion of our diesel fuel requirements expired at the end of 2016.
The average cost per gallon of diesel fuel was $2.29, $1.81 and $1.96 in 2018, 2017 and 2016, respectively. Pricing in 2016 reflects an unfavorable fixed-price agreement which expired on December 31, 2016. For 2018, the average cost per MCF (thousand cubic feet) for natural gas decreased 4% versus 2017, which had increased approximately 33% from 2016 levels.
The Company has fixed price agreements for 100% of its 2019 coal needs, approximately 50% of its 2019 natural gas needs, and 100% of its 2019 petroleum coke needs.
Cement production requires large amounts of energy, including electricity and fossil fuels. Energy costs represented approximately 23% of the 2018 direct production costs of our cement product line. Therefore, the cost of energy is one of our largest expenses. Prices for energy are subject to market forces largely beyond our control and can be quite volatile. Price increases that we are unable to pass through in the form of price increases for our products, or disruption of the uninterrupted supply of fuel and electricity, could adversely affect us. Accordingly, volatility in energy costs can adversely affect the financial results of our cement product line. Profitability of the cement product line is also subject to kiln maintenance, which requires the plant to be shut down for a period of time as repairs are made. The cement product line incurred shutdown costs of $17.3 million and $14.0 million during 2018 and 2017, respectively.
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Similarly our ready mixed concrete and asphalt and paving operations also require a continued supply of liquid asphalt and cement, which serve as key raw materials in the production of hot mix asphalt and ready mixed concrete, respectively. Some of these raw materials we produce internally, but most are purchased from third parties. These purchased raw materials are subject to potential supply constraints and significant price fluctuations, which are beyond our control. The financial results of our ready mixed concrete and asphalt and paving operations have been affected by the short supply or high costs of these raw materials. We generally see frequent volatility in the costs for these raw materials. Liquid asphalt prices were higher in 2018 than in 2017. Liquid asphalt prices may not always follow other energy products (e.g., oil or diesel fuel) because of complexities in the refining process which converts a barrel of oil into other fuels and petrochemical products.
Cement is a commodity sensitive to supply and price volatility.
Cement is a commodity, and competition is often based mainly on price, which is highly sensitive to changes in supply and demand. Prices may fluctuate significantly in response to relatively minor changes in supply and demand, general economic conditions and other market conditions, which we cannot control. When cement producers increase production capacity or more cement is imported into the market, an oversupply of cement in the market may occur if supply exceeds demand. In that case cement prices generally decline. We cannot be assured that prices for our cement products sold will not decline in the future or that such decline will not have a material adverse effect on our cement product line.
Our Magnesia Specialties business depends in part on the steel industry and the supply of reasonably priced fuels.
Our Magnesia Specialties business sells some of its products to companies in the steel industry. While we have reduced this risk over the last few years, this business is still dependent, in part, on the strength of the cyclical steel industry. The Magnesia Specialties business also requires significant amounts of natural gas, coal, and petroleum coke, and financial results are negatively affected by increases in fuel prices or shortages.
Cyber and Information Security Risk Factors
We are dependent on information technology and our systems and infrastructure face certain risks, including cybersecurity risks and data leakage risks.
We are dependent on information technology systems and infrastructure. Any significant breakdown, invasion, destruction or interruption of these systems by employees, others with authorized access to our systems, or unauthorized persons could negatively impact operations. There is also a risk that we could experience a business interruption, theft of information or reputational damage as a result of a cyber-attack, such as an infiltration of a data center, or data leakage of confidential information either internally or at our third-party providers. While we have invested in the protection of our data and information technology to reduce these risks and routinely test the security of our information systems network, we cannot assure you that our efforts will prevent breakdowns or breaches in our systems that could adversely affect our business.
Other Risk Factors
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 or ship. We also rely heavily on third-party truck and rail transportation to ship coal, natural gas and other fuels to our plants. Any significant delays, disruptions, or the non-availability of our transportation support system could negatively affect our operations. Transportation operations are subject to capacity constraints, high fuel costs and various hazards, including extreme weather conditions and slowdowns due to labor strikes and other work stoppages. In Texas, we compete for third-party trucking services with operations in the oil and gas fields, which can significantly constrain the availability of those services to us. If there are material changes in the availability or cost of transportation services, we may not be able to arrange alternative and timely means to ship our products or fuels at a reasonable cost, which could lead to interruptions or slowdowns in our businesses or increases in our costs.
The availability of rail cars can also affect our ability to transport our products. Rail cars can be used to transport many different types of products across all of our segments. If owners sell or lease rail cars for use in other industries, we may not have enough rail cars to transport our products.
We have long-term agreements with shipping companies to provide ships to transport our aggregates products from our Bahamas and Nova Scotia operations to various coastal ports. These contracts have varying expiration dates ranging from 2023 to 2027 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.
When we sold our River District operations in 2011 as part of our asset exchange with Lafarge, we sold most of our barge long-haul distribution network. As a result, we reduced our risks from distributing our products by barges, especially along the Mississippi
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2018 FORM 10-K
|
Item 1A - Risk Factors ◆ Part I
River. We still distribute some of our product by barge along rivers in West Virginia. We may continue to experience, to a lesser degree, risks associated with distributing our products by barges, including significant delays, disruptions or the non-availability of our barge transportation system that could negatively affect our operations, water levels that could affect our ability to transport our products by barge, and barges that may not be available in quantities that we might need from time to time to support our operations.
Our articles of incorporation and bylaws and North Carolina law may inhibit a change in control that you may favor.
Our restated articles of incorporation and restated bylaws 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:
|
the ability of the Board of Directors to establish the terms of, and issue, preferred stock without shareholder approval; |
|
the requirement that our shareholders may only remove directors for cause; |
|
the inability of shareholders to call special meetings of shareholders; and |
|
super-majority shareholder approval requirements for business combination transactions with certain five percent shareholders. |
Additionally, the occurrence of certain change-of-control events could result in an event of default under certain of our existing or future debt instruments.
ITEM 1B - UNRESOLVED STAFF COMMENTS
There are no unresolved written comments that were received from the staff of the SEC one hundred and eighty (180) days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.
Building Materials Business
As of December 31, 2018, the Company processed or shipped aggregates from more than 300 quarries, underground mines, and distribution yards in 26 states, Canada, and the Bahamas, of which 124 are located on land owned by the Company free of major encumbrances, 61 are on land owned in part and leased in part, 110 are on leased land, and 10 are on facilities neither owned nor leased, where raw materials are removed under an agreement. The Companys aggregates reserves, on the average, exceed 75 years based on normalized levels of production, and approximate 100 years at current production rates. However, certain locations may be subject to more limited reserves and may not be able to expand. In addition, as of December 31, 2018, the Company processed and shipped ready mixed concrete and/or asphalt products from 149 properties in five states, of which 126 are located on land owned by the Company free of major encumbrances, one is on land owned in part and leased in part, and 22 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 Companys standards and are economically mineable, then they are either leased or purchased.
The Company estimates proven and probable reserves based on the results of drilling. Proven reserves are reserves of deposits designated using closely spaced drill data, and based on that data the reserves are believed to be relatively homogenous. Proven reserves have a certainty of 85% to 90%. Probable reserves are reserves that are inferred utilizing fewer drill holes and/or assumptions about the economically mineable reserves based on local geology or drill results from adjacent properties. The degree of certainty for probable reserves is 70% to 75%. In determining the amount of reserves, the Companys 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. The Company uses the same methods of analysis to evaluate and estimate the amount of its aggregates reserves used in the cement manufacturing process for its cement product line as
2018 FORM 10-K
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23
|
Part I ◆ Item 2 - Properties
it does for its aggregates product line. For additional information on the Companys assessment of reserves, see Managements Discussion and Analysis of Financial Condition and Results of Operations Other Financial Information Critical Accounting Policies and Estimates- Property, Plant and Equipment included in the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K for a discussion of reserves evaluation by the Company.
Set forth in the tables below are the Companys estimates of reserves of recoverable aggregates (hard rock and sand and gravel) of suitable quality for economic extraction, shown on a state-by-state basis, and the Companys total annual production for the last three years, along with the Companys estimate of years of production available, shown on a segment-by-segment basis. The number of producing quarries shown on the table includes underground mines. The Companys reserve estimates for the last two 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 Companys 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. The Companys estimate of reserves shown in the tables below include reserves used in the Companys cement product line and Magnesia Specialties business.
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2018 FORM 10-K
|
Item 2 - Properties ◆ Part I
* |
The Company calculates its aggregate reserves for purposes of this table based on land that has been zoned for quarrying and land for which the Company has determined zoning is not required. |
** |
The Company may own additional land adjacent or near existing quarries on which reserves may be located but does not include such reserves in these calculations if zoning is required but has not been obtained. |
*** |
The Companys reserves presented in the State of Ohio include dolomitic limestone reserves used in the business of the Magnesia Specialties segment. |
**** |
The Companys reserves presented in the State of Texas include limestone reserves used in the business of the cement product line. |
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25
|
Part I ◆ Item 2 - Properties
Total Annual Production (in tons) (add
000)
For year ended December 31 |
Number of
years of production available at December 31, |
|||||||||||||||||||
Reportable Segment |
2018 | 2017 | 2016 | 2018 | ||||||||||||||||
Mid-America Group |
78,137 | 70,340 | 67,431 | 105.7 | ||||||||||||||||
Southeast Group |
25,328 | 22,274 | 20,468 | 139.2 | ||||||||||||||||
West Group |
71,538 | 74,184 | 75,421 | 78.2 | ||||||||||||||||
Total Aggregates Product Line
|
|
175,003
|
|
|
166,798
|
|
|
163,320
|
|
|
99.3
|
|
Cement Product Line
As of December 31, 2018, the Company, through its subsidiaries, processed or shipped cement from six properties in one state, of which four are located on land owned by the Company free of major encumbrances and two are on leased land. The Companys cement product line has production facilities located at two sites in Texas: Midlothian, Texas, south of Dallas/Fort Worth; Hunter, Texas, north of San Antonio. The following table summarizes certain information about the Companys cement manufacturing facilities at December 31, 2018:
Plant |
Rated Annual Productive Capacity-Tons of Clinker |
Manufacturing Process |
Service Date |
Internally Estimated Minimum ReservesYears |
||||||||||||||||
Midlothian, TX |
2,200,000 | Dry | 2001 | 65 | ||||||||||||||||
Hunter, TX |
2,250,000 | Dry | 2013 and 1981 | 140 | ||||||||||||||||
Total
|
4,450,000
|
Reserves identified with the facilities shown above are contained on approximately 2,844 acres of land owned by the Company. As of December 31, 2018, the Company estimated its total proven and probable limestone reserves on such land to be approximately 692 million tons.
The Companys cement manufacturing facilities include kilns, crushers, pre-heaters/calciners, coolers, finish mills and other equipment used to process limestone and other raw materials into cement, as well as equipment used to extract and transport the limestone from the adjacent quarries. These cement manufacturing facilities are served by rail and truck.
As of December 31, 2018, the Company, through its subsidiaries, also operated, directly or through third parties, four cement distribution terminals and owned the real estate at the California cement grinding and packaging facility it sold on September 30, 2015, which it expects to sell for non-cement use.
Magnesia Specialties Business
The Magnesia Specialties business currently operates major manufacturing facilities in Manistee, Michigan, and Woodville, Ohio. Both of these facilities are owned.
Other Properties
The Companys principal corporate office, which it owns, is located in Raleigh, North Carolina. The Company owns and leases various administrative offices for its five reportable business segments.
Condition and Utilization
The Companys 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 2018, the principal properties of the aggregates product line were believed to be utilized at average productive capacities of approximately 65% and were capable of supporting a higher level of market demand. The Company adjusts its production schedules to meet volume demand for its products. For example, the Company reduced operating hours at a number of its facilities, closed some of
26
|
2018 FORM 10-K
|
Item 2 - Properties ◆ Part I
its facilities, and temporarily idled some of its facilities. In 2018, the Companys aggregates product line operated at a level significantly below capacity, which restricted the Companys ability to capitalize $44.5 million of costs that could have been inventoried under normal operating conditions. If demand does not improve over the near term, such reductions and temporary idling could continue. The Company expects, however, it will be able to resume production at its normalized levels and increase production again as demand for its products increases.
During 2018 the Texas cement plants operated on average at 75% to 80% utilization. The Portland Cement Association (PCA) has projected that cement consumption will slow modestly in 2019 from 2018, with the rate of change decreasing in 2019 to 2.6% from 2.9% in 2018. The cement product lines leadership, in collaboration with the aggregates and ready mixed concrete teams, have developed strategic plans regarding interplant efficiencies, as well as tactical plans addressing plant utilization and efficiency. Due to the 24/7/365 nature of cement operations, significant gains in plant utilization and efficiency are typically achieved only during plant shutdowns.
The Company expects future organic earnings growth to result from increased pricing, rationalization of the current assets and portfolio and/or further cost reductions. In the current operating environment where steel utilization is at levels close to or below 70% and the strength of the United States dollar pressures product competitiveness in international markets, any unplanned change in costs or customers introduces volatility to the earnings of the Magnesia Specialties segment. The dolomitic lime business of the Magnesia Specialties segment operated at 74% utilization in 2018.
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), based upon currently-available facts, it is remote that the ultimate outcome of any litigation and other proceedings will have a material adverse effect on the overall results of the Companys operations, its cash flows, or its financial condition. However, we cannot assure you 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 2018 for failure to disclose certain reportable transactions under Section 6707A of the Internal Revenue Code.
See also Note O: Commitments and Contingencies of the Notes to Financial Statements of the 2018 Financial Statements included in the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K and Managements Discussion and Analysis of Financial Condition and Results of Operations Environmental Regulation and Litigation included in the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K.
ITEM 4 - MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Annual Report on Form 10-K.
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27
|
Part I ◆ Item 4 - Mine Safety Disclosures
Executive Officers of the Registrant
The following sets forth certain information regarding the executive officers of Martin Marietta Materials, Inc. as of February 8, 2019:
Name
|
Age
|
Present Position
|
Year Assumed
|
Other Positions
and Other Business
|
||||
C. Howard Nye
|
56
|
Chairman of the Board;
|
2014
|
|||||
|
Chief Executive Officer;
|
2010
|
||||||
|
President;
|
2006
|
||||||
|
President of Aggregates
|
2010
|
||||||
|
Business;
|
|||||||
|
Chairman of Magnesia
|
2007
|
||||||
|
Specialties Business
|
|||||||
James A. J. Nickolas |
48 |
Senior Vice President, Chief Financial Officer |
2017 |
Head, Corporate Development group, Caterpillar Inc. (January-July 2017), Group Chief Financial Officer of Caterpillars Resources Industries segment (October 2014-December 2016), Group Chief Financial Officer of Caterpillars Global Mining business unit (December 2012-September 2014)
|
||||
Roselyn R. Bar
|
60
|
Executive Vice President;
|
2015
|
Senior Vice President (2005-2015) | ||||
|
General Counsel;
|
2001
|
||||||
|
Corporate Secretary
|
1997
|
||||||
Daniel L. Grant
|
64
|
Senior Vice President,
|
2013
|
|||||
|
Strategy & Development
|
|||||||
Dana F. Guzzo
|
53
|
Senior Vice President;
|
2011
|
Chief Information Officer (2011-2015)
|
||||
|
Chief Accounting Officer;
|
2006
|
||||||
|
Controller
|
2005
|
||||||
Donald A. McCunniff |
61 |
Senior Vice President, Human Resources
|
2011 |
|||||
John P. Mohr
|
54
|
Senior Vice President,
|
2017
|
Vice President (2015-2017); | ||||
|
Chief Information Officer |
2015 |
Vice President, Information Services, Liggett Vector Brands (2007-2015)
|
28
|
2018 FORM 10-K
|
Item 5 - Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ◆ Part II
ITEM 5 - MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
The Companys Common Stock, $.01 par value, is traded on the New York Stock Exchange (NYSE) (Symbol: MLM). There were 878 holders of record of the Companys Common Stock as of February 15, 2019.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
Period
|
Total
|
Average
|
Total
|
Maximum
|
||||||||||||
October 1, 2018 October 31, 2018
|
|
0
|
|
$
|
|
|
|
0
|
|
|
14,364,323
|
|
||||
November 1, 2018 November 30, 2018
|
|
125,507
|
|
$
|
186.92
|
|
|
125,507
|
|
|
14,238,816
|
|
||||
December 1, 2018 December 31, 2018
|
|
91,065
|
|
$
|
181.63
|
|
|
91,065
|
|
|
14,147,751
|
|
||||
Total
|
|
216,572
|
|
$
|
184.70
|
|
|
216,572
|
|
|
14,147,751
|
|
(1) |
The Companys stock repurchase program, which currently authorizes the repurchase of 20 million shares of common stock, is approved by the Companys Board of Directors from time to time, and updated as appropriate by the Board, and announced to the public by press release. The latest announcement on this topic was the Companys press release dated February 10, 2015 that its Board of Directors had authorized the repurchase of up to 20 million shares of its outstanding common stock, which included 5 million shares authorized under the Companys previous share repurchase program. Previous press releases announcing prior share repurchase programs and the related amounts of common stock included under the share repurchase authorizations were as follows: (i) press release dated August 15, 2007 (5 million shares); (ii) press release dated February 22, 2006 (5 million shares); and (iii) May 6, 1994 (2.5 million shares). |
ITEM 6 - SELECTED FINANCIAL DATA
The information required in response to this Item 6 is included under the caption Five Year Summary of the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K, and that information is incorporated herein by reference.
ITEM 7 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required in response to this Item 7 is included under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations in the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K, and that information is incorporated herein by reference, except that the information contained under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations Outlook 2019 in the 2018 Annual Report is not incorporated herein by reference.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required in response to this Item 7A is included under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations-Quantitative and Qualitative Disclosures About Market Risk of the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K, and that information is incorporated herein by reference.
2018 FORM 10-K
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29
|
Part II ◆ Item 8 - Financial Statements and Supplementary Data
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 Statements of Comprehensive Earnings, Consolidated Balance Sheets, Consolidated Statements of Cash Flows, Consolidated Statements of Total Equity, Notes to Financial Statements, Managements Discussion and Analysis of Financial Condition and Results of Operations, and Quarterly Performance (Unaudited) of the 2018 Annual Report filed as Exhibit 13.01 to this Form 10-K, and that information is incorporated herein by reference, except that the information contained under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations Outlook 2019 in the 2018 Annual Report is not incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2018, an evaluation was performed under the supervision and with the participation of the Companys management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Companys disclosure controls and procedures. Based on that evaluation, the Companys CEO and CFO concluded that the Companys disclosure controls and procedures were effective at the reasonable assurance level.
The foregoing evaluation of the Companys disclosure controls and procedures was based on the definition in Exchange Act Rule 13a-15(e), which requires that disclosure controls and procedures are effectively designed to provide reasonable assurance that information required to be disclosed by an issuer in the reports that it files or submits with the SEC under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SECs rules and forms, and is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Our managements report on internal control over financial reporting is included in the Annual Report filed as Exhibit 13.01 to this Form 10-K, under the heading Statement of Financial Responsibility and Managements Report on Internal Controls over Financial Reporting, and is incorporated by reference. The Companys management concluded that the Companys internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with generally accepted accounting principles as of December 31, 2018.
Management has excluded certain elements of the internal control over financial reporting of Bluegrass Materials Company (Bluegrass) from its assessment of the Companys internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Subsequent to the acquisition, certain elements of Bluegrass internal control over financial reporting and related processes were integrated into the Companys existing systems and internal control over financial reporting. Those controls that were not integrated have been excluded from managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. The excluded elements represent controls over accounts of less than 1% of consolidated assets and 4% of consolidated total revenues as of and for the year ended December 31, 2018.
Changes in Internal Control over Financial Reporting
There were no changes in the Companys internal control over financial reporting during the most recently completed fiscal quarter ended December 31, 2018 that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
Limitations on the Effectiveness of Controls
The Companys management, including the CEO and CFO, does not expect that the Companys 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
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2018 FORM 10-K
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Item 9A - Controls and Procedures ◆ Part II
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls 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.
CEO and CFO Certifications
Included among the exhibits to this Form 10-K are forms of Certifications of the Companys 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 Companys 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.
None.
2018 FORM 10-K
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31
|
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 Companys definitive proxy statement to be filed with the SEC pursuant to Regulation 14A within 120 days after the close of the Companys fiscal year ended December 31, 2018 (the 2019 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 Companys 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.
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 Companys 2019 Proxy Statement, and that information 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 Companys 2019 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 Companys 2019 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 Companys 2019 Proxy Statement, and that information is hereby incorporated by reference in this Form 10-K.
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2018 FORM 10-K
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Item 15 - Exhibits and Financial Statement Schedules ◆ 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 2018 Annual Report and incorporated by reference under Item 8 of this Form 10-K:
Consolidated Statements of Earnings for years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Comprehensive Earnings for years ended December 31, 2018, 2017, and 2016
Consolidated Balance Sheets at December 31, 2018 and 2017
Consolidated Statements of Cash Flows for years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Total Equity for years ended December 31, 2018, 2017, and 2016
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 Companys independent registered public accounting firm with respect to the above-referenced financial statements is included in the 2018 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 Companys independent registered public accounting firm are attached as Exhibit 23.01 to this Form 10-K.
(3) Exhibits
The list of Exhibits on the accompanying Index of Exhibits 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.
2018 FORM 10-K
|
33
|
Part IV ◆ Item 15 - Exhibits and Financial Statement Schedules
(b) Index of Exhibits
Exhibit No.
|
||
3.01 |
|
|
3.02 |
|
|
4.01 |
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.01 to the Martin Marietta Materials, Inc. registration statement on Form S-1, filed on December 8, 1993 (SEC Registration No. 33-72648) (P)
|
|
4.02 |
|
|
4.03 |
|
|
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)) (P)
|
|
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)) (P)
|
|
4.06 |
|
|
4.07 |
|
|
4.08 |
|
|
4.09 |
|
|
4.10 |
Form of 4.250% Senior Notes due 2024 (included in Exhibit 4.09)
|
|
4.11 |
|
|
4.12 |
|
|
4.13 |
Form of Floating Rate Senior Notes due 2020 (included in Exhibit 4.12)
|
|
4.14 |
|
34
|
2018 FORM 10-K
|
Item 15 - Exhibits and Financial Statement Schedules ◆ PART IV
Exhibit No.
|
||
4.15 |
Form of Floating Rate Senior Notes due 2019 (included in Exhibit 4.14)
|
|
4.16 |
Form of 3.500% Senior Notes due 2027 (included in Exhibit 4.14)
|
|
4.17 |
Form of 4.250% Senior Notes due 2047 (included in Exhibit 4.14)
|
|
10.01 |
|
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10.02 |
|
|
10.03 |
|
|
10.04 |
|
|
10.05 |
|
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10.06 |
|
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10.07 |
|
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10.08 |
|
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10.09 |
|
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10.10 |
|
|
10.11 |
|
2018 FORM 10-K
|
35
|
Part IV ◆ Item 15 - Exhibits and Financial Statement Schedules
Exhibit No.
|
||
10.12 |
|
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10.13 |
|
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10.14 |
|
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10.15 |
|
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10.16 |
|
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10.17 |
|
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10.18 |
|
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10.19 |
|
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10.20 |
|
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10.21 |
|
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10.22 |
|
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10.23 |
|
|
10.24 |
|
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10.25 |
|
|
10.26 |
|
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*10.27 |
|
|
*13.01 |
|
36
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2018 FORM 10-K
|
Item 15 - Exhibits and Financial Statement Schedules ◆ PART IV
Exhibit No.
|
||
*21.01 |
List of subsidiaries of Martin Marietta Materials, Inc.
|
|
*23.01 |
|
|
*24.01 |
Powers of Attorney (included in this Form 10-K immediately following Signatures)
|
|
*31.01 |
|
|
*31.02 |
|
|
*32.01 |
|
|
*32.02 |
|
|
*95 |
Mine Safety Disclosure Exhibit
|
|
*101.INS |
XBRL Instance Document
|
|
*101.SCH |
XBRL Taxonomy Extension Schema Document
|
|
*101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
*101.LAB |
XBRL Taxonomy Extension Label Linkbase Document
|
|
*101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document
|
|
*101. DEF |
XBRL Taxonomy Extension Definition Linkbase
|
Other material incorporated by reference:
Martin Marietta Materials, Inc.s 2019 Proxy Statement filed pursuant to Regulation 14A, portions of which are incorporated by reference in this Form 10-K. Those portions of the 2019 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 |
2018 FORM 10-K
|
37
|
Part IV ◆ Item 15 - Exhibits and Financial Statement Schedules
(c) Financial Statement Schedule
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
(a) |
Write off of uncollectible accounts and change in estimates |
(b) |
Application of reserve policy to acquired inventories |
(c) |
Sale of reserved inventory and divestitures |
The Company has chosen not to include an optional summary of the information required by this Form 10-K. For a reference to the information in this Form 10-K, investors should refer to the Table of Contents to this Form 10-K.
38
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2018 FORM 10-K
|
◆ 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 |
||||
Executive Vice President, General Counsel and Corporate Secretary |
Dated: February 25, 2019
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.
2018 FORM 10-K
|
39
|
Signatures ◆
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/ C. Howard Nye C. Howard Nye |
Chairman of the Board, President and Chief Executive Officer |
February 25, 2019 |
||
/s/ James A. J. Nickolas James A. J. Nickolas |
Senior Vice President and Chief Financial Officer | February 25, 2019 | ||
/s/ Dana F. Guzzo Dana F. Guzzo |
Senior Vice President, Chief Accounting Officer and Controller | February 25, 2019 | ||
/s/ Dorothy M. Ables Dorothy M. Ables |
Director | February 25, 2019 | ||
/s/ Sue W. Cole Sue W. Cole |
Director | February 25, 2019 | ||
/s/ Smith W. Davis Smith W. Davis |
Director | February 25, 2019 | ||
/s/ John J. Koraleski John J. Koraleski |
Director | February 25, 2019 | ||
/s/ Laree E. Perez Laree E. Perez |
Director | February 25, 2019 | ||
/s/ Michael J. Quillen Michael J. Quillen |
Director | February 25, 2019 | ||
/s/ Dennis L. Rediker Dennis L. Rediker |
Director | February 25, 2019 | ||
/s/ Donald W. Slager Donald W. Slager |
Director | February 25, 2019 | ||
/s/ Stephen P. Zelnak, Jr. Stephen P. Zelnak, Jr.
|
Director | February 25, 2019 |
40
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2018 FORM 10-K
|
EXHIBIT 10.27
MARTIN MARIETTA MATERIALS, INC.
DIRECTORS RESTRICTED STOCK UNIT AWARD AGREEMENT
THIS RESTRICTED STOCK UNIT AWARD AGREEMENT (the Award Agreement), made as of between Martin Marietta Materials, Inc., a North Carolina corporation (the Corporation), and (the Director).
1. GRANT
Pursuant to the Martin Marietta Materials, Inc. Amended and Restated Stock-Based Award Plan (the Plan), the Corporation hereby grants the Director Restricted Stock Units on the terms and conditions contained in this Award Agreement, and subject to the terms and conditions of the Plan. The term Restricted Stock Unit or Unit(s) as used in this Award Agreement refers only to the Restricted Stock Units awarded to the Director under this Award Agreement.
2. GRANT DATE
The Grant Date is .
3. VESTING OF RESTRICTED STOCK UNITS
The Restricted Stock Units granted hereby shall vest immediately, but Stock issuable with respect to Restricted Stock Units shall be delivered as provided in Section 5 or Section 8.
5. DIVIDEND EQUIVALENTS
On the date that Stock is delivered as provided in Section 5 or Section 8 (each, a Delivery Date, and each period commencing on the Grant Date and ending on a Delivery Date, a Dividend Equivalent Period), dividend equivalents will be credited to the Director in an amount equal to the aggregate amount of dividends paid on a share of Stock during the applicable Dividend Equivalent Period multiplied by the number of Restricted Stock Units settled on such Delivery Date. The dividend equivalent amounts shall be paid as soon as practicable following the applicable Delivery Date (but in no event later than 60 days following such Delivery Date) from the general assets of the Corporation and shall be treated and reported as additional compensation for the year in which payment is made.
5. AWARD PAYOUT
(a) |
Except as otherwise provided in an election form provided by the Director on or before December 31 of the calendar year preceding the calendar year in which this Award is granted (or, for a newly-elected director, before the effective date of the Directors commencement of service as a Director) (the Election Form), fifty percent (50%) of the Restricted Stock Units granted hereunder will be converted into shares of Stock and delivered to the Director as soon as practicable following termination of the Directors service on the Board of Directors (but in no event later than 60 days following such termination of service). |
(b) |
The other fifty percent (50%) (or, if the Director timely files an Election Form, the percentage not deliverable as provided in Section 5(a)) of the Restricted Stock Units granted hereunder will be converted into shares of Stock and delivered to the Director as soon as practicable following the Grant Date (but in no event later than 60 days following the Grant Date). |
(c) |
The Director may timely file an Election Form to increase the percentage of Restricted Stock Units granted hereunder that are deliverable as provided in Section 5(a) from fifty percent (50%) to any whole percentage greater than fifty percent (50%) and less than or equal to one hundred percent (100%). |
(d) |
For purposes of determining the number of shares of Stock deliverable to the Director under this Section 5, the conversion from Units to Stock will be one Unit for one share of Stock. |
(e) |
Notwithstanding any elections made pursuant to this Section 5, if the Director dies while serving on the Board of Directors, then all outstanding Units shall be immediately converted into shares of Stock and delivered to the Directors estate or beneficiary (but in no event later than 60 days following such death). |
6. TRANSFERABLE ONLY UPON DEATH
This Restricted Stock Unit grant shall not be assignable or transferable by the Director except by will or the laws of descent and distribution.
7. TAX WITHHOLDING
Except as otherwise required by law, the Corporation will not withhold any taxes at the time of vesting or distribution in accordance with Section 5. The Director is responsible for the payment of any applicable taxes.
8. CHANGE IN CONTROL
In the event of a Change in Control that is a change in the ownership or effective control of the Corporation or a change in the ownership of a substantial portion of the assets of the Corporation (in each case, within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended), all outstanding Units shall convert to shares of Stock. Such shares will be distributed no later than 60 days following the date of such Change in Control.
9. AMENDMENT AND TERMINATION OF PLAN OR AWARDS
As provided in Section 7 of the Plan, subject to certain limitations contained within Section 7, the Board of Directors may at any time amend, suspend or discontinue the Plan and the Committee may at any time alter or amend all Award Agreements under the Plan. Notwithstanding Section 7 of the Plan, no such amendment, suspension or discontinuance of the Plan or alteration or amendment of this Award Agreement shall accelerate any distribution under the Plan or, except with the Directors express written consent, adversely affect any Restricted Stock Unit granted under this Award Agreement; provided, however, that the Board of Directors or the Committee may amend the Plan or this Award Agreement to the extent it deems appropriate to cause this Agreement or the Units hereunder to comply with Section 409A of the Code (Section 409A) (including the distribution requirements thereunder) or be exempt from Section 409A or the tax penalty under Section 409A(a)(1)(B). If the Plan and the Award Agreement are terminated in a manner consistent with the requirements of Treas. Reg. § 1.409A-3(j)(4)(ix), the Board of Directors may, in its sole discretion, accelerate the conversion of Units to shares of Stock and immediately distribute such shares of Stock to the Director.
10. EXECUTION OF AWARD AGREEMENT
No Restricted Stock Unit granted under this Award Agreement is distributable nor is this Award Agreement enforceable until this Award Agreement has been fully executed by the Corporation and the Director. By executing this Award Agreement, the Director shall be deemed to have accepted and consented to any action taken under the Plan by the Committee, the Board of Directors or their delegates.
11. MISCELLANEOUS
(a) |
Nothing contained in the Award Agreement confers on the Director the rights of a shareholder with respect to this Restricted Stock Unit award during the applicable Dividend Equivalent Period and before the Director becomes the holder of record of the shares of Stock payable. Except as provided in Section 9 of the Plan, no adjustment will be made for dividends or other rights, and grants of dividend equivalents pursuant to Section 4 will not be considered to be a grant of any other shareholder right. |
(b) |
For purposes of this Award Agreement, the Director will be considered to be in the service of the Corporation during an approved leave of absence unless otherwise provided in an agreement between the Director and the Corporation. |
(c) |
Nothing contained in this Award Agreement or in any Restricted Stock Unit granted hereunder shall confer upon any Director any right of continued service by the Corporation, expressed or implied, nor limit in any way the right of the Corporation to terminate the Directors service on the Board of Directors at any time. |
(d) |
Except as provided under Section 6 herein, neither these Units nor any of the rights or obligations hereunder shall be assigned or delegated by either party hereto. |
(e) |
Capitalized terms used but not defined in this Award Agreement shall have the meanings assigned to such terms in the Plan. |
(f) |
To the extent there is a conflict between the terms of the Plan and this Award Agreement, the terms of the Plan shall govern. |
12. NOTICES
Notices and all other communications provided for in this Award Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or when mailed by overnight mail courier service, postage prepaid, addressed as follows:
If to the Director, to the most recent address on file with the Corporation.
If to the Corporation, to:
Martin Marietta Materials, Inc.
2710 Wycliff Road
Raleigh, NC 27607
Fax: (919) 783-4535
Attn: Corporate Secretary
or to such other address or such other person as the Director or the Corporation shall designate in writing in accordance with this Section 12, except that notices regarding changes in notices shall be effective only upon receipt.
13. GOVERNING LAW
This Award Agreement shall be governed by the laws of the State of North Carolina.
IN WITNESS WHEREOF, the Corporation has caused this Award Agreement to be executed and the Director has hereunto set his hand as of the day and year first above written.
MARTIN MARIETTA MATERIALS, INC. |
||
By: |
|
|
Roselyn Bar |
||
Executive Vice President, General Counsel and Corporate Secretary |
||
DIRECTOR |
||
By: |
|
|
(Directors Signature) |
Exhibit 13.01
STATEMENT OF FINANCIAL RESPONSIBILITY AND MANAGEMENTS REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Managements Statement of Responsibility
The management of Martin Marietta Materials, Inc. (the Company or Martin Marietta) is responsible for the consolidated financial statements, the related financial information contained in this 2018 Annual Report and the establishment and maintenance of adequate internal control over financial reporting. The consolidated balance sheets for Martin Marietta, at December 31, 2018 and 2017, and the related consolidated statements of earnings, comprehensive earnings, total equity and cash flows for each of the three years in the period ended December 31, 2018, include amounts based on estimates and judgments and have been prepared in accordance with accounting principles generally accepted in the United States applied on a consistent basis.
A system of internal control over financial reporting is designed to provide reasonable assurance, in a cost-effective manner, that assets are safeguarded, transactions are executed and recorded in accordance with managements authorization, accountability for assets is maintained and financial statements are prepared and presented fairly in accordance with accounting principles generally accepted in the United States. Internal control systems over financial reporting have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company operates in an environment that establishes an appropriate system of internal control over financial reporting and ensures that the system is maintained, assessed and monitored on a periodic basis. This internal control system includes examinations by internal audit staff and oversight by the Audit Committee of the Board of Directors.
The Companys management recognizes its responsibility to foster a strong ethical climate. Management has issued written policy statements that document the Companys business code of ethics. The importance of ethical behavior is regularly communicated to all employees through the distribution of the Code of Ethical Business Conduct booklet and through ongoing education and review programs designed to create a strong commitment to ethical business practices.
The Audit Committee of the Board of Directors, which consists of four independent, nonemployee directors, meets periodically and separately with management, the independent auditors and the internal auditors to review the activities of each. The Audit Committee meets standards established by the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) as they relate to the composition and practices of audit committees.
Managements Report on Internal Control over Financial Reporting
The management of Martin Marietta is responsible for establishing and maintaining adequate internal control over financial reporting. Management assessed the effectiveness of the Companys internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on managements assessment under the 2013 framework, management concluded that the Companys internal control over financial reporting was effective as of December 31, 2018.
Management has excluded certain elements of the internal control over financial reporting of Bluegrass Materials Company (Bluegrass) from its assessment of the Companys internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Subsequent to the acquisition, certain elements of Bluegrass internal control over financial reporting and related processes were integrated into the Companys existing systems and internal control over financial reporting. Those controls that were not integrated have been excluded from managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. The excluded elements represent controls over accounts of less than 1% of consolidated assets and 4% of consolidated total revenues as of and for the year ended December 31, 2018.
The consolidated financial statements of the Company as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, and the effectiveness of the Companys internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report appears on the following page.
|
|
|||
C. Howard Nye, |
James A. J. Nickolas, |
|||
Chairman, President and Chief Executive Officer |
Senior Vice President and Chief Financial Officer | |||
February 25, 2019 |
Martin Marietta | Page 7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Martin Marietta Materials, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Martin Marietta Materials, Inc. and its subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of earnings, comprehensive earnings, total equity, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and schedule of valuation and qualifying accounts for each of the three years in the period ended December 31, 2018 appearing under Item 15(a)(2) (collectively referred to as the consolidated financial statements). We also have audited the Companys internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Companys management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Companys consolidated financial statements and on the Companys internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Managements Report on Internal Control over Financial Reporting, management has excluded certain elements of the internal control over financial reporting of Bluegrass Materials Company from its assessment of the Companys internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Subsequent to the acquisition, certain elements of Bluegrass Materials Companys internal control over financial reporting and related processes were integrated into the Companys existing systems and internal control over financial reporting. Those controls that were not integrated have been excluded from managements assessment of the effectiveness of internal control over financial reporting as of December 31, 2018. We have also excluded these elements of the internal control over financial reporting of Bluegrass Materials Company from our audit of the Companys internal control over financial reporting. The excluded elements represent controls over less than 1% of consolidated assets and 4% of the consolidated total revenues.
Martin Marietta | Page 8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Definition and Limitations of Internal Control over Financial Reporting
A companys 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 companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP | ||
We have served as the Companys auditor since 2016. |
Raleigh, North Carolina
February 25, 2019
Martin Marietta | Page 9
CONSOLIDATED STATEMENTS OF EARNINGS for years ended December 31
|
|
(add 000, except per share) |
2018 |
2017 | 2016 | |||||||||||||
Products and services revenues |
$ | 3,980,351 | $ | 3,723,478 | $ | 3,578,650 | ||||||||||
Freight revenues |
263,914 | 242,116 | 240,099 | |||||||||||||
Total revenues |
4,244,265 | 3,965,594 | 3,818,749 | |||||||||||||
Cost of revenues products and services |
3,009,810 | 2,749,488 | 2,665,029 | |||||||||||||
Cost of revenues freight |
267,878 | 244,166 | 241,982 | |||||||||||||
Total cost of revenues |
3,277,688 | 2,993,654 | 2,907,011 | |||||||||||||
Gross Profit |
966,577 | 971,940 | 911,738 | |||||||||||||
Selling, general and administrative expenses |
280,554 | 262,128 | 241,606 | |||||||||||||
Acquisition-related expenses, net |
13,479 | 8,638 | 909 | |||||||||||||
Other operating (income) and expenses, net |
(18,193 | ) | 793 | (8,043 | ) | |||||||||||
Earnings from Operations |
690,737 | 700,381 | 677,266 | |||||||||||||
Interest expense |
137,069 | 91,487 | 81,677 | |||||||||||||
Other nonoperating income, net |
(22,413 | ) | (10,034 | ) | (11,439 | ) | ||||||||||
Earnings before income tax expense (benefit) |
576,081 | 618,928 | 607,028 | |||||||||||||
Income tax expense (benefit) |
105,705 | (94,457 | ) | 181,584 | ||||||||||||
Consolidated net earnings |
470,376 | 713,385 | 425,444 | |||||||||||||
Less: Net earnings attributable to noncontrolling interests |
378 | 43 | 58 | |||||||||||||
Net Earnings Attributable to Martin Marietta |
$ | 469,998 | $ | 713,342 | $ | 425,386 | ||||||||||
Net Earnings Attributable to Martin Marietta Per Common Share (see Note A) |
||||||||||||||||
Basic attributable to common shareholders |
$ | 7.46 | $ | 11.30 | $ | 6.66 | ||||||||||
Diluted attributable to common shareholders |
$ | 7.43 | $ | 11.25 | $ | 6.63 | ||||||||||
Weighted-Average Common Shares Outstanding |
||||||||||||||||
Basic |
62,895 | 62,932 | 63,610 | |||||||||||||
Diluted |
63,147 | 63,217 | 63,861 |
The notes on pages 15 through 41 are an integral part of these financial statements.
Martin Marietta | Page 10
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS for years ended December 31
|
|
(add 000) |
2018 |
2017 | 2016 | |||||||||||||
Consolidated Net Earnings |
$ | 470,376 | $ | 713,385 | $ | 425,444 | ||||||||||
Other comprehensive (loss) earnings, net of tax: |
||||||||||||||||
Defined benefit pension and postretirement plans: |
||||||||||||||||
Net loss arising during period, net of tax of $(7,640), $(2,625) and $(19,734), respectively |
(22,877 | ) | (8,052 | ) | (31,620 | ) | ||||||||||
Amortization of prior service credit, net of tax of $(493), $(547) and $(617), respectively |
(1,478 | ) | (883 | ) | (992 | ) | ||||||||||
Amortization of actuarial loss, net of tax of $3,156, $5,271 and $4,437, respectively |
9,463 | 8,503 | 7,138 | |||||||||||||
Amount recognized in net periodic pension cost due to settlement, net of tax of $734, $8 and $44, respectively |
2,202 | 13 | 71 | |||||||||||||
Amount recognized in net periodic pension cost due to special plan termination benefits, net of tax of $0, $0 and $293, respectively |
| | 471 | |||||||||||||
(12,690 | ) | (419 | ) | (24,932 | ) | |||||||||||
Foreign currency translation (loss) gain |
(2,052 | ) | 1,140 | (898 | ) | |||||||||||
Amortization of terminated value of forward starting interest rate swap agreements into interest expense, net of tax of $178, $571 and $541, respectively |
280 | 872 | 826 | |||||||||||||
(14,462 | ) | 1,593 | (25,004 | ) | ||||||||||||
Consolidated comprehensive earnings |
455,914 | 714,978 | 400,440 | |||||||||||||
Less: Comprehensive earnings attributable to noncontrolling interests |
391 | 53 | 119 | |||||||||||||
Comprehensive Earnings Attributable to Martin Marietta |
$ | 455,523 | $ | 714,925 | $ | 400,321 |
The notes on pages 15 through 41 are an integral part of these financial statements.
Martin Marietta | Page 11
CONSOLIDATED BALANCE SHEETS at December 31
|
|
Assets (add 000) |
2018 |
2017 | ||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 44,892 | $ | 1,446,364 | ||||||
Accounts receivable, net |
523,276 | 487,240 | ||||||||
Inventories, net |
663,035 | 600,591 | ||||||||
Other current assets |
134,613 | 96,965 | ||||||||
Total Current Assets |
1,365,816 | 2,631,160 | ||||||||
Property, plant and equipment, net |
5,157,229 | 3,592,813 | ||||||||
Goodwill |
2,399,118 | 2,160,290 | ||||||||
Other intangibles, net |
501,282 | 506,349 | ||||||||
Other noncurrent liabilities |
127,974 | 101,899 | ||||||||
Total Assets |
$ | 9,551,419 | $ | 8,992,511 | ||||||
Liabilities and Equity (add 000, except parenthetical share data) |
||||||||||
Current Liabilities: |
||||||||||
Accounts payable |
$ | 210,808 | $ | 183,638 | ||||||
Accrued salaries, benefits and payroll taxes |
51,434 | 44,255 | ||||||||
Pension and postretirement benefits |
9,942 | 13,652 | ||||||||
Accrued insurance and other taxes |
63,543 | 64,958 | ||||||||
Current maturities of long-term debt |
390,042 | 299,909 | ||||||||
Other current liabilities |
60,981 | 87,804 | ||||||||
Total Current Liabilities |
786,750 | 694,216 | ||||||||
Long-term debt |
2,730,439 | 2,727,294 | ||||||||
Pension, postretirement and postemployment benefits |
134,469 | 244,043 | ||||||||
Deferred income taxes, net |
705,564 | 410,723 | ||||||||
Other noncurrent liabilities |
244,785 | 233,758 | ||||||||
Total Liabilities |
4,602,007 | 4,310,034 | ||||||||
Equity: |
||||||||||
Common stock ($0.01 par value; 100,000,000 shares authorized; 62,515,000 and 62,873,000 shares outstanding at December 31, 2018 and 2017, respectively) |
624 | 628 | ||||||||
Preferred stock ($0.01 par value; 10,000,000 shares authorized; no shares outstanding) |
| | ||||||||
Additional paid-in capital |
3,396,059 | 3,368,007 | ||||||||
Accumulated other comprehensive loss |
(143,579 | ) | (129,104 | ) | ||||||
Retained earnings |
1,693,259 | 1,440,069 | ||||||||
Total Shareholders Equity |
4,946,363 | 4,679,600 | ||||||||
Noncontrolling interests |
3,049 | 2,877 | ||||||||
Total Equity |
4,949,412 | 4,682,477 | ||||||||
Total Liabilities and Equity |
$ | 9,551,419 | $ | 8,992,511 |
The notes on pages 15 through 41 are an integral part of these financial statements.
Martin Marietta | Page 12
CONSOLIDATED STATEMENTS OF CASH FLOWS for years ended December 31
|
|
(add 000) |
2018 |
2017 | 2016 | |||||||||||||
Cash Flows from Operating Activities: |
||||||||||||||||
Consolidated net earnings |
$ | 470,376 | $ | 713,385 | $ | 425,444 | ||||||||||
Adjustments to reconcile consolidated net earnings to net cash provided by operating activities: |
||||||||||||||||
Depreciation, depletion and amortization |
344,033 | 297,162 | 285,253 | |||||||||||||
Stock-based compensation expense |
29,253 | 30,460 | 20,481 | |||||||||||||
(Gain) Loss on divestitures and sales of assets |
(39,260 | ) | (19,366 | ) | 410 | |||||||||||
Deferred income taxes, net |
85,063 | (239,056 | ) | 67,050 | ||||||||||||
Noncash portion of asset and portfolio rationalization charge |
16,970 | | | |||||||||||||
Other items, net |
(8,891 | ) | (13,437 | ) | (18,023 | ) | ||||||||||
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures: |
||||||||||||||||
Accounts receivable, net |
(10,617 | ) | (29,329 | ) | (25,072 | ) | ||||||||||
Inventories, net |
(21,984 | ) | (78,966 | ) | (47,381 | ) | ||||||||||
Accounts payable |
20,148 | (17,874 | ) | (8,116 | ) | |||||||||||
Other assets and liabilities, net |
(179,943 | ) | 14,619 | (11,106 | ) | |||||||||||
Net Cash Provided by Operating Activities |
705,148 | 657,598 | 688,940 | |||||||||||||
Cash Flows from Investing Activities: |
||||||||||||||||
Additions to property, plant and equipment |
(375,954 | ) | (410,325 | ) | (387,267 | ) | ||||||||||
Acquisitions, net of cash acquired |
(1,642,137 | ) | (12,095 | ) | (174,522 | ) | ||||||||||
Proceeds from divestitures and sales of assets |
69,114 | 35,941 | 6,476 | |||||||||||||
Payment of railcar construction advances |
(79,351 | ) | (43,594 | ) | (82,910 | ) | ||||||||||
Reimbursement of railcar construction advances |
79,351 | 43,594 | 82,910 | |||||||||||||
Investments in life insurance contracts, net |
771 | 280 | 293 | |||||||||||||
Net Cash Used for Investing Activities |
(1,948,206 | ) | (386,199 | ) | (555,020 | ) | ||||||||||
Cash Flows from Financing Activities: |
||||||||||||||||
Borrowings of long-term debt |
1,000,000 | 2,408,830 | 560,000 | |||||||||||||
Repayments of long-term debt |
(910,052 | ) | (1,065,048 | ) | (449,306 | ) | ||||||||||
Payments of deferred acquisition consideration |
(6,707 | ) | (2,774 | ) | | |||||||||||
Debt issuance costs |
(3,892 | ) | (2,204 | ) | (2,300 | ) | ||||||||||
Change in bank overdraft |
| | (10,235 | ) | ||||||||||||
Payments on capital lease obligations |
(3,486 | ) | (3,543 | ) | (3,364 | ) | ||||||||||
Dividends paid |
(116,436 | ) | (108,852 | ) | (105,036 | ) | ||||||||||
Purchase of the noncontrolling interest in the existing joint venture |
(12,800 | ) | | | ||||||||||||
Distributions to owners of noncontrolling interest |
| | (400 | ) | ||||||||||||
Contributions by noncontrolling interest to joint venture |
| 212 | 44 | |||||||||||||
Repurchase of common stock |
(100,377 | ) | (99,999 | ) | (259,228 | ) | ||||||||||
Proceeds from exercise of stock options |
7,201 | 10,110 | 27,257 | |||||||||||||
Shares withheld for employees income tax obligations |
(11,865 | ) | (11,805 | ) | (9,723 | ) | ||||||||||
Net Cash (Used for) Provided by Financing Activities |
(158,414 | ) | 1,124,927 | (252,291 | ) | |||||||||||
Net (Decrease) Increase in Cash and Cash Equivalents |
(1,401,472 | ) | 1,396,326 | (118,371 | ) | |||||||||||
Cash and Cash Equivalents, beginning of year |
1,446,364 | 50,038 | 168,409 | |||||||||||||
Cash and Cash Equivalents, end of year |
$ | 44,892 | $ | 1,446,364 | $ | 50,038 |
The notes on pages 15 through 41 are an integral part of these financial statements.
Martin Marietta | Page 13
CONSOLIDATED STATEMENTS OF TOTAL EQUITY
|
|
(add 000, except per share data) |
Shares of
Common Stock |
Common
Stock |
Additional
Paid-In Capital |
Accumulated
Other Comprehensive (Loss) Earnings |
Retained
Earnings |
Total
Shareholders Equity |
Non-
controlling Interests |
Total Equity |
||||||||||||||||||||||||
Balance at December 31, 2015 |
64,479 | $ | 643 | $ | 3,287,827 | $ | (105,622) | $ | 874,436 | $ | 4,057,284 | $ | 2,893 | $ | 4,060,177 | |||||||||||||||||
Consolidated net earnings |
| | | | 425,386 | 425,386 | 58 | 425,444 | ||||||||||||||||||||||||
Other comprehensive (loss) earnings |
| | | (25,065) | | (25,065) | 61 | (25,004) | ||||||||||||||||||||||||
Dividends declared ($1.64 per common share) |
| | | | (105,036 | ) | (105,036) | | (105,036) | |||||||||||||||||||||||
Issuances of common stock for stock award plans |
285 | 3 | 26,109 | | | 26,112 | | 26,112 | ||||||||||||||||||||||||
Repurchases of common stock |
(1,588 | ) | (16 | ) | | | (259,212 | ) | (259,228) | | (259,228) | |||||||||||||||||||||
Stock-based compensation expense |
| | 20,481 | | | 20,481 | | 20,481 | ||||||||||||||||||||||||
Distributions to owners of noncontrolling interest |
| | | | | | (400) | (400) | ||||||||||||||||||||||||
Contribution from owners of noncontrolling interest |
| | 44 | | | 44 | | 44 | ||||||||||||||||||||||||
Balance at December 31, 2016 |
63,176 | 630 | 3,334,461 | (130,687) | 935,574 | 4,139,978 | 2,612 | 4,142,590 | ||||||||||||||||||||||||
Consolidated net earnings |
| | | | 713,342 | 713,342 | 43 | 713,385 | ||||||||||||||||||||||||
Other comprehensive earnings |
| | | 1,583 | | 1,583 | 10 | 1,593 | ||||||||||||||||||||||||
Dividends declared ($1.72 per common share) |
| | | | (108,852 | ) | (108,852) | | (108,852 | ) | ||||||||||||||||||||||
Issuances of common stock for stock award plans |
155 | 2 | 14,891 | | | 14,893 | | 14,893 | ||||||||||||||||||||||||
Shares withheld for employees income tax obligations |
| | (11,805 | ) | | | (11,805) | | (11,805 | ) | ||||||||||||||||||||||
Repurchases of common stock |
(458 | ) | (4 | ) | | | (99,995 | ) | (99,999) | | (99,999 | ) | ||||||||||||||||||||
Stock-based compensation expense |
| | 30,460 | | | 30,460 | | 30,460 | ||||||||||||||||||||||||
Contribution from owners of noncontrolling interest |
| | | | | | 212 | 212 | ||||||||||||||||||||||||
Balance at December 31, 2017 |
62,873 | 628 | 3,368,007 | (129,104) | 1,440,069 | 4,679,600 | 2,877 | 4,682,477 | ||||||||||||||||||||||||
Consolidated net earnings |
| | | | 469,998 | 469,998 | 378 | 470,376 | ||||||||||||||||||||||||
Other comprehensive (loss) earnings |
| | | (14,475) | | (14,475) | 13 | (14,462 | ) | |||||||||||||||||||||||
Dividends declared ($1.84 per common share) |
| | | | (116,436 | ) | (116,436) | | (116,436 | ) | ||||||||||||||||||||||
Issuances of common stock for stock award plans |
163 | 1 | 14,244 | | | 14,245 | | 14,245 | ||||||||||||||||||||||||
Shares withheld for employees income tax obligations |
| | (11,865 | ) | | | (11,865) | | (11,865 | ) | ||||||||||||||||||||||
Repurchases of common stock |
(521 | ) | (5) | | | (100,372 | ) | (100,377) | | (100,377 | ) | |||||||||||||||||||||
Stock-based compensation expense |
| | 29,253 | | | 29,253 | | 29,253 | ||||||||||||||||||||||||
Noncontrolling interest acquired in business combination |
| | | | | | 9,001 | 9,001 | ||||||||||||||||||||||||
Purchase of the noncontrolling interest in the existing joint venture |
| | (3,580 | ) | | | (3,580) | (9,220) | (12,800 | ) | ||||||||||||||||||||||
Balance at December 31, 2018 |
62,515 | $ | 624 | $ | 3,396,059 | $ | (143,579) | $ | 1,693,259 | $ | 4,946,363 | $ | 3,049 | $ | 4,949,412 |
The notes on pages 15 through 41 are an integral part of these financial statements.
Martin Marietta | Page 14
NOTES TO FINANCIAL STATEMENTS
Note A: Accounting Policies
Organization. Martin Marietta (the Company) is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of more than 300 quarries, mines and distribution yards to its customers in 31 states, Canada, the Bahamas and the Caribbean Islands. In the western United States, Martin Marietta also provides cement and downstream products, namely, ready mixed concrete, asphalt and paving services, in markets where the Company also has a leading aggregates position. Specifically, the Company has two cement plants and four cement distribution facilities in Texas, and 140 ready mixed concrete plants and nine asphalt plants in Texas, Colorado, Louisiana and Arkansas. Paving services are exclusively in Colorado. The Companys heavy-side building materials are used in infrastructure, nonresidential and residential construction projects. Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast. The aggregates, cement, ready mixed concrete and asphalt and paving product lines are reported collectively as the Building Materials business. As of December 31, 2018, the Building Materials business contains the following reportable segments: Mid-America Group, Southeast Group and West Group. The Mid-America Group operates in Indiana, Iowa, northern Kansas, Kentucky, Maryland, Minnesota, Missouri, eastern Nebraska, North Carolina, Ohio, Pennsylvania, South Carolina, Virginia, Washington and West Virginia. The Southeast Group has operations in Alabama, Florida, Georgia, Tennessee, Nova Scotia and the Bahamas. The West Group operates in Arkansas, Colorado, southern Kansas, Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah and Wyoming. In addition to these operations, the Company sells to customers in New York, Delaware, New Mexico and Mississippi. The following states accounted for 72% of the Building Materials business 2018 total revenues: Texas, Colorado, North Carolina, Georgia and Iowa.
The Company also operates a Magnesia Specialties business, which produces magnesia-based chemical products used in industrial, agricultural and environmental applications, and dolomitic lime sold primarily to customers in the steel and mining industries. Magnesia Specialties production facilities are located in Ohio and Michigan, and products are shipped to customers worldwide.
Use of Estimates. The preparation of the Companys consolidated financial statements in conformity with accounting principles generally accepted in the United States
(U.S. GAAP) requires management to make certain estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets and other long-lived assets and assumptions used in the calculation of income tax expense (benefit), retirement and other postemployment benefits, stock-based compensation, the allocation of the purchase price to the fair values of assets acquired and liabilities assumed as part of business combinations and revenue recognition for service contracts. These estimates and assumptions are based on managements judgment. Management evaluates estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and adjusts such estimates and assumptions when facts and circumstances dictate. Changes in credit, equity and energy markets and changes in construction activity increase the uncertainty inherent in certain estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from estimates. Changes in estimates, including those resulting from continuing changes in the economic environment, are reflected in the consolidated financial statements for the period in which the change in estimate occurs.
Basis of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Partially-owned affiliates are either consolidated or accounted for at cost or as equity investments, depending on the level of ownership interest or the Companys ability to exercise control over the affiliates operations. Intercompany balances and transactions between subsidiaries have been eliminated in consolidation.
Revenue Recognition. Total revenues include sales of materials and services provided to customers, net of discounts or allowances, if any, and include freight and delivery costs billed to customers. Revenues for product sales are recognized when control of the promised good is transferred to unaffiliated customers, typically when finished products are shipped. Revenues derived from the paving business are recognized using the percentage-of-completion method under the cost-to-cost approach. Under the cost-to-cost approach, recognized contract revenue is determined by multiplying the total estimated contract revenue by the estimated
Martin Marietta | Page 15
NOTES TO FINANCIAL STATEMENTS (continued)
percentage of completion. Contract costs are recognized as incurred. The percentage of completion is determined on a contract-by-contract basis using project costs incurred to date as a percentage of total estimated project costs. The Company believes the cost-to-cost approach is appropriate, as the use of asphalt in a paving contract is relatively consistent with the performance of the related paving services. Paving contracts, notably with governmental entities, may contain performance bonuses based on quality specifications. Given the uncertainty of meeting the criteria until the performance obligation is completed, performance bonuses are recognized as revenues when and if determined to be achieved. Performance bonuses were not material to the Companys consolidated results of operations for the years ended December 31, 2018, 2017 and 2016. Freight revenues reflect delivery arranged by the Company using a third party on behalf of the customer and are recognized consistently with the timing of the product revenues.
Freight and Delivery Costs. Freight and delivery costs represent pass-through transportation costs incurred and paid by the Company to third-party carriers to deliver products to customers. These costs are then billed to the customers.
Cash and Cash Equivalents. Cash equivalents are comprised of highly-liquid instruments with original maturities of three months or less from the date of purchase. The Company manages its cash and cash equivalents to ensure short-term operating cash needs are met and excess funds are managed efficiently. When operating cash is not sufficient to meet current needs, the Company borrows money under its credit facilities. The Company utilizes excess cash to either pay down credit facility borrowings or invest in money market funds, money market demand deposit accounts or offshore time deposit accounts. Money market demand deposits and offshore time deposit accounts are exposed to bank solvency risk.
Accounts Receivable. Accounts receivable are stated at cost. The Company does not typically charge interest on customer accounts receivable. The Company records an allowance for doubtful accounts, which includes a provision for probable losses based on historical write offs and a specific reserve for accounts deemed at risk. The Company writes off accounts receivable as bad debt expense when it becomes probable, based upon customer facts and circumstances, that such amounts will not be collected.
Inventories Valuation. Inventories are stated at the lower of cost or net realizable value. Costs for finished products and in process inventories are determined by the first-in, first-out method. Carrying value for expendable parts and supplies are determined by the weighted-average cost method. The Company records an allowance for finished product inventories based on an analysis of inventory on hand in excess of historical sales for a twelve-month or five-year average period and future demand. The Company also establishes an allowance for expendable parts over five years old and supplies over one year old.
Post-production stripping costs, which represent costs of removing overburden and waste materials to access mineral deposits, are a component of inventory production costs and recognized as incurred.
Property, Plant and Equipment. Property, plant and equipment are stated at cost.
The estimated service lives for property, plant and equipment are as follows:
Class of Assets |
Range of Service Lives |
|
Buildings |
5 to 20 years | |
Machinery & Equipment |
2 to 20 years | |
Land Improvements |
5 to 60 years |
The Company begins capitalizing quarry development costs at a point when reserves are determined to be proven or probable, economically mineable and when demand supports investment in the market. Capitalization of these costs ceases when production commences. Capitalized quarry development costs are classified as land improvements and depreciated over the life of the reserves.
The Company reviews relevant facts and circumstances to determine whether to capitalize or expense pre-production stripping costs when additional pits are developed at an existing quarry. If the additional pit operates in a separate and distinct area of the quarry, these costs are capitalized as quarry development costs and depreciated over the life of the uncovered reserves. Additionally, a separate asset retirement obligation is created for additional pits when the liability is incurred. Once a pit enters the production phase, all post-production stripping costs are charged to inventory production costs as incurred.
Mineral reserves and mineral interests acquired in connection with a business combination are valued using an income approach over the life of the reserves.
Martin Marietta | Page 16
NOTES TO FINANCIAL STATEMENTS (continued)
Depreciation is computed based on estimated service lives, principally using the straight-line method. Depletion of mineral reserves is calculated based on proven and probable reserves using the units-of-production method on a quarry-by-quarry basis.
Property, plant and equipment are reviewed for impairment whenever facts and circumstances indicate that the carrying amount of an asset group may not be recoverable. An impairment loss is recognized if expected future undiscounted cash flows over the estimated remaining service life of the related asset are less than the assets carrying value.
Repair and Maintenance Costs. Repair and maintenance costs that do not substantially extend the life of the Companys plant and equipment are expensed as incurred.
Goodwill and Intangible Assets. Goodwill represents the excess purchase price paid for acquired businesses over the estimated fair value of identifiable assets and liabilities. Other intangibles represent amounts assigned principally to contractual agreements and are amortized ratably over periods based on related contractual terms. If an other intangible asset is deemed to have an indefinite life, it is not amortized.
The Companys reporting units, which represent the level at which goodwill is tested for impairment, are based on the operating segments of the Building Materials business. Goodwill is assigned to the respective reporting unit(s) based on the location of acquisitions at the time of consummation. Goodwill is tested for impairment by comparing the reporting units fair value to its carrying value, which represents Step 1 of a two-step approach. However, prior to Step 1, the Company may perform an optional qualitative assessment and evaluate macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and other business or reporting unit-specific events. If the Company concludes it is more-likely-than-not (i.e., a likelihood of more than 50%) that a reporting units fair value is higher than its carrying value, the Company does not perform any further goodwill impairment testing for that reporting unit. Otherwise, the Company proceeds to Step 1 of its goodwill impairment analysis. The Company may bypass the qualitative assessment for any reporting unit in any period and proceed directly with the quantitative calculation in Step 1. If the reporting units fair value exceeds its carrying value, no further calculation is necessary. A reporting unit with a carrying value in excess of its fair value constitutes a Step 1 failure and will lead to an impairment charge.
The carrying values of goodwill and other indefinite-lived intangible assets are reviewed annually, as of October 1, for impairment. An interim review is performed between annual tests if facts and circumstances indicate potential impairment. The carrying value of other amortizable intangibles is reviewed if facts and circumstances indicate potential impairment. If a review indicates the carrying value is impaired, a charge is recorded.
Retirement Plans and Postretirement Benefits. The Company sponsors defined benefit retirement plans and also provides other postretirement benefits. The Company recognizes the funded status, defined as the difference between the fair value of plan assets and the benefit obligation, of its pension plans and other postretirement benefits as an asset or liability on the consolidated balance sheets. Actuarial gains or losses that arise during the year are not recognized as net periodic benefit cost in the same year, but rather are recognized as a component of accumulated other comprehensive earnings or loss. Those amounts are amortized over the participants average remaining service period and recognized as a component of net periodic benefit cost. The amount amortized is determined using a corridor approach and represents the excess over 10% of the greater of the projected benefit obligation or pension plan assets.
Stock-Based Compensation. The Company has stock-based compensation plans for employees and its Board of Directors. The Company recognizes all forms of stock-based awards that vest as compensation expense. The compensation expense is the fair value of the awards at the measurement date and is recognized over the requisite service period.
The fair value of restricted stock awards, incentive compensation stock awards and Board of Directors fees paid in the form of common stock are based on the closing price of the Companys common stock on the awards respective grant dates. The fair value of performance stock awards is determined by a Monte Carlo simulation methodology.
In 2018, 2017 and 2016, the Company did not issue any stock options. For stock options issued prior to 2016, the Company used the accelerated expense recognition method. The accelerated recognition method requires stock options that vest ratably to be divided into tranches. The expense for each tranche is allocated to its particular vesting period.
Martin Marietta | Page 17
NOTES TO FINANCIAL STATEMENTS (continued)
Environmental Matters. The Company records a liability for an asset retirement obligation at fair value in the period in which it is incurred. The asset retirement obligation is recorded at the acquisition date of a long-lived tangible asset if the fair value can be reasonably estimated. A corresponding amount is capitalized as part of the assets carrying amount. The fair value is affected by managements assumptions regarding the scope of the work required, inflation rates and quarry closure dates.
Further, the Company records an accrual for other environmental remediation liabilities in the period in which it is probable that a liability has been incurred and the appropriate amounts can be estimated reasonably. Such accruals are adjusted as further information develops or circumstances change. Generally, these costs are not discounted to their present value or offset for potential insurance or other claims or potential gains from future alternative uses for a site.
Income Taxes. Deferred income taxes, net, on the consolidated balance sheets reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, net of valuation allowances. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense or benefit in the period of enactment.
Uncertain Tax Positions. The Company recognizes a tax benefit when it is more-likely-than-not, based on the technical merits, that a tax position would be sustained upon examination by a taxing authority. The amount to be recognized is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Companys unrecognized tax benefits are recorded in other liabilities on the consolidated balance sheets or as an offset to the deferred tax asset for tax carryforwards where available.
The Company records interest accrued in relation to unrecognized tax benefits as income tax expense. Penalties, if incurred, are recorded as operating expenses in the consolidated statements of earnings.
Sales Taxes. Sales taxes collected from customers are recorded as liabilities until remitted to taxing authorities and therefore are not reflected in the consolidated statements of earnings.
Start-Up Costs. Noncapital start-up costs for new facilities and products are charged to operations as incurred.
Warranties. The Companys construction contracts usually contain warranty provisions covering defects in materials, design or workmanship that generally run from nine months to one year after project completion. Due to the nature of its projects, including contract owner inspections of the work both during construction and prior to acceptance, the Company has not experienced material warranty costs for these short-term warranties and therefore does not believe an accrual for these costs is necessary. The ready mixed concrete product line carries a longer warranty period, for which the Company has accrued an estimate of warranty cost based on experience with the type of work and any known risks relative to the projects. These costs were not material to the Companys consolidated results of operations for the years ended December 31, 2018, 2017 and 2016.
Consolidated Comprehensive Earnings and Accumulated Other Comprehensive Loss. Consolidated comprehensive earnings for the Company consist of consolidated net earnings, adjustments for the funded status of pension and postretirement benefit plans, foreign currency translation adjustments and the amortization of the value of terminated forward starting interest rate swap agreements into interest expense, and are presented in the Companys consolidated statements of comprehensive earnings.
Accumulated other comprehensive loss consists of unrecognized gains and losses related to the funded status of the pension and postretirement benefit plans, foreign currency translation and the unamortized value of terminated forward starting interest rate swap agreements, and is presented on the Companys consolidated balance sheets.
Martin Marietta | Page 18
NOTES TO FINANCIAL STATEMENTS (continued)
The components of the changes in accumulated other comprehensive loss and related cumulative noncurrent deferred tax assets are as follows:
years ended December 31 (add 000)
|
Pension and Postretirement Benefit Plans
|
Foreign Currency
|
Unamortized Value of Terminated Forward Starting Interest Rate Swap
|
Total
|
||||||||||||||
|
||||||||||||||||||
2018
|
||||||||||||||||||
|
||||||||||||||||||
Accumulated other comprehensive loss at beginning of period |
$ | (128,802) | $ | (22 | ) | $ | (280) | $ | (129,104) | |||||||||
|
|
|||||||||||||||||
Other comprehensive loss before reclassifications, net of tax |
(22,890) | (2,052 | ) | | (24,942) | |||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax |
10,187 | | 280 | 10,467 | ||||||||||||||
|
|
|||||||||||||||||
Other comprehensive (loss) earnings, net of tax |
(12,703) | (2,052 | ) | 280 | (14,475) | |||||||||||||
|
|
|||||||||||||||||
Accumulated other comprehensive loss at end of period |
$ | (141,505) | $ | (2,074 | ) | $ | | $ | (143,579) | |||||||||
|
|
|||||||||||||||||
Cumulative noncurrent deferred tax assets at end of period |
$ | 84,207 | $ | | $ | | $ | 84,207 | ||||||||||
|
|
|||||||||||||||||
2017
|
||||||||||||||||||
|
||||||||||||||||||
Accumulated other comprehensive loss at beginning of period |
$ | (128,373) | $ | (1,162 | ) | $ | (1,152) | $ | (130,687) | |||||||||
|
|
|||||||||||||||||
Other comprehensive (loss) earnings before reclassifications, net of tax |
(8,062) | 1,140 | | (6,922) | ||||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax |
7,633 | | 872 | 8,505 | ||||||||||||||
|
|
|||||||||||||||||
Other comprehensive (loss) earnings, net of tax |
(429) | 1,140 | 872 | 1,583 | ||||||||||||||
|
|
|||||||||||||||||
Accumulated other comprehensive loss at end of period |
$ | (128,802) | $ | (22 | ) | $ | (280) | $ | (129,104) | |||||||||
|
|
|||||||||||||||||
Cumulative noncurrent deferred tax assets at end of period |
$ | 79,938 | $ | | $ | 178 | $ | 80,116 | ||||||||||
|
|
|||||||||||||||||
2016
|
||||||||||||||||||
|
||||||||||||||||||
Accumulated other comprehensive loss at beginning of period |
$ | (103,380) | $ | (264 | ) | $ | (1,978) | $ | (105,622) | |||||||||
|
|
|||||||||||||||||
Other comprehensive loss before reclassifications, net of tax |
(31,678) | (898 | ) | | (32,576) | |||||||||||||
Amounts reclassified from accumulated other comprehensive loss, net of tax |
6,685 | | 826 | 7,511 | ||||||||||||||
|
|
|||||||||||||||||
Other comprehensive (loss) earnings, net of tax |
(24,993) | (898 | ) | 826 | (25,065) | |||||||||||||
|
|
|||||||||||||||||
Accumulated other comprehensive loss at end of period |
$ | (128,373) | $ | (1,162 | ) | $ | (1,152) | $ | (130,687) | |||||||||
|
|
|||||||||||||||||
Cumulative noncurrent deferred tax assets at end of period |
$ | 82,044 | $ | | $ | 749 | $ | 82,793 | ||||||||||
|
|
Reclassifications out of accumulated other comprehensive loss are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 |
Affected line items in the consolidated statements of earnings
|
||||||||||
Pension and postretirement benefit plans |
||||||||||||||
Special plan termination benefit |
$ | | $ | | $ | 764 | ||||||||
Settlement charge |
2,936 | 21 | 115 | |||||||||||
Amortization of: |
||||||||||||||
Prior service credit |
(1,971 | ) | (1,430 | ) | (1,609 | ) | ||||||||
Actuarial loss |
12,619 | 13,774 | 11,575 | |||||||||||
13,584 | 12,365 | 10,845 | Other nonoperating income, net | |||||||||||
Tax effect |
(3,397 | ) | (4,732 | ) | (4,160 | ) | Income tax expense (benefit) | |||||||
Total |
$ | 10,187 | $ | 7,633 | $ | 6,685 | ||||||||
Unamortized value of terminated forward starting interest rate swap |
||||||||||||||
Additional interest expense |
$ | 458 | $ | 1,443 | $ | 1,367 | Interest expense | |||||||
Tax effect |
(178 | ) | (571 | ) | (541 | ) | Income tax expense (benefit) | |||||||
Total |
$ | 280 | $ | 872 | $ | 826 |
Martin Marietta | Page 19
NOTES TO FINANCIAL STATEMENTS (continued)
Earnings Per Common Share. The Company computes earnings per share (EPS) pursuant to the two-class method. The two-class method determines EPS for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings. The Company pays nonforfeitable dividend equivalents during the vesting period on its restricted stock awards and incentive stock awards made prior to 2016, which results in these being considered participating securities.
The numerator for basic and diluted earnings per common share is net earnings attributable to Martin Marietta, reduced by dividends and undistributed earnings attributable to the Companys unvested restricted stock awards and incentive stock awards issued prior to 2016. The denominator for basic earnings per common share is the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are computed assuming that the weighted-average number of common shares is increased by the conversion, using the treasury stock method, of awards issued to employees and nonemployee members of the Companys Board of Directors under certain stock-based compensation arrangements if the conversion is dilutive.
The following table reconciles the numerator and denominator for basic and diluted earnings per common share:
years ended December 31 | ||||||||||||
(add 000) | 2018 | 2017 | 2016 | |||||||||
|
||||||||||||
Net earnings attributable to Martin Marietta |
$ | 469,998 | $ | 713,342 | $ | 425,386 | ||||||
Less: Distributed and undistributed earnings attributable to unvested participating securities |
806 | 2,029 | 1,775 | |||||||||
Basic and diluted net earnings attributable to common shareholders attributable to Martin Marietta |
$ | 469,192 | $ | 711,313 | $ | 423,611 | ||||||
Basic weighted-average common shares outstanding |
62,895 | 62,932 | 63,610 | |||||||||
Effect of dilutive employee and director awards |
252 | 285 | 251 | |||||||||
Diluted weighted-average common shares outstanding |
63,147 | 63,217 | 63,861 |
New Accounting Pronouncements
Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which changes the evaluation and accounting for revenue recognition under contracts with customers and enhances financial statement disclosures. The Company implemented ASU 2014-09 using the modified-retrospective approach and applied the guidance only to contracts that were not completed at the date of adoption. The adoption had an immaterial impact on the Companys financial position and results of operations but required new disclosures (see Note B).
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides clarification or additional guidance on certain transactions and its classification on the statement of cash flows on a retrospective basis. In accordance with the adoption of ASU 2016-15, the Company reclassified the net activity related to company-owned life insurance policies to investing activities from operating activities in the consolidated statements of cash flows. The reclassifications reduced net cash provided by operating activities and net cash used for investing activities by $280,000 and $293,000 for the years ended December 31, 2017 and 2016, respectively.
Pending Accounting Pronouncements
Lease Standard
In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard, Accounting Standards Codification 842 Leases (ASC 842), intending to improve financial reporting of leases and to provide more transparency into off-balance sheet leasing obligations. The guidance requires virtually all leases, excluding mineral interest leases, to be recorded as right-of-use assets and lease liabilities on the balance sheet and provides guidance on the recognition of lease expense and income. Effective January 1, 2019, ASC 842 requires the modified-retrospective transition approach, applying the new standard to all leases existing at the date of initial application. An entity may use either 1) ASC 842s effective date or 2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The
Martin Marietta | Page 20
NOTES TO FINANCIAL STATEMENTS (continued)
Company adopted the new standard effective January 1, 2019 and used the effective date as the date of initial application.
The new standard provides a number of practical expedients for transition and policy elections for ongoing accounting. The Company elected the package of practical expedients, which permits the Company to not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient pertaining to the use of hindsight, which resulted in including renewal options in the lease term that were not previously included in historical lease terms under the guidance prior to ASC 842. While the adoption of ASC 842 does not impact the expense over the life of a lease, the inclusion of renewal options with fixed escalation clauses in the lease term may impact the timing of expense recognition. Additionally, the Company elected the practical expedient that allows it not to evaluate land easements that existed or expired before the adoption of ASC 842 and that were not previously accounted for as leases. The standard provides policy election options for recognition exemption for short-term leases and separation of lease and non-lease components. The Company elected the short-term lease recognition exemption and to not separate lease and non-lease components for all underlying asset classes with the exception of railcars and fleet leases.
The Company expects the adoption of ASC 842 to increase its assets and liabilities on its consolidated balance sheet in the range of $475,000,000 to $550,000,000 as of January
1, 2019 and to require additional footnote disclosures pertaining to leasing activities beginning with the quarter ending March 31, 2019.
Note B: Revenue Recognition
Performance Obligations. Performance obligations are contractual promises to transfer or provide a distinct good or service for a stated price. The Companys product sales agreements are single-performance obligations that are satisfied at a point in time. Performance obligations within paving service agreements are satisfied over time, primarily ranging from one day to two years. For product revenues and freight revenues, customer payment terms are generally 30 days from invoice date. Customer payments for the paving operations are based on a contractual billing schedule and are due 30 days from invoice date.
Future revenues from unsatisfied performance obligations at December 31, 2018, 2017 and 2016 were $78,142,000, $66,956,000 and $74,146,000, respectively, where the remaining periods to complete these obligations ranged from two months to 22 months, one month to 23 months and one month to 33 months, respectively.
Sales Taxes. The Company is deemed to be an agent when collecting sales taxes from customers. Sales taxes collected are initially recorded as liabilities until remitted to taxing authorities and are not reflected in the consolidated statements of earnings as revenues and expenses.
Revenue by Category. The following table presents the Companys total revenues by category for each reportable segment:
year ended December 31 |
Products
and Services |
Freight | Total | |||||||||
(add 000) |
2018 | |||||||||||
Mid-America Group |
$ | 1,133,754 | $ | 89,482 | $ | 1,223,236 | ||||||
Southeast Group |
409,543 | 13,839 | 423,382 | |||||||||
West Group |
2,168,418 | 141,506 | 2,309,924 | |||||||||
Total Building Materials Business |
|
3,711,715 |
|
|
244,827 |
|
|
3,956,542 |
|
|||
Magnesia Specialties |
268,636 | 19,087 | 287,723 | |||||||||
Total |
$ | 3,980,351 | $ | 263,914 | $ | 4,244,265 | ||||||
2017 | ||||||||||||
Mid-America Group |
$ | 982,214 | $ | 71,112 | $ | 1,053,326 | ||||||
Southeast Group |
348,675 | 13,880 | 362,555 | |||||||||
West Group |
2,139,867 | 139,856 | 2,279,723 | |||||||||
Total Building Materials Business |
3,470,756 | 224,848 | 3,695,604 | |||||||||
Magnesia Specialties |
252,722 | 17,268 | 269,990 | |||||||||
Total |
$ | 3,723,478 | $ | 242,116 | $ | 3,965,594 | ||||||
2016 | ||||||||||||
Mid-America Group |
$ | 945,193 | $ | 71,905 | $ | 1,017,098 | ||||||
Southeast Group |
304,722 | 16,356 | 321,078 | |||||||||
West Group |
2,086,351 | 137,164 | 2,223,515 | |||||||||
Total Building Materials Business |
3,336,266 | 225,425 | 3,561,691 | |||||||||
Magnesia Specialties |
242,384 | 14,674 | 257,058 | |||||||||
Total |
$ | 3,578,650 | $ | 240,099 | $ | 3,818,749 |
Martin Marietta | Page 21
NOTES TO FINANCIAL STATEMENTS (continued)
Service revenues, which solely include the paving operations located in Colorado, were $219,593,000, $245,276,000 and $216,827,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
Contract Balances. Costs in excess of billings relate to the conditional right to consideration for completed contractual performance and are contract assets on the consolidated balance sheets. Costs in excess of billings are reclassified to accounts receivable when the right to consideration becomes unconditional. Billings in excess of costs relate to customers invoiced in advance of contractual performance and are contract liabilities on the consolidated balance sheets. The following table presents information about the Companys contract balances:
December 31 | ||||||||
(add 000) | 2018 | 2017 | ||||||
Costs in excess of billings |
$ | 1,975 | $ | 1,310 | ||||
Billings in excess of costs |
$ | 6,743 | $ | 7,204 |
Revenues recognized from the beginning balance of contract liabilities for the years ended December 31, 2018 and 2017 were $6,831,000 and $8,265,000, respectively.
Retainage, which primarily relates to the paving services, represents amounts that have been billed to customers but payment withheld until final acceptance of the performance obligation by the customer. Included on the Companys consolidated balance sheets, retainage was $7,528,000 and $9,029,000 at December 31, 2018 and 2017, respectively.
Policy Elections. When the Company arranges third party freight to deliver products to customers, the Company has elected the delivery to be a fulfillment activity rather than a separate performance obligation. Further, the Company acts as a principal in the delivery arrangements and, as required by ASU 2014-09, the related revenues and costs are presented gross and are included in the consolidated statements of earnings.
Note C: Goodwill and Other Intangible Assets
The following table shows the changes in goodwill by reportable segment and in total:
Mid-
America Group |
Southeast
Group |
West
Group |
Total | |||||||||||||
December 31 |
||||||||||||||||
(add 000) |
2018 | |||||||||||||||
Balance at beginning of period |
$ | 281,403 | $ | 50,346 | $ | 1,828,541 | $ | 2,160,290 | ||||||||
Acquisitions |
150,552 | 94,774 | | 245,326 | ||||||||||||
Goodwill allocated to assets held for sale |
| | (5,571 | ) | (5,571 | ) | ||||||||||
Divestitures |
| (927 | ) | | (927 | ) | ||||||||||
Balance at end of period |
$ | 431,955 | $ | 144,193 | $ | 1,822,970 | $ | 2,399,118 | ||||||||
2017 | ||||||||||||||||
Balance at beginning of period |
$ | 281,403 | $ | 50,346 | $ | 1,827,588 | $ | 2,159,337 | ||||||||
Acquisitions |
| | 230 | 230 | ||||||||||||
Purchase price adjustments |
| | 723 | 723 | ||||||||||||
Balance at end of period |
$ | 281,403 | $ | 50,346 | $ | 1,828,541 | $ | 2,160,290 |
Intangible assets subject to amortization consist of the following:
December
31
(add 000) |
Gross
Amount |
Accumulated
Amortization |
Net
Balance |
|||||||||
2018 | ||||||||||||
Noncompetition agreements |
$ | 6,314 | $ | (6,179 | ) | $ | 135 | |||||
Customer relationships |
65,550 | (25,575 | ) | 39,975 | ||||||||
Operating permits |
458,951 | (36,111 | ) | 422,840 | ||||||||
Use rights and other |
16,745 | (11,243 | ) | 5,502 | ||||||||
Trade names |
12,800 | (9,697 | ) | 3,103 | ||||||||
Total |
$ | 560,360 | $ | (88,805 | ) | $ | 471,555 | |||||
2017 | ||||||||||||
Noncompetition agreements |
$ | 6,274 | $ | (6,144 | ) | $ | 130 | |||||
Customer relationships |
45,955 | (17,551 | ) | 28,404 | ||||||||
Operating permits |
458,951 | (26,435 | ) | 432,516 | ||||||||
Use rights and other |
16,745 | (10,176 | ) | 6,569 | ||||||||
Trade names |
12,800 | (7,947 | ) | 4,853 | ||||||||
Total |
$ | 540,725 | $ | (68,253) | $ | 472,472 |
Martin Marietta | Page 22
NOTES TO FINANCIAL STATEMENTS (continued)
Intangible assets deemed to have an indefinite life and not being amortized consist of the following:
December
31
(add 000) |
Building
Materials Business |
Magnesia
Specialties |
Total | |||||||||
2018 | ||||||||||||
Operating permits |
$ | 6,600 | $ | | $ | 6,600 | ||||||
Use rights |
20,282 | | 20,282 | |||||||||
Trade names |
280 | 2,565 | 2,845 | |||||||||
Total |
$ | 27,162 | $ | 2,565 | $ | 29,727 | ||||||
2017 | ||||||||||||
Operating permits |
$ | 6,600 | $ | | $ | 6,600 | ||||||
Use rights |
24,432 | | 24,432 | |||||||||
Trade names |
280 | 2,565 | 2,845 | |||||||||
Total |
$ | 31,312 | $ | 2,565 | $ | 33,877 |
During 2018, the Company acquired $21,760,000 of intangible assets, consisting of the following:
(add 000, except year data) | Amount |
Weighted-average
amortization period |
||||||
Subject to amortization: |
||||||||
Customer relationships |
$ | 20,620 | 12 years | |||||
Noncompletion agreements |
40 | 10 years | ||||||
Total subject to amortization |
20,660 | 12 years | ||||||
Not subject to amortization: |
||||||||
Use rights |
1,100 | N/A | ||||||
Total |
$ | 21,760 |
Total amortization expense for intangible assets for the years ended December 31, 2018, 2017 and 2016 was $13,911,000, $14,178,000 and $13,922,000, respectively.
The estimated amortization expense for intangible assets for each of the next five years and thereafter is as follows:
(add 000) | ||||
2019 |
$ | 13,203 | ||
2020 |
13,168 | |||
2021 |
12,462 | |||
2022 |
11,036 | |||
2023 |
10,592 | |||
Thereafter |
411,094 | |||
Total |
$ | 471,555 |
Note D: Business Combinations
On April 27, 2018, the Company completed its acquisition of all of the equity interests in Bluegrass Materials Company (Bluegrass), the largest privately-held, pure-play aggregates company in the United States, for $1,617,357,000 in cash. Bluegrass operations included 22 active sites with more than 125 years of reserves, collectively, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Companys existing southeastern footprint in its Mid-America and Southeast Groups and provide a new growth platform within Maryland and Kentucky. The Company reached an agreement with the U.S. Department of Justice (DOJ), approved by the federal district court for the District of Columbia, which resolved all competition issues with respect to the acquisition. Under the terms of the agreement with the DOJ, Martin Marietta divested its heritage Forsyth aggregates quarry, north of Atlanta, Georgia, and the legacy Bluegrass Beaver Creek aggregates quarry in western Maryland. In connection with the sale of its Forsyth quarry, the Company recognized a pretax gain of $14,785,000, which is included in acquisition-related expenses, net, in the consolidated statements of earnings and comprehensive earnings. There was no gain or loss on the Beaver Creek divestiture.
The Bluegrass acquisition was a stock transaction wherein the Company acquired 100% of the voting interest of the owners. The Company acquired cash, accounts receivable; inventories; property, plant and equipment, which primarily consists of mineral reserves; intangible assets; prepaid and other assets; and assumed accounts payable; accrued liabilities and deferred tax liabilities, net. The Company did not assume any of Bluegrass outstanding debt.
The Company determined fair values of the assets acquired and liabilities assumed. Although initial accounting for the business combination has been recorded, these amounts are subject to change during the measurement period which extends no longer than one year from the consummation date based on additional reviews, such as completion of deferred tax estimates based on the determination of the historic tax basis in assets acquired. Specific accounts subject to ongoing purchase accounting adjustments include goodwill and deferred income tax liabilities, net. Therefore, the measurement period remains open as of December 31, 2018. The following is a summary of the preliminary estimated fair values of the assets acquired and the liabilities assumed:
Martin Marietta | Page 23
NOTES TO FINANCIAL STATEMENTS (continued)
(add 000) | ||||
Assets: |
||||
Cash and cash equivalents |
$ | 1,159 | ||
Receivables |
25,479 | |||
Inventory |
46,635 | |||
Other current assets |
1,029 | |||
Property, plant and equipment |
1,519,289 | |||
Intangible assets, other than goodwill |
20,150 | |||
Goodwill |
244,615 | |||
Total Assets |
1,858,356 | |||
Liabilities: |
||||
Accounts payable and accrued expenses |
17,978 | |||
Deferred income tax liabilities, net |
214,020 | |||
Noncontrolling interest |
9,001 | |||
Total Liabilities |
240,999 | |||
Total Consideration |
$ | 1,617,357 |
Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed and reflects projected operating synergies from the transaction, including expected overhead savings. None of the goodwill generated by the transaction will be deductible for income tax purposes.
Total revenues and earnings from operations attributable to acquired operations included in the consolidated statement of earnings for the year ended December 31, 2018 were $172,015,000 and $32,364,000, respectively.
Acquisition-related expenses, primarily related to Bluegrass, were $28,264,000 and $8,638,000 for the years ended December 31, 2018 and 2017, respectively.
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information summarizes the combined results of operations for the Company and Bluegrass as though the companies were combined as of January 1, 2017. Financial information for periods prior to the April 27, 2018 acquisition date included in the pro forma earnings does not reflect any cost savings or associated costs to achieve such savings from operating efficiencies or synergies that result from the combination. Consistent with the assumed acquisition date of January 1, 2017, the pro forma financial results for the year ended December 31, 2017 include acquisition-related expenses of $28,088,000, the $14,785,000 gain on the required divestiture of assets and the one-time $18,738,000 increase in cost of sales for the sale of acquired inventory marked up to fair value as part of acquisition accounting.
The pro forma financial information does do not purport to project the future financial position or operating results of the combined company. The pro forma financial information as
presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2017.
year ended December 31 (add 000) |
2018 | 2017 | ||||||
Total revenues |
$ | 4,299,673 | $ | 4,178,627 | ||||
Net earnings attributable to |
||||||||
Martin Marietta |
$ | 489,526 | $ | 691,719 | ||||
Diluted earnings per share |
$ | 7.75 | $ | 10.94 |
On August 31, 2018, the Company purchased the remaining noncontrolling interest in a consolidated joint venture where the controlling interest was acquired as part of the Bluegrass acquisition.
Note E: Accounts Receivable, Net
December 31 (add 000) |
2018 | 2017 | ||||||
Customer receivables |
$ | 514,094 | $ | 480,073 | ||||
Other current receivables |
12,535 | 9,557 | ||||||
526,629 | 489,630 | |||||||
Less: allowances |
(3,353 | ) | (2,390 | ) | ||||
Total |
$ | 523,276 | $ | 487,240 |
Of the total accounts receivable, net, balances, $2,478,000 and $2,819,000 at December 31, 2018 and 2017, respectively, were due from unconsolidated affiliates.
Note F: Inventories, Net
December 31 (add 000) |
2018 | 2017 | ||||||
Finished products |
$ | 615,719 | $ | 552,999 | ||||
Products in process and raw materials |
66,920 | 62,761 | ||||||
Supplies and expendable parts |
139,566 | 128,792 | ||||||
822,205 | 744,552 | |||||||
Less: allowances |
(159,170 | ) | (143,961 | ) | ||||
Total |
$ | 663,035 | $ | 600,591 |
Note G: Property, Plant and Equipment, Net
December 31 (add 000) |
2018 | 2017 | ||||||
Land and land improvements |
$ | 1,089,675 | $ | 974,622 | ||||
Mineral reserves and interests |
2,506,817 | 1,162,289 | ||||||
Buildings |
162,098 | 154,564 | ||||||
Machinery and equipment |
4,357,705 | 4,006,619 | ||||||
Construction in progress |
178,668 | 199,973 | ||||||
8,294,963 | 6,498,067 | |||||||
Less: accumulated depreciation, depletion and amortization |
(3,137,734 | ) | (2,905,254 | ) | ||||
Total |
$ | 5,157,229 | $ | 3,592,813 |
Martin Marietta | Page 24
NOTES TO FINANCIAL STATEMENTS (continued)
Included in these amounts are the gross asset value and accumulated amortization for machinery and equipment recorded under capital leases at December 31 as follows:
(add 000) |
2018 | 2017 | ||||||
Machinery and equipment under capital leases |
$ | 24,931 | $ | 23,919 | ||||
Less: accumulated amortization |
(14,524 | ) | (11,243 | ) | ||||
Total |
$ | 10,407 | $ | 12,676 |
Depreciation, depletion and amortization expense related to property, plant and equipment was $326,099,000, $279,808,000 and $268,935,000 for the years ended December 31, 2018, 2017 and 2016, respectively. Depreciation, depletion and amortization expense includes amortization of machinery and equipment under capital leases.
Interest expense of $3,017,000, $3,616,000 and $3,543,000 was capitalized during 2018, 2017 and 2016, respectively.
At December 31, 2018 and 2017, $56,235,000 and $57,665,000, respectively, of the Building Materials business net property, plant and equipment were located in foreign countries, namely the Bahamas and Canada.
Note H: Long-Term Debt
December 31 (add 000) |
2018 | 2017 | ||||||
4.25% Senior Notes, due 2024 |
$ | 396,398 | $ | 395,814 | ||||
7% Debentures, due 2025 |
124,272 | 124,180 | ||||||
3.450% Senior Notes, due 2027 |
296,939 | 296,628 | ||||||
3.500% Senior Notes, due 2027 |
494,765 | 494,352 | ||||||
6.25% Senior Notes, due 2037 |
228,094 | 228,033 | ||||||
4.250% Senior Notes, due 2047 |
591,541 | 591,688 | ||||||
Floating Rate Senior Notes, due 2019, interest rate of 3.29% and 2.13% at December 31, 2018 and 2017, respectively |
299,260 | 298,102 | ||||||
Floating Rate Senior Notes, due 2020, interest rate of 3.30% and 2.10% at December 31, 2018 and 2017, respectively |
298,956 | 298,227 | ||||||
6.60% Senior Notes, due 2018 |
| 299,871 | ||||||
Trade Receivable Facility, interest rate of 3.07% at December 31, 2018 |
390,000 | | ||||||
Other notes |
256 | 308 | ||||||
Total |
3,120,481 | 3,027,203 | ||||||
Less: current maturities |
(390,042 | ) | (299,909 | ) | ||||
Long-term debt |
$ | 2,730,439 | $ | 2,727,294 |
The Companys 4.25% Senior Notes due 2024, 7% Debentures due 2025, 3.450% Senior Notes due 2027, 3.500% Senior Notes due 2027, 6.25% Senior Notes due 2037, 4.250% Senior Notes due 2047, Floating Rate Senior Notes due 2019 and Floating Rate Senior Notes due 2020 (collectively, the Senior Notes) are senior unsecured obligations of the Company, ranking equal in right of payment with the Companys existing and future unsubordinated indebtedness. Upon a change-of-control repurchase event and a resulting below-investment-grade credit rating, the Company would be required to make an offer to repurchase all outstanding Senior Notes, with the exception of the 7% Debentures due 2025, at a price in cash equal to 101% of the principal amount of the Senior Notes, plus any accrued and unpaid interest.
On May 22, 2017, the Company issued $300,000,000 aggregate principal amount of Floating Rate Senior Notes due in 2020 (the 2020 Floating Rate Notes) and $300,000,000 aggregate principal amount of 3.450% Senior Notes due in 2027 (the 3.45% Senior Notes). The 3.45% Senior Notes may be redeemed in whole or in part prior to March 1, 2027 at a make-whole redemption price, or on or after March 1, 2027 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, and in either case plus unpaid interest. The 2020 Floating Rate Notes bear interest at a rate, reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) for U.S. Dollars plus 0.65% (or 65 basis points) and may not be redeemed prior to their stated maturity date of May 22, 2020.
On December 20, 2017, the Company issued $300,000,000 aggregate principal amount of Floating Rate Senior Notes due 2019 (the 2019 Floating Rate Notes), $500,000,000 aggregate principal amount of 3.50% Senior Notes due 2027 (the 2027 3.50% Fixed Rate Notes) and $600,000,000 aggregate principal amount of 4.25% Senior Notes due 2047 (the 2047 Fixed Rate Notes). The net proceeds of the offering were used to finance, in part, the Bluegrass acquisition and to repay the $300,000,000 6.60% Senior Notes that matured April 15, 2018. The Company may not redeem the 2019 Floating Rate Notes prior to their stated maturity date of December 20, 2019.
The Senior Notes are carried net of original issue discount, which is being amortized by the effective interest method over the life of the issue. With the exception of the 2019 Floating Rate Senior Notes and the 2020 Floating Rate
Martin Marietta | Page 25
NOTES TO FINANCIAL STATEMENTS (continued)
Senior Notes the Senior Notes are redeemable prior to their respective maturity dates at a make-whole redemption price. The principal amount, effective interest rate and maturity date for the Senior Notes are as follows:
Principal
Amount (add 000) |
Effective
Interest Rate |
Maturity
Date |
|||||||||||||
4.25% Senior Notes |
$ | 400,000 | 4.25% | July 2, 2024 | |||||||||||
7% Debentures |
$ | 125,000 | 7.12% | December 1, 2025 | |||||||||||
3.450% Senior Notes |
$ | 300,000 | 3.47% | June 1, 2027 | |||||||||||
3.500% Senior Notes |
$ | 500,000 | 3.53% | December 15, 2027 | |||||||||||
6.25% Senior Note |
$ | 230,000 | 6.45% | May 1, 2037 | |||||||||||
4.250% Senior Notes |
$ | 600,000 | 4.27% | December 15, 2047 | |||||||||||
Floating Rate Senior Notes, due 2019 |
$ | 300,000 |
Three-month
LIBOR + 0.50% |
December 20, 2019 | |||||||||||
Floating Rate Senior Notes, due 2020 |
$ | 300,000 |
Three-month
LIBOR + 0.65% |
May 22, 2020 |
The Company has a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent, Branch Banking and Trust Company (BB&T), Deutsche Bank Securities, Inc., SunTrust Bank, and Wells Fargo Bank, N.A., as Co-Syndication Agents, and the lenders party thereto (the Credit Agreement), which provides for a $700,000,000 five-year senior unsecured revolving facility (the Revolving Facility). Borrowings under the Revolving Facility bear interest, at the Companys option, at rates based upon LIBOR or a base rate, plus, for each rate, a margin determined in accordance with a ratings-based pricing grid.
The Credit Agreement requires the Companys ratio of consolidated net debt-to-consolidated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), as defined, for the trailing-twelve months (the Ratio) to not exceed 3.50x as of the end of any fiscal quarter, provided that the Company may exclude from the Ratio debt incurred in connection with certain acquisitions during the quarter or three preceding quarters so long as the Ratio calculated without such exclusion does not exceed 3.75x. Additionally, if no amounts are outstanding under both the Revolving Facility and the trade receivable securitization facility (discussed later), consolidated debt, including debt for which the Company is a co-borrower (see Note O), may be reduced by the Companys unrestricted cash and cash equivalents in excess of $50,000,000, such reduction not to exceed $200,000,000, for purposes of the covenant calculation. The Company was in compliance with the Ratio at December 31, 2018.
On December 20, 2018, the Company extended its Revolving Facility by one year. The Revolving Facility expires on December 5, 2023, with any outstanding principal amounts, together with interest accrued thereon, due in full on that date. Available borrowings under the Revolving Facility are reduced by any outstanding letters of credit issued by the Company under the Revolving Facility. At December 31, 2018 and 2017, the Company had $2,301,000 of outstanding letters of credit issued under the Revolving Facility and $697,699,000 available for borrowing under the Revolving Facility. The Company paid the bank group an upfront loan commitment fee that is being amortized over the life of the Revolving Facility. The Revolving Facility includes an annual facility fee.
The Company, through a wholly-owned special-purpose subsidiary, has a $400,000,000 trade receivable securitization facility (the Trade Receivable Facility). On September 25, 2018, the Company extended the maturity to September 25, 2019. The Trade Receivable Facility, with SunTrust Bank, Regions Bank, PNC Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, and certain other lenders that may become a party to the facility from time to time, is backed by eligible trade receivables, as defined. Borrowings are limited to the lesser of the facility limit or the borrowing base, as defined. These receivables are originated by the Company and then sold or contributed to the wholly-owned special-purpose subsidiary. The Company continues to be responsible for the servicing and administration of the receivables purchased by the wholly-owned special-purpose subsidiary. Borrowings under the Trade Receivable Facility bear interest at a rate equal to one-month LIBOR plus 0.725%, subject to change in the event that this rate no longer reflects the lenders cost of lending. The Trade Receivable Facility contains a cross-default provision to the Companys other debt agreements.
The Companys long-term debt maturities for the five years following December 31, 2018, and thereafter are:
(add 000) |
||||
2019 |
$ | 390,042 | ||
2020 |
299,015 | |||
2021 |
65 | |||
2022 |
90 | |||
2023 |
299,260 | |||
Thereafter |
2,132,009 | |||
Total |
$ | 3,120,481 |
The 2019 Floating Rate Notes mature December 20, 2019. The Company has classified these obligations as noncurrent long-term debt on the consolidated balance sheets as of
Martin Marietta | Page 26
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2018 as it has the ability and intent to refinance the notes on a long-term basis. For the debt maturity schedule, the 2019 Floating Rate Notes are included in 2023.
The Company has a $5,000,000 short-term line of credit. No amounts were outstanding under this line of credit at December 31, 2018 or 2017.
Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. For the years ended December 31, 2018, 2017 and 2016, the Company recognized $458,000, $1,443,000 and $1,367,000, respectively, as additional interest expense.
Note I: Financial Instruments
The Companys financial instruments include temporary cash investments, accounts receivable, notes receivable, accounts payable, publicly-registered long-term notes, debentures and other long-term debt.
Temporary cash investments are placed primarily in money market funds, money market demand deposit accounts or offshore time deposit accounts with financial institutions. The Companys cash equivalents have maturities of less than three months. Due to the short maturity of these investments, they are carried on the consolidated balance sheets at cost, which approximates fair value.
Accounts receivable are due from a large number of customers, primarily in the construction industry, and are dispersed across wide geographic and economic regions. However, accounts receivable are more heavily concentrated in certain states, namely Texas, Colorado, North Carolina, Georgia and Iowa. The estimated fair values of accounts receivable approximate their carrying amounts.
Notes receivable are primarily promissory notes with customers and are not publicly traded. Management estimates that the fair value of notes receivable approximates its carrying amount.
Accounts payable represent amounts owed to suppliers and vendors. The estimated fair value of accounts payable approximates its carrying amount due to the short-term nature of the payables.
The carrying values and fair values of the Companys long-term debt were $3,120,481,000 and $3,012,224,000, respectively, at December 31, 2018 and $3,027,203,000 and $3,144,902,000, respectively, at December 31, 2017.
The estimated fair value of the Companys publicly-registered long-term debt was estimated based on Level 2 of the fair value hierarchy using quoted market prices. The estimated fair values of other borrowings, which primarily represent variable-rate debt, approximate their carrying amounts as the interest rates reset periodically.
Note J: Income Taxes
The components of the Companys income tax expense (benefit) are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Federal income taxes: |
||||||||||||
Current |
$ | 15,285 | $ | 129,236 | $ | 97,975 | ||||||
Deferred |
69,599 | (239,304 | ) | 68,899 | ||||||||
Total federal income taxes |
84,884 | (110,068 | ) | 166,874 | ||||||||
State income taxes: |
||||||||||||
Current |
5,986 | 14,843 | 15,189 | |||||||||
Deferred |
14,134 | (882 | ) | (1,149 | ) | |||||||
Total state income taxes |
20,120 | 13,961 | 14,040 | |||||||||
Foreign income taxes: |
||||||||||||
Current |
(1,354 | ) | 1,175 | 1,064 | ||||||||
Deferred |
2,055 | 475 | (394 | ) | ||||||||
Total foreign income taxes |
701 | 1,650 | 670 | |||||||||
Income tax expense (benefit) |
$ | 105,705 | $ | (94,457) | $ | 181,584 |
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act). The 2017 Tax Act included provisions that lowered the federal statutory corporate income tax rate from 35% to 21% beginning in 2018, imposed a one-time transition tax on mandatory deemed repatriation of undistributed net earnings and changed how foreign earnings are subject to U.S. tax. U.S. GAAP generally requires the effects of a tax law change to be recorded as a component of income tax expense in the period of enactment. However, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), which allowed companies to record provisional amounts during a measurement period of up to one year from enactment where the necessary information was not available to complete the accounting for certain income tax effects of the 2017 Tax Act.
The Company recognized, on a provisional basis, a net tax benefit of $258,103,000 related to the 2017 Tax Act for the remeasurement of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. In accordance with the provisions of SAB 118, the Company completed the accounting for the impact of the 2017 Tax Act during the year ended December 31, 2018, and as a result recognized income tax expense of $1,147,000 for the transition tax on
Martin Marietta | Page 27
NOTES TO FINANCIAL STATEMENTS (continued)
mandatory deemed repatriation of undistributed foreign earnings; income tax expense of $1,481,000 for the write off of deferred tax assets that will not be realized due to changes in the deductibility of executive compensation; and an income tax benefit of $21,514,000 primarily related to the accelerated deductions for pension funding, inventory and insurance prepayments that were claimed on the Companys 2017 income tax returns.
Effective January 1, 2018, global intangible low-taxed income (GILTI) earned by controlled foreign corporations must be included in the income of the U.S. shareholder. Under U.S. GAAP, an accounting policy choice is required to either (1) treat taxes due on future U.S. inclusions related to GILTI as a current period expense when incurred or (2) factor such amounts into a companys measurement of its deferred taxes. The Company has elected to treat GILTI as a current period expense.
For the years ended December 31, 2018 and 2016, the benefit related to the utilization of federal net operating loss (NOL) carryforwards, reflected in current tax expense, was $5,794,000 and $11,852,000, respectively.
For the year ended December 31, 2016, excess tax benefits attributable to stock-based compensation transactions that were recorded to shareholders equity amounted to $6,792,000.
For the years ended December 31, 2018, 2017 and 2016, foreign pretax earnings were $5,718,000, $10,566,000 and $3,865,000, respectively.
The Companys effective income tax rate varied from the statutory United States income tax rate because of the following tax differences:
years ended December 31 |
2018 | 2017 | 2016 | |||||||||
Statutory income tax rate |
21.0 | % | 35.0 | % | 35.0 | % | ||||||
(Reduction) increase resulting from: |
|
|||||||||||
Impact from 2017 Tax Act |
(3.3 | ) | (41.7 | ) | | |||||||
Effect of statutory depletion |
(3.4 | ) | (5.6 | ) | (5.4 | ) | ||||||
State income taxes, net of federal tax benefit |
2.8 | 1.5 | 1.5 | |||||||||
Stock based compensation |
(0.5 | ) | (1.0 | ) | (0.1 | ) | ||||||
Domestic production deduction |
| (2.2 | ) | (2.0 | ) | |||||||
Other items |
1.7 | (1.3 | ) | 0.9 | ||||||||
Effective income tax rate |
18.3 | % | (15.3 | %) | 29.9 | % |
The change in the effective income tax rate in 2017 and the lower effective income tax rate in 2018, as compared with 2016, is attributable to the impact of the 2017 Tax Act. The statutory depletion deduction for all years is calculated as a
percentage of sales, subject to certain limitations. Due to these limitations, the impact of changes in the sales volumes and earnings may not proportionately affect the Companys statutory depletion deduction and the corresponding impact on the effective income tax rate.
The Company was entitled to receive a 9% tax deduction related to income from domestic (i.e., United States) production activities in 2017 and 2016. The deduction reduced income tax expense and increased consolidated net earnings by $15,461,000, or $0.25 per diluted share, in 2017 and $13,583,000, or $0.21 per diluted share, in 2016. The domestic production deduction was eliminated by the 2017 Tax Act and will not generate a tax benefit in 2018 and beyond.
The principal components of the Companys deferred tax assets and liabilities are as follows:
Deferred | ||||||||
December 31 | Assets (Liabilities) | |||||||
(add 000) | 2018 | 2017 | ||||||
Deferred tax assets related to: |
||||||||
Employee benefits |
$ | | $ | 16,059 | ||||
Inventories |
52,618 | 56,242 | ||||||
Valuation and other reserves |
22,359 | 22,989 | ||||||
Net operating loss carryforwards |
10,990 | 11,780 | ||||||
Accumulated other comprehensive loss |
84,207 | 80,116 | ||||||
Other items, net |
3,052 | 3,963 | ||||||
Gross deferred tax assets |
173,226 | 191,149 | ||||||
Valuation allowance on deferred tax assets |
(8,604 | ) | (10,349 | ) | ||||
Total net deferred tax assets |
164,622 | 180,800 | ||||||
Deferred tax liabilities related to: |
||||||||
Property, plant and equipment |
(478,329 | ) | (407,400 | ) | ||||
Partnerships and joint ventures |
(204,315 | ) | (15,617 | ) | ||||
Goodwill and other intangibles |
(170,538 | ) | (168,506 | ) | ||||
Employee benefits |
(17,004 | ) | | |||||
Total deferred tax liabilities |
(870,186 | ) | (591,523 | ) | ||||
Deferred income taxes, net |
$ | (705,564 | ) | $ | (410,723 | ) |
The Company had $3,219,000 of domestic federal NOL carryforwards at December 31, 2018. The Company had domestic state NOL carryforwards of $168,060,000 and $197,916,000 at December 31, 2018 and 2017, respectively. These carryforwards have various expiration dates through 2037. At December 31, 2018 and 2017, deferred tax assets associated with these carryforwards were $10,990,000 and $11,780,000, respectively, net of the federal benefit of the state deduction, for which valuation allowances of $8,576,000 and $10,085,000, respectively, were recorded. The Company also had domestic tax credit carryforwards of $993,000 and $1,342,000 at December 31, 2018 and 2017, respectively,
Martin Marietta | Page 28
NOTES TO FINANCIAL STATEMENTS (continued)
which expire in 2036. At December 31, 2018 and 2017, deferred tax assets associated with these carryforwards were $784,000 and $1,060,000, respectively, net of the federal benefit of the state deduction, for which valuation allowances of $28,000 and $264,000, respectively, were recorded.
Deferred tax liabilities for property, plant and equipment result from accelerated depreciation methods being used for income tax purposes as compared with the straight-line method for financial reporting purposes.
Deferred tax liabilities for partnerships and joint ventures relate to the difference between the tax basis in partnerships and joint ventures when compared to the basis for financial reporting purposes. The increase in 2018 was a result of the Bluegrass acquisition, as this business is a partnership for income tax purposes.
Deferred tax liabilities related to goodwill and other intangibles reflect the cessation of goodwill amortization for financial reporting purposes, while amortization continues for income tax purposes.
The change in deferred taxes for employee benefits was primarily driven by the additional pension funding in 2018 for the 2017 plan year.
The Company expects to permanently reinvest the earnings from its wholly-owned Canadian and Bahamian subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries undistributed net earnings or basis differences. The Company believes that the tax liability that would be incurred upon repatriation is immaterial at December 31, 2018.
The following table summarizes the Companys unrecognized tax benefits, excluding interest and correlative effects:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Unrecognized tax benefits at beginning of year |
$ | 22,367 | $ | 21,807 | $ | 18,727 | ||||||
Gross increases tax positions in prior years |
944 | 1,396 | 2,401 | |||||||||
Gross decreases tax positions in prior years |
| (672 | ) | (1,924 | ) | |||||||
Gross increases tax positions in current year |
1,802 | 4,961 | 4,650 | |||||||||
Gross decreases tax positions in current year |
(1,013 | ) | (946 | ) | (2,047 | ) | ||||||
Lapse of statute of limitations |
| (4,179 | ) | | ||||||||
Unrecognized tax benefits at end of year |
$ | 24,100 | $ | 22,367 | $ | 21,807 | ||||||
Amount that, if recognized, would favorably impact the effective tax rate |
$ | 12,820 | $ | 10,399 | $ | 11,603 |
Unrecognized tax benefits are reversed as a discrete event if an examination of applicable tax returns is not initiated by a federal or state tax authority within the statute of limitations or upon effective settlement with federal or state tax authorities. Management believes its accrual for unrecognized tax benefits is sufficient to cover uncertain tax positions reviewed during audits by taxing authorities. The accrual is not expected to materially change in the next twelve months.
For the year ended December 31, 2017, $3,922,000 was reversed into income upon the statute of limitations expiration for the 2010 through 2013 tax years.
The Companys tax years subject to federal, state or foreign examinations are 2011 through 2018.
Note K: Retirement Plans, Postretirement and Postemployment Benefits
The Company sponsors defined benefit retirement plans that cover substantially all employees. Additionally, the Company provides other postretirement benefits for certain employees, including medical benefits for retirees and their spouses and retiree life insurance. Employees starting on or after January 1, 2002 are not eligible for postretirement welfare plans. The Company also provides certain benefits, such as disability benefits, to former or inactive employees after employment but before retirement.
The measurement date for the Companys defined benefit plans, postretirement benefit plans and postemployment benefit plans is December 31.
Martin Marietta | Page 29
NOTES TO FINANCIAL STATEMENTS (continued)
Defined Benefit Retirement Plans. Retirement plan assets are invested in listed stocks, bonds, hedge funds, real estate and cash equivalents. Defined retirement benefits for salaried employees are based on each employees years of service and average compensation for a specified period of time before retirement. Defined retirement benefits for hourly employees are generally stated amounts for specified periods of service.
The Company sponsors a Supplemental Excess Retirement Plan (SERP) that generally provides for the payment of retirement benefits in excess of allowable Internal Revenue Code limits. The SERP generally provides for a lump-sum payment of vested benefits. When these benefit payments exceed the sum of the service and interest costs for the SERP during a year, the Company recognizes a pro-rata portion of the SERPs unrecognized actuarial loss as settlement expense.
The net periodic retirement benefit cost of defined benefit plans includes the following components:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Service cost |
$ | 31,624 | $ | 26,805 | $ | 22,167 | ||||||
Interest cost |
33,209 | 36,101 | 35,879 | |||||||||
Expected return on assets |
(46,011 | ) | (39,759 | ) | (37,699 | ) | ||||||
Amortization of: |
||||||||||||
Prior service cost |
104 | 311 | 350 | |||||||||
Actuarial loss |
12,830 | 14,138 | 12,074 | |||||||||
Transition asset |
(1 | ) | (1 | ) | (1 | ) | ||||||
Settlement charge |
2,936 | 21 | 124 | |||||||||
Termination benefit charge |
| | 764 | |||||||||
Net periodic benefit cost |
$ | 34,691 | $ | 37,616 | $ | 33,658 |
The components of net periodic benefit cost other than service cost are included in the line item Other nonoperating (income) and expenses, net , in the consolidated statements of earnings.
The expected return on assets is calculated by applying an annually selected expected rate of return assumption to the estimated fair value of the plan assets, giving consideration to contributions and benefits paid. The termination benefit charge represents the increased benefits payable to former Texas Industries, Inc. (TXI) executives as part of their change-in-control agreements.
The Company recognized the following amounts in consolidated comprehensive earnings:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Actuarial loss |
$ | 32,214 | $ | 13,343 | $ | 52,028 | ||||||
Net prior service cost |
3 | | | |||||||||
Amortization of: |
||||||||||||
Prior service cost |
(104 | ) | (311 | ) | (350 | ) | ||||||
Actuarial loss |
(12,830 | ) | (14,138 | ) | (12,074 | ) | ||||||
Transition asset |
1 | 1 | 1 | |||||||||
Special plan termination benefits |
| | (764 | ) | ||||||||
Settlement charge |
(2,936 | ) | (21 | ) | (124 | ) | ||||||
Total |
$ | 16,348 | $ | (1,126 | ) | $ | 38,717 |
Accumulated other comprehensive loss includes the following amounts that have not yet been recognized in net periodic benefit cost:
December 31 | 2018 | 2017 | ||||||||||||||
(add 000) | Gross | Net of tax | Gross | Net of tax | ||||||||||||
Prior service cost |
$ | 14 | $ | 9 | $ | 115 | $ | 71 | ||||||||
Actuarial loss |
233,688 | 146,588 | 217,240 | 134,066 | ||||||||||||
Transition asset |
(5 | ) | (3 | ) | (6 | ) | (4 | ) | ||||||||
Total |
$ | 233,697 | $ | 146,594 | $ | 217,349 | $ | 134,133 |
The prior service cost, actuarial loss and transition asset expected to be recognized in net periodic benefit cost during 2019 are $8,000 (net of deferred taxes of $2,000), $15,727,000 (net of deferred taxes of $3,893,000) and $1,000, respectively. These amounts are included in accumulated other comprehensive loss at December 31, 2018.
The defined benefit plans change in projected benefit obligation is as follows:
years ended December 31 (add 000) |
2018 | 2017 | ||||||
Net projected benefit obligation at beginning of year |
$ | 879,335 | $ | 831,849 | ||||
Service cost |
31,624 | 26,805 | ||||||
Interest cost |
33,209 | 36,101 | ||||||
Actuarial (gain) loss |
(54,621 | ) | 56,675 | |||||
Plan amendment |
3 | | ||||||
Gross benefits paid |
(41,654 | ) | (72,095 | ) | ||||
Net projected benefit obligation at end of year |
$ | 847,896 | $ | 879,335 |
Martin Marietta | Page 30
NOTES TO FINANCIAL STATEMENTS (continued)
The Companys change in plan assets, funded status and amounts recognized on the Companys consolidated balance sheets are as follows:
years ended December 31 (add 000) |
2018 | 2017 | ||||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 638,106 | $ | 596,207 | ||||
Actual return on plan assets, net |
(40,823 | ) | 83,091 | |||||
Employer contributions |
162,281 | 30,903 | ||||||
Gross benefits paid |
(41,654 | ) | (72,095 | ) | ||||
Fair value of plan assets at end of year |
$ | 717,910 | $ | 638,106 | ||||
December 31 (add 000) |
2018 | 2017 | ||||||
Funded status of the plan at end of year |
$ | (129,986 | ) | $ | (241,229 | ) | ||
Accrued benefit cost |
$ | (129,986 | ) | $ | (241,229 | ) | ||
December 31 (add 000) |
2018 | 2017 | ||||||
Amounts recognized on consolidated balance sheets consist of: |
||||||||
Current liability |
$ | (8,992 | ) | $ | (11,092 | ) | ||
Noncurrent liability |
(120,994 | ) | (230,137 | ) | ||||
Net amount recognized at end of year |
$ | (129,986 | ) | $ | (241,229 | ) |
The accumulated benefit obligation for all defined benefit pension plans was $771,921,000 and $792,912,000 at December 31, 2018 and 2017, respectively.
Benefit obligations and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets are as follows:
December 31 (add 000) |
2018 | 2017 | ||||||
Projected benefit obligation |
$ | 98,729 | $ | 879,335 | ||||
Accumulated benefit obligation |
$ | 85,548 | $ | 792,912 | ||||
Fair value of plan assets |
$ | 560 | $ | 638,106 |
Weighted-average assumptions used to determine benefit obligations as of December 31 are:
2018 | 2017 | |||||||
Discount rate |
4.38 | % | 3.76 | % | ||||
Rate of increase in future compensation levels |
4.50 | % | 4.50 | % |
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 are:
2018 | 2017 | 2016 | ||||||||||
Discount rate |
3.76% | 4.29% | 4.67% | |||||||||
Rate of increase in future compensation levels |
4.50% | 4.50% | 4.50% | |||||||||
Expected long-term rate of return on assets |
6.75% | 6.75% | 7.00% |
The expected long-term rate of return on assets is based on a building-block approach, whereby the components are weighted based on the allocation of pension plan assets.
For 2018 and 2017, the Company estimated the remaining lives of participants in the pension plans using the RP-2014 Base Table. The no-collar table was used for salaried participants and the blue-collar table, reflecting the experience of the Companys participants, was used for hourly participants. The Company used mortality improvement scales MP-2018 and MP-2017 for the years 2018 and 2017, respectively. The change in mortality improvement scale in 2018 did not have a material impact on the projected benefit obligation.
The target allocation for 2018 and the actual pension plan asset allocation by asset class are as follows:
Percentage of Plan Assets | ||||||||||||
2018 | December 31 | |||||||||||
Target | ||||||||||||
Asset Class |
Allocation | 2018 | 2017 | |||||||||
Equity securities |
56% | 57% | 57% | |||||||||
Debt securities |
30% | 32% | 29% | |||||||||
Hedge funds |
4% | 6% | 7% | |||||||||
Real estate |
10% | 5% | 7% | |||||||||
Total |
100% | 100% | 100% |
The Companys investment strategy is for approximately 45% of equity securities, excluding hedge funds and real estate, to be invested in mid-sized to large capitalization U.S. funds, with the remaining invested in small capitalization, emerging markets and international funds. Debt securities, or fixed income investments, are invested in funds benchmarked to the Barclays U.S. Aggregate Bond Index.
Martin Marietta | Page 31
NOTES TO FINANCIAL STATEMENTS (continued)
The fair values of pension plan assets by asset class and fair value hierarchy level are as follows:
Fair Value Measurement | ||||||||||||||||||||
December 31 (add 000) |
Quoted
Prices in
for
|
Significant
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Net Asset Value |
Total Fair Value |
|||||||||||||||
2018 | ||||||||||||||||||||
Equity securities 1 : |
|
|||||||||||||||||||
Mid-sized to large cap |
$ | | $ | | $ | | $ | 196,475 | $ | 196,475 | ||||||||||
Small cap, international and emerging growth funds |
| | | 210,371 | 210,371 | |||||||||||||||
Debt securities 1 : |
|
|||||||||||||||||||
Core fixed income |
| | | 228,194 | 228,194 | |||||||||||||||
Real estate |
| | | 35,553 | 35,553 | |||||||||||||||
Hedge funds |
| | 44,453 | 44,453 | ||||||||||||||||
Cash equivalents |
2,864 | | | | 2,864 | |||||||||||||||
Total |
$ | 2,864 | $ | | $ | | $ | 715,046 | $ | 717,910 | ||||||||||
2017 | ||||||||||||||||||||
Equity securities 1 : |
|
|||||||||||||||||||
Mid-sized to large cap |
$ | | $ | | $ | | $ | 177,497 | $ | 177,497 | ||||||||||
Small cap, international and emerging growth funds |
| | | 186,272 | 186,272 | |||||||||||||||
Debt securities 1 : |
|
|||||||||||||||||||
Core fixed income |
| | | 182,225 | 182,225 | |||||||||||||||
Real estate |
| | | 46,467 | 46,467 | |||||||||||||||
Hedge funds |
| | | 45,604 | 45,604 | |||||||||||||||
Cash equivalents |
41 | | | | 41 | |||||||||||||||
Total |
$ | 41 | $ | | $ | | $ | 638,065 | $ | 638,106 |
1 |
These investments are common collective investment trusts valued using the net asset value (NAV) unit price provided by the fund administrator. The NAV is based on the value of the underlying assets owned by the fund. |
Real estate investments are stated at estimated fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair values of real estate investments generally do not reflect transaction costs which may be incurred upon disposition of the real estate investments and do not necessarily represent the prices at which the real estate investments would be sold or repaid, since market prices of real estate investments can only be determined by negotiation between a willing buyer and seller. An independent valuation consultant is employed to determine the fair value of the real estate investments. The value of hedge funds is based on the values of the sub-fund investments. In determining the fair value of each sub-funds investment, the hedge funds Board of Trustees uses the values provided by the sub-funds and any other considerations that may, in its judgment, increase or decrease such estimated value.
In 2018 and 2017, the Company made combined pension plan and SERP contributions of $162,281,000 and $30,903,000, respectively. The Company currently estimates that it will contribute $32,022,000 to its pension plans in 2019.
The expected benefit payments to be paid from plan assets for each of the next five years and the five-year period thereafter are as follows:
(add 000) |
||||
2019 |
$ | 40,835 | ||
2020 |
$ | 42,908 | ||
2021 |
$ | 44,237 | ||
2022 |
$ | 45,848 | ||
2023 |
$ | 47,170 | ||
Years 2024 - 2028 |
$ | 260,117 |
Postretirement Benefits. The net periodic postretirement benefit credit for postretirement plans includes the following components:
Martin Marietta | Page 32
NOTES TO FINANCIAL STATEMENTS (continued)
years ended December 31 |
||||||||||||
(add 000) |
2018 | 2017 | 2016 | |||||||||
Service cost |
$ | 77 | $ | 80 | $ | 85 | ||||||
Interest cost |
519 | 727 | 863 | |||||||||
Amortization of: |
||||||||||||
Prior service credit |
(2,074 | ) | (1,741 | ) | (1,959 | ) | ||||||
Actuarial gain |
(211 | ) | (364 | ) | (499 | ) | ||||||
Settlement credit |
| | (9 | ) | ||||||||
Total net periodic benefit credit |
$ | (1,689 | ) | $ | (1,298 | ) | $ | (1,519 | ) |
The components of net periodic benefit credit other than service cost are included in the line item Other nonoperating (income) and expenses, net , in the consolidated statements of earnings.
The Company recognized the following amounts in consolidated comprehensive earnings:
years ended December 31 |
||||||||||||
(add 000) |
2018 | 2017 | 2016 | |||||||||
Actuarial (gain) loss |
$ | (1,700 | ) | $ | 1,236 | $ | 686 | |||||
Net prior service credit |
| (3,902 | ) | (1,326 | ) | |||||||
Settlement credit |
| | 9 | |||||||||
Amortization of: |
||||||||||||
Prior service credit |
2,074 | 1,741 | 1,959 | |||||||||
Actuarial gain |
211 | 364 | 499 | |||||||||
Total |
$ | 585 | $ | (561 | ) | $ | 1,827 |
Accumulated other comprehensive loss includes the following amounts that have not yet been recognized in net periodic benefit credit or cost:
December 31 |
2018 | 2017 | ||||||
(add 000) | Gross | Net of tax | Gross | Net of tax | ||||
Prior service credit |
$ (3,747) | $ (2,388) | $(6,314) | $ (3,899) | ||||
Actuarial gain |
(4,238) | (2,701) | (2,256) | (1,393) | ||||
Total |
$ (7,985) | $ (5,089) | $(8,570) | $ (5,292) |
The prior service credit and actuarial gain expected to be recognized in net periodic benefit cost during 2019 is $762,000 (net of deferred taxes of $189,000) and $473,000 (net of deferred taxes of $117,000), respectively, and are included in accumulated other comprehensive loss at December 31, 2018.
The postretirement health care plans change in benefit obligation is as follows:
years ended December 31 |
||||||||
(add 000) |
2018 | 2017 | ||||||
Change in benefit obligation: |
||||||||
Net benefit obligation at beginning of year |
$ | 15,347 | $ | 20,591 | ||||
Service cost |
77 | 80 | ||||||
Interest cost |
519 | 727 | ||||||
Participants contributions |
312 | 3,421 | ||||||
Actuarial (gain) loss |
(1,700 | ) | 1,236 | |||||
Gross benefits paid |
(1,262 | ) | (6,806 | ) | ||||
Plan amendments |
| (3,902 | ) | |||||
Net benefit obligation at end of year |
$ | 13,293 | $ | 15,347 |
The postretirement health care plans change in plan assets, funded status and amounts recognized on the Companys consolidated balance sheets are as follows:
years ended December 31 |
||||||||
(add 000) |
2018 | 2017 | ||||||
Fair value of plan assets at beginning of year |
$ | | $ | | ||||
Employer contributions |
950 | 3,385 | ||||||
Participants contributions |
312 | 3,421 | ||||||
Gross benefits paid |
(1,262 | ) | (6,806 | ) | ||||
Fair value of plan assets at end of year |
$ | | $ | | ||||
December 31 |
||||||||
(add 000) |
2018 | 2017 | ||||||
Funded status of the plan at end of year |
$ | (13,293 | ) | $ | (15,347 | ) | ||
Accrued benefit cost |
$ | (13,293 | ) | $ | (15,347 | ) | ||
December 31 |
||||||||
(add 000) |
2018 | 2017 | ||||||
Amounts recognized on consolidated balance sheets consist of: |
||||||||
Current liability |
$ | (950 | ) | $ | (2,560 | ) | ||
Noncurrent liability |
(12,343 | ) | (12,787 | ) | ||||
Net amount recognized at end of year |
$ | (13,293 | ) | $ | (15,347 | ) |
Weighted-average assumptions used to determine the post-retirement benefit obligation as of December 31 are:
2018 | 2017 | |||||||
Discount rate |
4.15 | % | 3.47 | % |
Weighted-average assumptions used to determine net postretirement benefit credit for the years ended December 31 are:
2018 | 2017 | 2016 | ||||||||||
Discount rate |
3.47 | % | 3.78 | % | 4.25 | % |
For 2018 and 2017, the Company estimated the remaining lives of participants in the postretirement benefit plans using the RP-2014 Base Table. The no-collar table was used for salaried participants and the blue-collar table, reflecting the experience of the Companys participants, was used for hourly
Martin Marietta | Page 33
NOTES TO FINANCIAL STATEMENTS (continued)
participants. The Company used mortality improvement scales MP-2018 and MP-2017 for the years 2018 and 2017, respectively. The change in mortality improvement scale in 2018 did not have a material impact on the projected benefit obligation.
Assumed health care cost trend rates at December 31 are:
2018 | 2017 | |||||||
Health care cost trend rate assumed for next year |
7.0% | 7.0% | ||||||
Rate to which the cost trend rate gradually declines |
5.0% | 5.0% | ||||||
Year the rate reaches the ultimate rate |
2023 | 2022 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the Companys health care plans. A one percentage-point change in assumed health care cost trend rates would have the following effects:
One Percentage Point | ||||||||
(add 000) |
Increase | (Decrease) | ||||||
Total service and interest cost components |
$ | 25 | $ | (22 | ) | |||
Postretirement benefit obligation |
$ | 640 | $ | (575 | ) |
The Company estimates that it will contribute $950,000 to its postretirement health care plans in 2019.
The total expected benefit payments to be paid by the Company, net of participant contributions, for each of the next five years and the five-year period thereafter are as follows:
(add 000) |
||||
2019 |
$ | 950 | ||
2020 |
$ | 1,492 | ||
2021 |
$ | 1,419 | ||
2022 |
$ | 1,344 | ||
2023 |
$ | 1,254 | ||
Years 2024 - 2028 |
$ | 5,809 |
Defined Contribution Plan. The Company maintains a defined contribution plan that covers substantially all employees. This plan, qualified under Section 401(a) of the Internal Revenue Code, is a retirement savings and investment plan for the Companys salaried and hourly employees. Under certain provisions of the plan, the Company, at established rates, matches employees eligible contributions. The Companys matching obligations were $16,545,000 in 2018, $14,893,000 in 2017 and $13,235,000 in 2016.
Note L: Stock-Based Compensation
On May 19, 2016, the Companys shareholders approved the Martin Marietta Amended and Restated Stock-Based Award Plan. The Martin Marietta Materials, Inc. Stock-Based Award Plan, as amended from time to time (along with the Amended Omnibus Securities Award Plan, originally approved in 1994, the Plans) is still effective for awards made prior to 2017. The Company has been authorized by the Board of Directors to repurchase shares of the Companys common stock for issuance under the stock-based award plans (see Note N).
The Company grants restricted stock awards under the Plans to a group of executive officers, key personnel and nonemployee members of the Board of Directors. The vesting of certain restricted stock awards is based on certain performance criteria over a specified period of time. The number of shares may be increased to the maximum or reduced to the minimum threshold based on the results of those criteria. In addition, certain awards are granted to individuals to encourage retention and motivate key employees. These awards generally vest if the employee is continuously employed over a specified period of time and require no payment from the employee. Awards granted to non-employee members of the Board of Directors vest immediately.
The fair value of stock-based award grants is amortized to expense over the vesting period. Awards to employees eligible for retirement prior to the award becoming fully vested are amortized to expense over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Awards granted to nonemployee members of the Board of Directors are expensed immediately.
Additionally, an incentive compensation stock plan has been adopted under the Plans whereby certain participants may elect to use up to 50% of their annual incentive compensation to acquire units representing shares of the Companys common stock at a 20% discount to the market value on the date of the incentive compensation award. Certain executive officers are required to participate in the incentive compensation stock plan at certain minimum levels. Participants receive unrestricted shares of common stock in an amount equal to their respective units generally at the end of a 34-month period of additional employment from the date of award or at retirement beginning at age 62. All rights of ownership of the common stock convey to the participants upon the issuance of their respective shares at the end of the ownership-vesting period.
Martin Marietta | Page 34
NOTES TO FINANCIAL STATEMENTS (continued)
The following table summarizes information for restricted stock awards and incentive compensation stock awards for 2018:
Restricted Stock | Restricted Stock | Incentive | ||||||||||||||||||||||
Service Based | Performance Based | Compensation Stock | ||||||||||||||||||||||
Weighted-Average | Weighted-Average | Weighted-Average | ||||||||||||||||||||||
Number of
Awards |
Grant-Date Fair Value |
Number of
Awards |
Grant-Date
Fair Value |
Number of
Awards |
Grant-Date
Fair Value |
|||||||||||||||||||
January 1, 2018 |
314,840 | $ | 151.84 | 139,999 | $ | 150.34 | 38,510 | $ | 166.67 | |||||||||||||||
Awarded |
64,352 | $ | 211.03 | 37,138 | $ | 212.12 | 18,180 | $ | 212.12 | |||||||||||||||
Distributed |
(88,674 | ) | $ | 159.04 | (20,219 | ) | $ | 126.01 | (20,992 | ) | $ | 138.54 | ||||||||||||
Forfeited |
(12,371 | ) | $ | 211.63 | (4,979 | ) | $ | 182.90 | (322 | ) | $ | 184.74 | ||||||||||||
December 31, 2018 |
278,147 | $ | 158.29 | 151,939 | $ | 174.74 | 35,376 | $ | 206.55 |
The weighted-average grant-date fair value of service-based restricted stock awards granted during 2018, 2017 and 2016 was $211.03, $213.76 and $128.48, respectively. The weighted-average grant-date fair value of performance-based restricted stock awards granted during 2018, 2017 and 2016 was $212.12, $207.73 and $124.41, respectively. The weighted-average grant-date fair value of incentive compensation stock awards granted during 2018, 2017 and 2016 was $212.12, $208.68 and $124.41, respectively.
The aggregate intrinsic values for unvested restricted stock awards and unvested incentive compensation stock awards at December 31, 2018 were $73,919,000 and $234,000, respectively, and were based on the closing price of the Companys common stock at December 31, 2018, which was $171.87. The aggregate intrinsic values of restricted stock awards distributed during the years ended December 31, 2018, 2017 and 2016 were $22,985,000, $15,771,000 and $9,738,000, respectively. The aggregate intrinsic values of incentive compensation stock awards distributed during the years ended December 31, 2018, 2017 and 2016 were $1,662,000, $2,601,000 and $1,941,000, respectively. The aggregate intrinsic values for distributed awards were based on the closing prices of the Companys common stock on the dates of distribution.
Under the Plans, prior to 2016, the Company granted options to employees to purchase its common stock at a price equal to the closing market value at the date of grant. Options become exercisable in four annual installments beginning one year after date of grant. Options granted starting in 2013 expire ten years after the grant date while outstanding options granted prior to 2013 expire eight years after the grant date.
In connection with the TXI acquisition, completed in 2014, the Company issued 821,282 Martin Marietta stock options (Replacement Options) to holders of outstanding TXI stock
options at the acquisition date. The Company issued 0.7 Replacement Options for each outstanding TXI stock option, and the Replacement Option prices reflected the exchange ratio. The Replacement Options will expire on the original contractual dates when the TXI stock options were initially issued. Consistent with the terms of the Companys other outstanding stock options, Replacement Options expire 90 days after employment is terminated.
The following table includes summary information for stock options as of December 31, 2018:
Weighted- | Weighted-Average | |||||||||||
Average | Remaining | |||||||||||
Number of | Exercise | Contractual | ||||||||||
Options | Price | Life (years) | ||||||||||
Outstanding at January 1, 2018 |
301,958 | $ | 91.44 | |||||||||
Exercised |
(89,557 | ) | $ | 81.06 | ||||||||
Terminated |
(2,011 | ) | $ | 83.32 | ||||||||
Outstanding at December 31, 2018 |
210,390 | $ | 95.93 | 3.6 | ||||||||
Exercisable at December 31, 2018 |
197,241 | $ | 92.02 | 3.4 |
The aggregate intrinsic values of options exercised during the years ended December 31, 2018, 2017 and 2016 were $12,395,000, $13,247,000 and $22,571,000, respectively, and were based on the closing prices of the Companys common stock on the dates of exercise. The aggregate intrinsic values for options outstanding and exercisable at December 31, 2018 were $15,977,000 and $15,750,000, respectively, and were based on the closing price of the Companys common stock at December 31, 2018, which was $171.87. The excess tax benefits for stock options exercised during the years ended December 31, 2018, 2017 and 2016 were $1,741,000, $3,483,000 and $4,238,000, respectively.
At December 31, 2018, there are approximately 792,000 awards available for grant under the Plans. In 2016, the
Martin Marietta | Page 35
NOTES TO FINANCIAL STATEMENTS (continued)
Companys shareholders approved the issuance of an additional 800,000 shares of common stock under the Plans. As part of approving the additional shares, the Company agreed to not issue any additional awards under the legacy TXI plan. The awards available for grant under the Plans at December 31, 2018 reflect no awards available under the legacy TXI plan.
In 1996, the Company adopted the Shareholder Value Achievement Plan to award shares of the Companys common stock to key senior employees based on certain common stock performance criteria over a long-term period. Under the terms of this plan, 250,000 shares of common stock were reserved for issuance. Through December 31, 2018, 42,025 shares have been issued under this plan. No awards have been granted under this plan since 2000.
The Company adopted and the shareholders approved the Common Stock Purchase Plan for Directors in 1996, which provides nonemployee members of the Board of Directors the election to receive all or a portion of their total fees in the form of the Companys common stock. Beginning in 2016, members of the Board of Directors were not required to defer any of their fees in the form of the Companys common stock. Under the terms of this plan, 300,000 shares of common stock were reserved for issuance. Nonemployee members of the Board of Directors elected to defer portions of their fees representing 3,105, 2,132 and 3,699 shares of the Companys common stock under this plan during 2018, 2017 and 2016, respectively.
The following table summarizes stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016, unrecognized compensation cost for nonvested awards at December 31, 2018 and the weighted-average period over which unrecognized compensation cost will be recognized:
The following presents expected stock-based compensation expense in future periods for outstanding awards as of December 31, 2018:
(add 000) |
||||
2019 |
$ | 16,191 | ||
2020 |
5,843 | |||
2021 |
409 | |||
2022 |
94 | |||
Total |
$ | 22,537 |
Stock-based compensation expense is included in selling, general and administrative expenses in the Companys consolidated statements of earnings.
Note M: Leases
Total lease expense for operating leases was $122,545,000, $90,731,000 and $85,945,000 for the years ended December 31, 2018, 2017 and 2016, respectively. The Companys operating leases generally contain renewal and/ or purchase options with varying terms. The Company has royalty agreements that generally require royalty payments based on tons produced or total sales dollars and also contain minimum payments. Total royalties, principally for leased properties, were $52,482,000, $51,827,000 and $55,257,000 for the years ended December 31, 2018, 2017 and 2016, respectively. The Company also has capital lease obligations for machinery and equipment.
Future minimum lease and royalty commitments for all non-cancelable agreements and capital lease obligations as of December 31, 2018 are as follows:
Capital | Operating | Royalty | ||||||||||
(add 000) | Leases | Leases | Commitments | |||||||||
2019 |
$ | 3,718 | $ | 105,955 | $ | 14,614 | ||||||
2020 |
2,695 | 70,478 | 11,364 | |||||||||
2021 |
1,735 | 60,382 | 10,335 | |||||||||
2022 |
1,004 | 57,531 | 9,545 | |||||||||
2023 |
713 | 56,511 | 8,109 | |||||||||
Thereafter |
3,893 | 318,147 | 65,981 | |||||||||
Total |
13,758 | $ | 669,004 | $ | 119,948 | |||||||
Less: imputed interest |
(2,879 | ) | ||||||||||
Present value of minimum lease payments |
10,879 | |||||||||||
Less: current capital lease obligations |
(3,249 | ) | ||||||||||
Long-term capital lease obligations |
$ | 7,630 |
Of the total future minimum commitments, $172,877,000 relates to the Companys contracts of affreightment.
Martin Marietta | Page 36
NOTES TO FINANCIAL STATEMENTS (continued)
Note N: Shareholders Equity
The authorized capital structure of the Company includes 100,000,000 shares of common stock, with a par value of $0.01 a share. At December 31, 2018, approximately 1,819,000 common shares were reserved for issuance under stock-based award plans.
Pursuant to authority granted by its Board of Directors, the Company can repurchase up to 20,000,000 shares of common stock. The Company repurchased 521,140, 457,742 and 1,587,987 shares of common stock during 2018, 2017 and 2016, respectively. At December 31, 2018, 14,147,751 shares of common stock were remaining under the Companys repurchase authorization.
Note O: Commitments and Contingencies
Legal and Administrative Proceedings. The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. In the opinion of management and counsel, based upon currently-available facts, it is remote that the ultimate outcome of any litigation and other proceedings, including those pertaining to environmental matters (see Note A), relating to the Company and its subsidiaries, will have a material adverse effect on the overall results of the Companys operations, its cash flows or its financial position.
Asset Retirement Obligations. The Company incurs reclamation and teardown costs as part of its mining and production processes. Estimated future obligations are discounted to their present value and accreted to their projected future obligations via charges to operating expenses. Additionally, the fixed assets recorded concurrently with the liabilities are depreciated over the period until retirement activities are expected to occur. Total accretion and depreciation expenses for 2018, 2017 and 2016 were $8,015,000, $8,682,000 and $8,823,000, respectively, and are included in Other operating income and expenses, net , in the consolidated statements of earnings.
The following shows the changes in the asset retirement obligations:
years ended December 31 |
||||||||
(add 000) |
2018 | 2017 | ||||||
Balance at beginning of year |
$ | 109,653 | $ | 101,106 | ||||
Accretion expense |
5,074 | 4,768 | ||||||
Liabilities incurred and liabilities assumed in business combinations |
4,692 | 7,940 | ||||||
Liabilities settled |
(2,821 | ) | (309 | ) | ||||
Revisions in estimated cash flows |
5,206 | (3,852 | ) | |||||
Balance at end of year |
$ | 121,804 | $ | 109,653 |
Other Environmental Matters. The Companys 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 Companys 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 Companys operations, and such permits are subject to modification, renewal and revocation. The Company regularly monitors and reviews its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental remediation liability is inherent in the operation of the Companys businesses, as it is with other companies engaged in similar businesses. The Company has no material provisions for environmental remediation liabilities and does not believe such liabilities will have a material adverse effect on the Company in the future.
Insurance Reserves. The Company has insurance coverage with large deductibles for workers compensation, automobile liability, marine liability and general liability claims. The Company is also self-insured for health claims. At December 31, 2018 and 2017, reserves of $48,256,000 and $48,061,000, respectively, were recorded for all such insurance claims. The Company records the reserves based on an actuarial-determined analysis, which calculates development factors that are applied to total case reserves within the insurance programs. While the Company believes the assumptions used to calculate these liabilities are appropriate, significant differences in actual experience and/or significant changes in these assumptions may materially affect insurance costs.
Letters of Credit. In the normal course of business, the Company provides certain third parties with standby letter of credit agreements guaranteeing its payment for certain insurance claims, contract performance and permit requirements. At December 31, 2018, the Company was contingently liable for $36,081,000 in letters of credit, of which $2,301,000 were issued under the Companys Revolving Facility.
Surety Bonds. In the normal course of business, at December 31, 2018, the Company was contingently liable for $375,561,000 in surety bonds required by certain states and municipalities and their related agencies. The bonds are principally for certain insurance claims, construction contracts, reclamation obligations and
Martin Marietta | Page 37
NOTES TO FINANCIAL STATEMENTS (continued)
mining permits guaranteeing the Companys own performance. Five of these bonds total $77,603,000, or 21%, of all outstanding surety bonds. The Company has indemnified the underwriting insurance companies, Liberty Mutual and W.R. Berkley, against any exposure under the surety bonds. In the Companys past experience, no material claims have been made against these financial instruments.
Borrowing Arrangements with Affiliate. The Company is a co-borrower with an unconsolidated affiliate for a revolving line of credit agreement with BB&T, of which $12,710,000 was outstanding as of December 31, 2018. The line of credit was amended in January 2018 to extend the maturity to March 2020 and reduce the line of credit from $25,000,000 to $15,500,000. The affiliate has agreed to reimburse and indemnify the Company for any payments and expenses the Company may incur from this agreement. The Company holds a lien on the affiliates membership interest in a joint venture as collateral for payment under the revolving line of credit.
In 2014, the Company loaned the unconsolidated affiliate a total of $6,000,000 as an interest-only note due December 31, 2022.
Purchase Commitments. The Company had purchase commitments for property, plant and equipment of $118,664,000 as of December 31, 2018. The Company also had other purchase obligations related to energy and service contracts of $106,360,000 as of December 31, 2018. The Companys contractual purchase commitments as of December 31, 2018 are as follows:
(add 000) | ||||
2019 |
$ | 181,768 | ||
2020 |
14,177 | |||
2021 |
6,264 | |||
2022 |
3,689 | |||
2023 |
1,931 | |||
Thereafter |
17,195 | |||
Total |
$ | 225,024 |
Capital expenditures in 2018, 2017 and 2016 that were purchase commitments as of the prior year end were $79,345,000, $83,748,000 and $62,927,000, respectively.
Employees. Approximately 11% of the Companys employees are represented by a labor union. All such employees are hourly employees. The Company maintains collective bargaining agreements relating to the union employees within the Building Materials business and Magnesia Specialties segment.
Of the Magnesia Specialties segment, located in Manistee, Michigan and Woodville, Ohio, 100% of its hourly employees are represented by labor unions. The Manistee collective bargaining agreement expires in August 2019. The Woodville collective bargaining agreement expires in June 2022.
Note P: Segments
The Building Materials business is comprised of divisions which represent operating segments. Certain divisions are consolidated into reportable segments for financial reporting purposes as they meet the aggregation criteria. The Building Materials business contains three reportable segments: Mid-America Group, Southeast Group and West Group. The Magnesia Specialties business represents an individual operating and reportable segment. The accounting policies used for segment reporting are the same as those described in Note A.
The Companys evaluation of performance and allocation of resources are based primarily on earnings from operations. Consolidated earnings from operations include total revenues less cost of revenues; selling, general and administrative expenses; acquisition-related expenses, net; other operating income and expenses, net; and exclude interest expense; other nonoperating income, net; and income tax expense (benefit). Corporate loss from operations primarily includes depreciation on capitalized interest; expenses for corporate administrative functions; acquisition-related expenses, net; and other nonrecurring and/or non-operational income and expenses excluded from the Companys evaluation of segment performance and resource allocation. All long-term debt and related interest expense are held at Corporate.
Assets employed by segment include assets directly identified with those operations. Corporate assets consist primarily of cash and cash equivalents; property, plant and equipment for corporate operations; investments and other assets not directly identifiable with a reportable segment.
The following tables display selected financial data for the Companys reportable segments. The acquired Bluegrass operations are located in the Mid-America Group and Southeast Group. Total revenues, as well as the consolidated statements of earnings and comprehensive earnings, exclude intersegment revenues which represent sales from one segment to another segment, which are eliminated. Prior-year information has been reclassified to conform to current year revenue presentation.
Martin Marietta | Page 38
NOTES TO FINANCIAL STATEMENTS (continued)
December 31 (add 000) |
|
|||||||||||
Assets employed | 2018 | 2017 | 2016 | |||||||||
Mid-America Group |
$ | 2,788,454 | $ | 1,532,867 | $ | 1,406,526 | ||||||
Southeast Group |
1,299,469 | 616,344 | 594,967 | |||||||||
West Group |
4,989,639 | 5,014,231 | 4,904,018 | |||||||||
Total Building
|
9,077,562 | 7,163,442 | 6,905,511 | |||||||||
Magnesia Specialties |
156,106 | 152,257 | 150,969 | |||||||||
Corporate |
317,751 | 1,676,812 | 244,425 | |||||||||
Total |
$ | 9,551,419 | $ | 8,992,511 | $ | 7,300,905 | ||||||
Total property additions, including the impact of acquisitions | ||||||||||||
Mid-America Group |
$ | 1,157,073 | $ | 139,505 | $ | 152,014 | ||||||
Southeast Group |
603,078 | 34,636 | 30,588 | |||||||||
West Group |
148,164 | 240,793 | 338,795 | |||||||||
Total Building
|
1,908,315 | 414,934 | 521,397 | |||||||||
Magnesia Specialties |
12,450 | 11,129 | 8,944 | |||||||||
Corporate |
4,838 | 12,558 | 10,430 | |||||||||
Total |
$ | 1,925,603 | $ | 438,621 | $ | 540,771 | ||||||
Property additions through acquisitions | ||||||||||||
Mid-America Group |
$ | 980,236 | $ | 60 | $ | 1,524 | ||||||
Southeast Group |
561,503 | | | |||||||||
West Group |
1,421 | 2,420 | 132,112 | |||||||||
Total Building
|
1,543,160 | 2,480 | 133,636 | |||||||||
Magnesia Specialties |
| | | |||||||||
Corporate |
| | | |||||||||
Total |
$ | 1,543,160 | $ | 2,480 | $ | 133,636 |
Note Q: Revenues and Gross Profit
The Building Materials business includes the aggregates, cement, ready mixed concrete and asphalt and paving product lines. All cement, ready mixed concrete and asphalt and paving product lines are reported within the West Group. The following tables, which are reconciled to consolidated amounts, provide total revenues and gross profit by line of business: Building Materials (further divided by product line) and Magnesia Specialties. Interproduct revenues represent sales from the aggregates product line to the ready mixed concrete and asphalt and paving product lines and sales from the cement product line to the ready mixed concrete product line.
Martin Marietta | Page 39
NOTES TO FINANCIAL STATEMENTS (continued)
years ended December 31 (add 000) |
|
|||||||||||
Total revenues | 2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
|
|||||||||||
Products and services: |
||||||||||||
Aggregates |
$ | 2,355,673 | $ | 2,134,927 | $ | 2,058,687 | ||||||
Cement |
387,830 | 371,233 | 364,139 | |||||||||
Ready Mixed Concrete |
963,770 | 936,037 | 902,678 | |||||||||
Asphalt and Paving |
268,679 | 292,571 | 257,873 | |||||||||
Less: Interproduct revenues |
(264,237 | ) | (264,012 | ) | (247,111 | ) | ||||||
Products and services |
3,711,715 | 3,470,756 | 3,336,266 | |||||||||
Freight |
244,827 | 224,848 | 225,425 | |||||||||
Total Building
|
3,956,542 | 3,695,604 | 3,561,691 | |||||||||
Magnesia Specialties: |
||||||||||||
Products and services |
268,636 | 252,722 | 242,384 | |||||||||
Freight |
19,087 | 17,268 | 14,674 | |||||||||
Total Magnesia
|
287,723 | 269,990 | 257,058 | |||||||||
Consolidated total revenues |
$ | 4,244,265 | $ | 3,965,594 | $ | 3,818,749 | ||||||
Gross profit (loss) | 2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
|
|||||||||||
Products and services: |
|
|||||||||||
Aggregates |
$ | 606,759 | $ | 599,670 | $ | 556,131 | ||||||
Cement |
126,213 | 117,021 | 119,894 | |||||||||
Ready Mixed Concrete |
74,175 | 91,646 | 99,085 | |||||||||
Asphalt and Paving |
52,917 | 64,693 | 53,025 | |||||||||
Products and services |
860,064 | 873,030 | 828,135 | |||||||||
Freight |
259 | 2,602 | 2,501 | |||||||||
Total Building
|
860,323 | 875,632 | 830,636 | |||||||||
Magnesia Specialties: |
||||||||||||
Products and services |
102,905 | 94,050 | 93,987 | |||||||||
Freight |
(4,223 | ) | (4,652 | ) | (4,384 | ) | ||||||
Total Magnesia
|
98,682 | 89,398 | 89,603 | |||||||||
Corporate |
7,572 | 6,910 | (8,501 | ) | ||||||||
Consolidated gross profit |
$ | 966,577 | $ | 971,940 | $ | 911,738 | ||||||
Domestic and foreign total revenues are as follows:
years ended December 31 | ||||||||||||
(add 000) | 2018 | 2017 | 2016 | |||||||||
Domestic |
$ | 4,166,339 | $ | 3,901,323 | $ | 3,761,651 | ||||||
Foreign |
77,926 | 64,271 | 57,098 | |||||||||
Consolidated total revenues |
$ | 4,244,265 | $ | 3,965,594 | $ | 3,818,749 |
Note R: Supplemental Cash Flow Information
The components of the change in other assets and liabilities, net, are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Other current and noncurrent assets |
$ | (34,252 | ) | $ | (19,424 | ) | $ | 9,171 | ||||
Accrued salaries, benefits and payroll taxes |
12,186 | 136 | 16,942 | |||||||||
Accrued insurance and other taxes |
(1,416 | ) | 4,866 | (2,688 | ) | |||||||
Accrued income taxes |
(10,336 | ) | (11,044 | ) | (12,523 | ) | ||||||
Accrued pension, postretirement and postemployment benefits |
(133,153 | ) | 1,980 | (15,955 | ) | |||||||
Other current and noncurrent liabilities |
(12,972 | ) | 38,105 | (6,053 | ) | |||||||
Change in other assets and liabilities, net |
$ | (179,943) | $ | 14,619 | $ | (11,106) |
Noncash investing and financing activities are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Accrued liabilities for purchases of property, plant and equipment |
$ | 66,985 | $ | 61,644 | $ | 38,566 | ||||||
Acquisition of assets through capital lease |
$ | 1,148 | $ | 811 | $ | 1,399 | ||||||
Acquisition of assets through asset exchange |
$ | | $ | 2,476 | $ | | ||||||
Sale of asset to settle liability |
$ | | $ | 900 | $ | |
Supplemental disclosures of cash flow information are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Cash paid for interest |
$ | 137,239 | $ | 78,902 | $ | 73,664 | ||||||
Cash paid for income taxes |
$ | 28,860 | $ | 155,771 | $ | 124,342 |
Martin Marietta | Page 40
NOTES TO FINANCIAL STATEMENTS
Note S: Other Operating (Income) and Expenses, Net
Other operating income and expenses, net, are comprised generally of gains and losses on the sale of assets; asset and portfolio rationalization charges; gains and losses related to certain customer accounts receivable; rental, royalty and services income; accretion expense, depreciation expense and gains and losses related to asset retirement obligations. These net amounts represented income of $18,193,000 in 2018, an expense of $793,000 in 2017 and income of $8,043,000 in 2016. The 2018 amount reflects $18,838,000 of asset and portfolio rationalization charge, offset by $7,677,000 in net gains on legal settlements and $25,271,000 in gains on the sale of assets, primarily excess land. The 2017 amount reflects $19,366,000 of gains on the sale of assets, primarily excess land, offset by $12,668,000 of nonrecurring repair costs related to certain of the Companys leased railcars and $10,813,000 of executive retirement expense.
The asset and portfolio rationalization charge relates to the Companys Southwest ready mixed concrete operations reported in the West Group reportable segment. This charge reflects the Companys evaluation of the recoverability of certain long-lived assets, including property, plant and equipment and intangible assets, for underperforming operations in this business and a reduction in workforce. Of the total charge, $16,970,000 is noncash and $1,868,000 will be settled in cash.
Martin Marietta | Page 41
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
INTRODUCTORY OVERVIEW
Martin Marietta Materials, Inc. (the Company or Martin Marietta) is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of more than 300 quarries, mines and distribution yards to customers in 31 states, Canada, the
Bahamas and the Caribbean Islands. In the western United States, Martin Marietta also provides cement and downstream products, namely ready mixed concrete, asphalt and paving services, in markets where the Company has a leading aggregates position. Specifically, the Company has two cement plants in Texas and ready mixed concrete and asphalt operations in Texas, Colorado, Louisiana and Arkansas. Paving services are exclusively in Colorado. The Companys heavy-side building materials are used in infrastructure, nonresidential and residential construction projects. Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast. The aggregates, cement, ready mixed concrete, asphalt and paving product lines are reported collectively as the Building Materials business.
As more fully discussed in the Consolidated Strategic Objectives section, geography is critically important for the Building Materials business. The Company conducts its Building Materials business through three reportable segments, organized by geography: Mid-America Group, Southeast Group and West Group. The Mid-America and Southeast Groups provide aggregates products only. The West Group provides aggregates, cement and downstream products. Further, the following five states accounted for 72% of the Building Materials business total revenues in 2018: Texas, Colorado, North Carolina, Georgia and Iowa.
The Building Materials business is a mature, cyclical business, dependent on activity within the construction marketplace. As of December 31, 2018, the nations current economic expansion, which started in June 2009, has lasted
Reportable Segments |
Mid-America Group | Southeast Group | West Group | |||
Operating Locations |
Indiana, Iowa, northern Kansas, Kentucky, Maryland, Minnesota, Missouri, eastern Nebraska, North Carolina, Ohio, Pennsylvania, South Carolina, Virginia, Washington and West Virginia | Alabama, Florida, Georgia, Tennessee, Nova Scotia and the Bahamas | Arkansas, Colorado, southern Kansas, Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah and Wyoming | |||
Product Lines |
Aggregates | Aggregates | Aggregates, Cement, Ready Mixed Concrete, Asphalt and Paving Services | |||
Plant Types |
Quarries, Mines and Distribution Facilities | Quarries, Mines and Distribution Facilities | Quarries, Mines, Plants and Distribution Facilities | |||
Modes of Transportation
|
Truck and Railcar | Truck, Railcar and Ship | Truck and Railcar |
Martin Marietta | Page 42
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
114 months. By comparison, the average trough-to-peak expansionary cycle since 1938 was 60 months and, as of May 2018, the current cycle became the second-longest economic recovery since the Great Depression. During this current economic expansion, however, governmental uncertainty, labor shortages, logistical challenges and record levels of precipitation have slowed the pace of heavy construction activity, resulting in a slow, steady, extended construction cycle that is expected to continue over the next several years. The level of recovery varies within the Companys geographic footprint. Specifically, Maryland, North Carolina, Georgia and Florida, key states in the Mid-America and Southeast Groups, are approximately 20% to 25% below mid-cycle demand, while Texas, a key state in the West Group, is modestly above mid-cycle demand.
Magnesia Specialties
The Company also operates a Magnesia Specialties business with production facilities in Michigan and Ohio. The Magnesia Specialties business produces magnesia-based chemicals products used in industrial, agricultural and environmental applications. It also produces dolomitic lime sold primarily to customers in the steel and mining industries. Magnesia Specialties products are shipped to customers worldwide.
Consolidated Strategic Objectives
The Companys strategic planning process, or S trategic O perating A nalysis and R eview (SOAR), provides the framework for execution of Martin Mariettas long-term strategic plan. Guided by this framework and giving consideration to the cyclicality of the Building Materials business, the Company determines capital allocation priorities to maximize long-term shareholder value. The Companys strategy includes ongoing evaluation of aggregates-led opportunities of scale in new domestic markets (i.e., platform acquisitions), expansion through acquisitions that complement existing operations (i.e., bolt-on acquisitions), divestitures of assets that are not consistent with stated strategic goals, and arrangements with other companies engaged in similar or complementary businesses. The Company finances such opportunities with the goal of preserving its financial flexibility by having a leverage ratio (consolidated debt-to-consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA) within a target range of 2.0 times to 2.5 times within a reasonable time following the completion of a transaction.
The Company, by purposeful design, will continue to be an aggregates-led business that focuses on markets with strong, underlying growth fundamentals where it can sustain or achieve a leading market position. Driven by this intentional approach, the Company has leading positions in 90% of its markets. In 2018, the aggregates product line represented 61% of consolidated total revenues. As part of its long-term strategic plan, the Company may pursue strategic cement and targeted downstream opportunities. For Martin Marietta, strategic cement and targeted downstream operations are located in vertically-integrated markets where the Company has, or envisions a clear path toward, a leading aggregates position. Additionally, strategic cement operations are those where market supply cannot be meaningfully interdicted by water.
Martin Marietta | Page 43
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Generally, the Companys building materials products are both sourced and sold locally. As a result, geography is critically important when assessing market attractiveness and growth opportunities. Attractive geographies exhibit a) population growth and/or population density, both of which are drivers of heavy-side building materials consumption; b) business and employment diversity, drivers of greater economic stability; and c) a superior state financial position, a driver of public infrastructure growth and support.
In order to assess population growth and density, the Company focuses on the megaregions of the United States. Megaregions are large networks of metropolitan population centers covering thousands of square miles. According to America 2050 , a planning and policy program of the Regional Plan Association (RPA), a majority of the nations population and economic growth through 2050 will occur in 11 megaregions. The Company has a significant strategic presence in five of the megaregions. As evidence of the successful execution of SOAR, the Companys leading positions in the Front Range and Texas Triangle mega-regions and its enhanced position in the Piedmont Atlantic, primarily the Atlanta area, are the results of acquisitions since
2011. Additionally, the 2018 acquisition of Bluegrass Materials Company (Bluegrass) provided the Company with a new growth platform within the southern portion of the Northeast megaregion. The Company has a legacy presence in the southeastern portion of the Great Lakes megaregion, encompassing operations in Indiana and Ohio. The megaregions and the key states for the Company are more fully discussed in the Building Materials Business Key Considerations section.
In considering business and employment diversity, the Company focuses its geographic footprint along significant transportation corridors, particularly where land is readily available for the construction of fulfillment centers and data centers. The retail sector values transportation corridors, as logistics and distribution are critical considerations for construction supporting that industry. In addition, technology companies view these areas as attractive locations for data centers.
Additionally, the Company considers a states financial position in determining the opportunities and attractiveness of areas for expansion or development. In this assessment, a states financial health rating, issued by S&P Global
Martin Marietta | Page 44
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Ratings and where AAA is the highest score, is reviewed. The Companys top ten revenue-generating states have been assigned a financial health rating of AA or AAA. The Company also reviews the states ingenuity to securing additional infrastructure sourcing.
In line with the Companys strategic objectives, managements overall focus includes the following items:
● |
Upholding the Companys commitment to its Mission, Vision and Values |
● |
Navigating effectively through a slow-and-steady construction recovery cycle, balancing investment and cost decisions against slower-than-expected shipment volume growth |
● |
Tracking shifts in population trends as well as local, state and national economic conditions to ensure changing trends are reflected in execution against the strategic plan |
● |
Integrating acquired businesses efficiently to maximize the return on the investment |
● |
Allocating capital in a manner consistent with the following long-standing priorities while maintaining financial flexibility |
- |
Acquisitions |
- |
Organic capital investment |
- |
Return of cash to shareholders through meaningful dividends and share repurchases |
2018 Performance Highlights
Achieved Record Heritage Safety Performance:
● |
Company-wide Lost Time Incident Rate (LTIR) of 0.20, the world-class LTIR threshold, for the second year in a row |
● |
Total Injury Incident Rate (TIIR) of 1.13 |
Expanded the Business Through Execution of Its Disciplined Growth Strategy:
On April 27, 2018, the Company acquired Bluegrass, the largest privately held, pure-play aggregates business in the United States. With a portfolio of 22 active sites, the acquired operations provide more than 125 years of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. The Company has surpassed its $15 million run rate synergy target.
Achieved Record Financial Performance:
The Company achieved record total revenues despite externally-driven headwinds and record amounts of precipitation, which was exacerbated by weather-related events that occurred across
a majority of the Companys leading geographies. Importantly, inclement weather was most significant during the second and third quarters, which represents the height of the construction season. According to the 2018 statewide precipitation map for the six-month period from April through September, for the 124 years the National Oceanic Atmospheric Administration (NOAA) has been tracking data, much of the states along the eastern seaboard experienced record breaking or near-record breaking precipitation. Among those were North Carolina, Florida, Maryland, Virginia and West Virginia. Though not along the coast, Tennessee and Iowa reported near-record precipitation during these six months, citing 2018 as the 8th wettest and 4th wettest period, respectively. This, coupled with government uncertainty regarding additional infrastructure investment, attendant project delays, tight labor markets and third-party logistical challenges, exerted downward pressure on 2018 shipment and production levels. However, the Companys commitment to operational excellence helped it achieve the following metrics (comparisons with 2017, unless otherwise noted):
● |
Earnings per diluted share of $7.43 |
● |
Net earnings attributable to Martin Marietta of $470.0 million |
● |
Record consolidated EBITDA of $1.05 billion, a 5% improvement, and a 25% margin as a percentage of total revenues |
● |
Aggregates product line pricing increase of 1.9% and volume growth of 8.3% |
- |
Heritage aggregates product line pricing improvement of 3.0% and volume relatively flat |
● |
Record Magnesia Specialties total revenues of $287.7 million and earnings from operations of $88.1 million |
● |
Selling, general and administrative (SG&A) expenses representing 6.6% of total revenues |
● |
Operating cash flow of $705.1 million |
Continued Disciplined Execution Against Capital Allocation Priorities:
● |
Resume share repurchases, purchasing 521,000 shares for $100.4 million |
● |
Dividend increase of 9% in August 2018, resulting in annual dividends paid of $116.4 million |
● |
Ratio of consolidated net debt-to-consolidated EBITDA to 2.76 times for the trailing-twelve months ended December 31, 2018, calculated as prescribed in the Companys bank credit agreements despite completing the debt-financed $1.625 billion acquisition of Bluegrass |
Martin Marietta | Page 45
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
BUSINESS ENVIRONMENT
Building Materials Business
The Building Materials business serves customers in the construction marketplace. The business profitability is sensitive to national, regional and local economic conditions and cyclical swings in construction spending, which are in turn affected by fluctuations in levels of public-sector infrastructure funding; interest rates; access to capital markets; and demographic, geographic, employment and population dynamics.
The heavy-side construction business, inclusive of much of the Companys operations, is conducted outdoors. Therefore, erratic weather patterns, precipitation and other weather-related conditions, including flooding, hurricanes, snowstorms and droughts, can significantly affect production schedules, shipments, costs, efficiencies and profitability. Generally, the financial results for the first and fourth quarters are subject to the impacts of winter weather, while the second and third quarters are subject to the impacts of heavy precipitation. The impacts of erratic weather patterns are more fully discussed in the Building Materials Business Key Considerations section.
Product Lines
Aggregates are an engineered, granular material consisting of crushed stone, sand and gravel of varying mineralogies, manufactured to specific sizes, grades and chemistry for use primarily in construction applications. The Companys operations consist primarily of open pit quarries; however, the Company is also the largest operator of underground aggregates mines in the United States, with 14 active underground mines located in the Mid-America Group. On average, the Companys aggregates reserves exceed 75 years based on normalized production levels and approximate 100 years at current production rates.
Cement is the basic binding agent used to bind water, aggregates and sand, in the production of ready mixed concrete. The Company has a strategic and leading cement position in the Texas market, with production facilities in Midlothian, Texas, south of Dallas/Fort Worth, and Hunter, Texas, north of San Antonio. These plants produce Portland and specialty cements, have a combined annual capacity of 4.5 million tons, and operated at 75% to 80% utilization in 2018. The Midlothian plant has a permit that provides an 800,000-ton-expansion opportunity. In addition to the two production facilities, the Company operates four cement distribution terminals. Calcium carbonate in the form of limestone is the principal raw material used in the production of cement.
The Company owns more than 600 million tons of limestone reserves adjacent to its cement production plants.
Ready mixed concrete, a mixture primarily of cement, water and aggregates, is measured in cubic yards and specifically batched or produced for customers construction projects and then transported and poured at the project site. The aggregates used for ready mixed concrete is a washed material with limited amounts of fines (i.e., dirt and clay). The Company operates 140 ready mix plants in Texas, Colorado, Louisiana and Arkansas. Asphalt is most commonly used in surfacing roads and parking lots and consists of liquid asphalt, or bitumen, the binding medium, and aggregates. Similar to ready mixed concrete, each asphalt batch is produced to customer specifications. The Companys asphalt operations are located primarily in Colorado; additionally, paving services are offered in Colorado. Market dynamics for these downstream product lines include a highly competitive environment and lower barriers to entry compared with aggregates and cement.
Martin Marietta | Page 46
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
End-Use Trends
● | According to the U.S. Geological Survey, for the nine months ended September 30, 2018, the latest available governmental data, estimated construction aggregates consumption and cement consumption increased 3% compared with the nine months ended September 30, 2017 |
● | Spending statistics for the eleven months ended November 2018 versus the eleven months ended November 2017, the latest available data, according to U.S. Census Bureau: |
- |
Total value of construction put in place increased 5% |
- |
Public construction spending increased 7% |
- |
Private nonresidential construction market spending increased 4% |
- |
Private residential construction market spending increased 4% |
The principal end-use markets of the Building Materials business are public infrastructure (i.e., highways; streets; roads; bridges; and schools); nonresidential construction (i.e., manufacturing and distribution facilities; industrial complexes; office buildings; large retailers and wholesalers; and energy-related activity); and residential construction (i.e., subdivision development; and single- and multi-family housing). Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast, collectively comprising the ChemRock/Rail market.
Public infrastructure jobs can require several years to complete, while residential and nonresidential construction jobs are usually completed within one year. Generally, the purchase orders the Company receives from its customers do not contain firm quantity commitments, regardless of end-use market. Therefore, management does not utilize a Company backlog in managing its business.
Public Infrastructure
The public infrastructure market accounted for 39% of the Companys aggregates product line shipments in 2018. Contractor capacity issues and logistics disruptions have exerted disproportionate downward pressure on public construction activity, resulting in the Companys shipments to this end-use market remaining below the most recent five-year average of 41% and ten-year average of 46%.
While construction spending in the public and private market sectors is affected by economic cycles, the historic level of spending on public infrastructure projects has been comparatively more stable due to predictability of funding from federal, state and local governments, with approximately half of the funding from federal government and half from state and local governments. The Fixing Americas Surface Transportation Act (FAST Act), signed into law on December 4, 2015, was the first long-term transportation funding bill in nearly a decade and authorized $305 billion over fiscal years 2016 through 2020. Included with FAST Act funding is $300 million available for loans issued under Transportation Infrastructure Finance and Innovation Act (TIFIA). However, to date, public infrastructure activity has not yet experienced the anticipated benefits from FAST Act funding. While some contractors are reporting longer lag times between contract awards and project commencement, public construction projects, once awarded, are seen through to completion. Thus, delays from weather or other factors typically serve to
Martin Marietta | Page 47
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
extend the duration of the construction cycle. State and local initiatives that support infrastructure funding, including gas tax increases and other ballot initiatives in recent years, are increasing in size and number as these governments recognize the need to play an expanded role in public infrastructure funding. Nationally, 78% of nearly 1,700 ballot initiatives since the 2009 elections were approved by voters. Importantly, in November 2018, $26.8 billion of transportation funding initiatives were approved in Florida, Texas, Colorado, Georgia, North Carolina and South Carolina. The pace of construction should accelerate and shipments to the public infrastructure market should return to historical levels as monies from both the federal government and state and local governments become awarded. A return to the higher historical shipment volumes should be facilitated by state Departments of Transportations (DOTs) and contractors as they address their respective labor constraints.
Nonresidential
The nonresidential construction market accounted for 33% of the Companys aggregates product line shipments in 2018. According to the U.S. Census Bureau, spending for the private nonresidential construction market increased 3.5%, or $13.9 billion, for the eleven months ended November 2018 compared with 2017. The Dodge Momentum Index (DMI), a twelve-month leading indicator of construction spending for nonresidential building compiled by McGraw-Hill Construction and where the year 2000 serves as an index basis of 100, was 151.9 in December 2018 compared with 153.9 in December 2017. The DMI suggests nonresidential construction activity will remain healthy over the next several years. Historically, half of the Companys nonresidential construction shipments have been used for office and retail projects, while the remainder has been used for heavy industrial and capacity-related projects, including energy-related projects. Since the latter part of 2015, reduced oil prices have suppressed shipments directly into shale exploration activities. Large, energy-related projects, which were completed in 2016 and required the full suite of the Building Materials products in the West Group, contributed favorably to shipments and profitability through the life of the projects.
Residential
The residential construction market accounted for 22% of the Companys aggregates product line shipments in 2018. Private residential construction spending increased 4% for the eleven months ended November 2018 compared with
2017, according to the U.S. Census Bureau. The residential construction market, like the nonresidential construction market, is interest rate sensitive and typically moves in direct correlation with economic cycles. The Companys exposure to residential construction is split between aggregates used in the construction of subdivisions (including roads, sidewalks, utilities and storm and sewage drainage), aggregates used in new single-family home construction and aggregates used in construction of multi-family units. Construction of both subdivisions and single-family homes is more aggregates intensive than construction of multi-family units. Through an economic cycle, multi-family construction generally begins early in the cycle and then transitions to single-family construction. Therefore, the timing of new subdivision starts, as well as new single-family housing permits, are strong indicators of residential volumes. While residential housing starts of 1.3 million units for the twelve months ended November 2018 were flat compared with the comparable prior-year period, they remain below the 50-year historical annual average of 1.5 million units. For the twelve months ended November 2018, eight of the Companys key states ranked in the top fifteen states for total housing permits. The Company expects continued growth in the residential market driven by favorable demographics, job growth, land availability and efficient permitting.
ChemRock/Rail
The remaining 6% of the Companys 2018 aggregates product line shipments was to the ChemRock/Rail market, which includes ballast and agricultural limestone. Ballast is an aggregates product used to stabilize railroad track beds and, increasingly, concrete rail ties are being used as a substitute for wooden ties. Agricultural lime, a high-calcium carbonate material, is used as a supplement in animal feed, a soil acidity neutralizer and agricultural growth enhancer. Additionally, ChemRock/Rail includes rip rap, which is used as a stabilizing material to control erosion caused by water runoff at embankments, ocean beaches, inlets, rivers and streams, and high-calcium limestone, which is used as filler in glass, plastic, paint, rubber, adhesives, grease and paper. Chemical-grade, high-calcium limestone is used as a desulfurization material in utility plants. Ballast shipments declined in 2018 due to lower maintenance spending by Class I railroads.
Martin Marietta | Page 48
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Pricing Trends
Pricing for construction projects is generally based on terms committing to the availability of specified products of a stated quantity at an agreed-upon price during a definitive period. Due to infrastructure projects spanning multiple years, announced changes in prices can have a lag time before taking effect while the Company sells products under existing price agreements. Pricing escalators included in multi-year infrastructure contracts somewhat mitigate this effect. However, during periods of sharp or rapid increases in production costs, multi-year infrastructure contract pricing may provide only nominal pricing growth. Additionally, the Company may implement mid-year price increases, on a market-by-market basis, where appropriate. Pricing is determined locally and is affected by supply and demand characteristics of the local market.
In 2018, the average selling price for the aggregates product line increased 1.9%, where heritage aggregates pricing increased 3.0%, in line with managements expectations. Management believes 2019 aggregates product line pricing growth will be in the mid-single digits.
Cost Structure
● | The top four cost categories, details which follow, represent 66% of the Building Materials business total direct production costs |
● | Health and welfare costs increased approximately 8% per year over past five years compared with the national average of 6% over same period; Companys costs expected to increase 3% in 2019 |
● | Pension expense decreased to $34.7 million in 2018 from $37.6 million in 2017; pension costs are expected to approximate $36.9 million in 2019 |
Direct production costs for the Building Materials business are components of cost of sales incurred at the quarries, mines, distribution yards and facilities, cement plants, ready
mixed concrete plants and asphalt plants. Cost of sales also includes the cost of resale materials, freight expenses to transport materials from a producing quarry to a distribution yard and production overhead costs.
Generally, the top seven categories of direct production costs for the Building Materials business are (1) labor and related benefits; (2) raw materials; (3) depreciation, depletion and amortization (DDA); (4) repairs and maintenance; (5) energy; (6) contract services; and (7) supplies. In 2018, these categories represented 91% of the Building Materials business total direct production costs.
Variable costs are expenses that fluctuate with the level of production volume while fixed costs are expenses that do not vary based on production or sales volume. Accordingly, the Companys operating leverage can be substantial. Production is the key driver in determining the levels of variable costs, as it affects the number of hourly employees and related labor hours. Further, components of energy, supplies and repairs and maintenance costs also increase in connection with higher production volumes.
Generally, when the Company invests capital in facilities and equipment, increased capacity and productivity, along with
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reduced repair costs, can offset increased fixed depreciation costs. However, with muted aggregates demand, the increased productivity and related efficiencies may not be fully realized, resulting in under absorption of fixed costs. Further, the aggregates facilities continue to operate at a level significantly below capacity, thereby, restricting the Companys ability to capitalize $44.5 million and $36.5 million of costs at December 31, 2018 and 2017, respectively, in inventories.
The Companys ready mixed concrete and asphalt product lines require the use of raw materials in the production of their products. Cement and liquid asphalt are key raw materials in the production of ready mixed concrete and asphalt, respectively. Therefore, fluctuations in prices for these raw materials directly affect the Companys operating results. Liquid asphalt prices were higher in 2018 versus 2017, but may not always proportionately follow changes in the prices of other energy products (e.g., oil or diesel fuel) because of complexities in the refining process which converts a barrel of oil into other fuels and petrochemical products.
The cement product line is a capital-intensive operation with high-fixed costs to run plants that operate all day, every day, with the exception of maintenance shutdowns. Kiln and finishing mill maintenance typically requires a plant to be shut down for a period of time as repairs are made. In 2018, 2017 and 2016, the cement product line incurred
plant maintenance outage costs of $17.3 million, $14.0 million and $22.9 million, respectively. The Company adjusts production levels in anticipation of planned maintenance shutdowns.
Diesel fuel represents the single largest component of energy costs for the Building Materials business. The average cost per gallon of diesel fuel was $2.29, $1.81 and $1.96 in 2018, 2017 and 2016, respectively. Pricing in 2016 reflects an unfavorable fixed-price agreement which expired on December 31, 2016. Changes in energy costs also affect the prices that the Company pays for related supplies, including explosives, conveyor belting and tires. Further, the Companys contracts of affreightment for shipping products on its rail and waterborne distribution network typically include provisions for escalations or reductions in the amounts paid by the Company if the price of fuel moves outside a stated range.
Wage inflation and increases in labor costs may be somewhat mitigated by enhanced productivity in an expanding economy. Further, workforce reductions resulting from process automation and mobile fleet right-sizing have mitigated rising labor costs. During economic downturns, the Company reviews its operations and, where practical, temporarily idles certain sites. The Company is able to serve these markets with other open facilities that are in close proximity. Further, in certain markets, management can create production super crews that work on a rotating basis at various locations within a district. For example, within a market, a crew may work three days per week at one quarry and the other two workdays at another quarry within that market. This has allowed the Company to responsibly manage headcount in periods of lower demand.
There is a risk of long-lived asset impairment at temporarily-idled locations. The timing of increased demand will determine when these locations are fully reopened. During the time that locations are temporarily idled, the locations plant and equipment continue to be depreciated. When appropriate, mobile equipment is transferred and used at an open location. As the Company continues to have long-term access to the supply of aggregates reserves and extend the useful lives of equipment, these locations are not impaired. When temporarily-idled locations are reopened, it is typical for equipment repair costs to, in the short term, increase.
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Rising health care costs continue to affect total labor costs. Over the past five years, national health care costs have increased approximately 6% on average, and are expected to increase at this rate in 2019. This expected cost increase is compounded for all employers by uncertainty relating to unpredictable high-cost claims. The Companys per employee health care cost increased 8% on average per year from 2014 through 2018, driven primarily by increased high-cost claims activity in 2018. For 2019, the Companys health
and welfare costs are expected to increase slightly below general marketplace trends. While potential changes to the Affordable Care Act (including the 40% excise tax on high-cost plans effective in 2022) may affect the Companys cost in the future, any impact cannot be predicted at this time.
Despite a higher discount rate, the Companys pension expense is expected to increase from $34.7 million in 2018 to an estimated $36.9 million in 2019 (see section Critical Accounting Policies and Estimates Pension Expense Selection of Assumptions ).
The impact of inflation on the Companys businesses has not been significant. Historically, the Company has achieved pricing growth in periods of inflation based on its ability to increase its selling prices in a normal economic environment.
Building Materials Business Key Considerations
Geography is critically important as products are sourced and sold locally.
The Companys geographic footprint is primarily in attractive markets with strong, underlying growth characteristics, including population growth and/or population density and business and economic diversity, both of which generate demand for construction and the Companys Building Materials products. The majority of the nations population currently resides in 11 megaregions; the RPA estimates 75% of the population will reside in these megaregions by 2050. The Company has a significant presence in five of the megaregions: Texas Triangle, Gulf Coast, Piedmont Atlantic, Front Range and Florida. The Building Materials business top five sales-generating states are Texas, Colorado, North Carolina, Georgia and Iowa; cumulatively they accounted for 72% of its 2018 total revenues by state of destination, four of which are discussed below as part of their respective megaregion. Iowa is discussed below as a top five sales-generating state and, while not part of a megaregion, is an attractive market that has diversified its economy over the past several years. Further, the top ten sales-generating states, which also include Florida, South Carolina, Indiana, Maryland and Nebraska, accounted for 85% of the Building Materials business 2018 total revenues by state of destination. As South Carolina is part of the Piedmont Atlantic megaregion and Florida is a separate megaregion, they are discussed below in their respective megaregion.
Texas Triangle and Gulf Coast
The Texas Triangle is primarily defined by the anchoring metropolises of Dallas/Fort Worth, San Antonio and Houston. The Texas Triangles population surged 41% in the 15-year period ended 2015, adding 5.3 million residents, and continues to experience population growth. Based on RPAs America 2050 study performed in 2010, it projects the population in this megaregion
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will nearly double in the forty-year period ending in 2050, with 70% of the states population residing there. The Texas Triangle represents a diverse economy, including the finance, technology, transportation and goods and services sectors.
Uniquely, Houston, which has consistently accounted for approximately 3% of the nations gross domestic product (GDP) for the past eleven years and has been ranked in the top five most populous metropolitan areas since 2010, is considered part of both the Gulf Coast and the Texas Triangle megaregions. In addition to Houston, cities in the Gulf Coast megaregion include New Orleans and Baton Rouge, Louisiana. The Gulf Coast megaregions population is expected to exceed 16 million in 2025 and 23 million in 2050. The economy is driven by the energy, chemical and transportation sectors. According to the Gulf Economic Survival Team, 16% of the nations domestic crude oil is supplied by this megaregion, supporting 430,000 jobs and contributing more than $44 billion to the national economy.
The Texas market remains one of the strongest in the United States. According to the Bureau of Economic Analysis, at the end of 2017, the states GDP comprised nearly 9% of the nations $19.5 trillion GDP. According to the American Legislative Exchange Council (ALEC), Texas ranked first in economic performance in 2017, supported by growth in GDP, employment and population. Texas ranks fifth in the nation in employment growth for the twelve months ended November 2018, while Dallas/Fort Worth was the second-ranked metropolitan area in the country for the same period. Consistent with this trend, from 2010 through 2018, the state added approximately 3.5 million people to its population.
The states Department of Transportation (TxDOT) let $7.3 billion in construction projects in fiscal 2018 and has a letting budget of $9.6 billion for fiscal 2019. As announced in 2017, TxDOT has committed to letting over $65 billion of projects over the ten-year period ending 2027. Funding for highway construction comes from dedicated sources, including Propositions 1 and 7, as opposed to the use of general funds. Proposition 1, which passed in 2014, takes a portion of the oil and gas severance tax revenues and allocates them to the state highway fund. Proposition 7 is estimated to provide an additional $2.0 billion of annual funding for non-toll roads beginning in fiscal 2018 and further increasing after 2019. Through fiscal 2018, Propositions 1 and 7 provided $5.4 billion and $2.5 billion, respectively, to the state highway fund. Further, on November 8, 2016, voters approved $990 million of additional statewide transportation
funding, including a $720 million transportation bond in Austin. All 14 ballot measures introduced and voted upon on November 6, 2018 were approved and are estimated to provide $1.2 billion of additional infrastructure funding. The strength of the Texas economy extends beyond infrastructure. Technology giant, Alphabet Inc., parent company of Google, announced in 2018 that it purchased 375 acres of land in Midlothian, Texas, for its next data center. Additionally, Apple announced it will invest $10 billion over the next five years in its data centers, including its new 133-acre campus in Austin that will have the capacity to hold 15,000 employees. Texas ranked second, behind Florida, in total housing permits and experienced a 7% increase for the twelve months ended November 2018. The Houston metropolitan area led the nation for total housing starts for the year ended December 31, 2018, driven partly due to rebuilding after the destruction brought by Hurricane Harvey.
Piedmont Atlantic
The Piedmont Atlantic megaregion generally follows the Interstate 85/20 corridor, spanning across North Carolina, South Carolina, Georgia, Tennessee and Alabama and includes four primary cities: Raleigh, Charlotte, Atlanta and Birmingham. The Piedmont Atlantic is a fast-growing megaregion; however, it is facing challenges, including increased traffic congestion and inadequate infrastructure that accompany a growing population.
North Carolina continues to demonstrate solid economic growth, exceeding the nations average GDP increase for the past four years. Nationally, North Carolina ranked seventh for job growth for the twelve months ended November 2018 and ranked fifth in the nation for population growth according to the U.S. Census Bureau for 2018. Supported by population growth, residential housing permits increased 5% for the twelve months ended November 2018 and multi-housing permits increased 17% over the twelve months ended November 2018, ranking fourth in the nation. The state also continues to make significant investment in its infrastructure. The states 2018-2027 Statewide Transportation Improvement Program, or STIP, plans approximately 1,000 highway projects and approximately 300 non-highway projects, representing investment of approximately $23 billion. Consistent with this plan, the North Carolina Department of Transportation set a twelve-month letting schedule of $4.1 billion for fiscal 2019. In addition to the $1.2 billion of transportation referendums approved in November 2016, four bond referendums totaling $225.8 million of additional funding were approved in the November 2018 election.
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For the past four years, South Carolina has ranked in the top ten states for population growth according to the U.S. Census Bureau. Supported by this growth, residential construction activity increased, with single-housing permits rising 4% for the twelve months ended November 2018, ranking ninth in the nation. The states infrastructure program should be bolstered by S.1258, also known as Act No. 275, allowing up to $4.2 billion to be devoted for highway spending over a 10-year period. South Carolinas 10-year DOT plan includes 1,000 miles of upgrades to rural roads and improvements to 140 miles of interstate highways. These are much-needed investments as, according to the a recent report issued by the American Society of Civil Engineers, the states infrastructure system is in need of major repair. The report further states that 16% of South Carolinas 76,000 miles of public roads are in poor condition. To fund infrastructure needs, the state passed House Bill 3516 in June 2017, which increases the states gas tax $0.02 per gallon per year for six years; this is the states first gas tax increase in 30 years. The house bill institutes a fee for vehicles that do not consume motor fuel, increases sales tax on vehicle purchases and charges a one-time fee for vehicles transferred from another state and registered in South Carolina. Collectively, House Bill 3516 is expected to generate an additional $625 million per year when fully implemented. In the November 2018 election, voters approved a sales tax increase to generate an additional $120 million for transportation funding for four years, or until the $120 million funding goal is met. The nonresidential market should experience benefits from the South Carolina Port Authoritys capital spending budget of $2.4 billion through 2022.
Though Georgias recovery from the Great Recession continues in certain areas, the state has largely rebounded. For the twelve months ended November 2018, Georgia ranked eighth in the country for employment growth. Further, population growth has ranked in the top seven for the last eight years, giving rise to residential growth. Total housing permits ranked fourth, and increased 11% for the twelve months ended November 2018. Further, companies continue to relocate to or expand their operations within the state. In the last two months of 2018, Norfolk Southern and Wayfair each announced expansion in Georgia, with collective investments exceeding $600 million. In January 2016, Governor Nathan Deal announced a comprehensive infrastructure maintenance plan including a 10-year plan and representing more than $10 billion in investment.
Some elements of the Governors plan include the addition of toll lanes along the I-285 loop in Atlanta, interchange upgrades for I-20 and I-285 and additional capacity of metropolitan sections of I-75, I-85 and GA 400. Consistent with these plans, the infrastructure construction market continues to expand and will significantly benefit from the passage of a gas tax increase and other funding mechanisms that will add approximately $1 billion, or essentially double, the states annual construction budget. Further, in 2016, Georgia voters approved five local sales tax increases to provide $4 billion for road and transit projects, spanning a five- to 40-year period. Additionally, the Transportation Special-Purpose Local-Option Sales Tax (T-SPLOST) program is starting to provide benefit in the southern part of Georgia. In November 2018, Georgia approved a ballot measure to renew a 1% sales/income tax increase for six years and a $0.01 tax increase that will contribute $183 million to the transportation and road maintenance projects.
Front Range
Extending from the southern portion of Wyoming near Cheyenne, following Interstate 25 through Colorado into New Mexico, incorporating Santa Fe and Albuquerque, the Front Range megaregion is the nations fastest-growing megaregion. The Front Range represents 85% of Colorados population and is estimated to exceed 10 million by 2050, nearly double the 2010 population. According to Colorados Department of Local Affairs, during the five-year period ending 2015, 96% of Colorados population growth occurred along the Front Range.
Through strategic acquisitions since 2011, the Company has built a leading position to serve the Front Range. The Colorado economy includes a diverse economic base, leading to strong employment and population growth. Employment and population are each expected to increase more than 45% from 2012 through 2040, driving an upward trend in vehicle miles traveled on the states highway system. Senate Bill 17-267, enacted in 2017, includes a component that focuses on new lease-purchase agreements that allocates $1.9 billion of its proceeds to Colorados DOT and the remainder of its proceeds to transportation and capital construction projects over a four-year period. Growth in population continues to support increased construction activity. For the twelve months ended November 2018, total housing permits in Colorado increased 9%, with single-family housing permits increasing 20%.
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Florida
Spanning nearly the entire state, the Florida megaregion is also rapidly expanding. Florida is the third-most populous state according to the Bureau of Economic Analysis, with a high volume of its population growth from foreign countries. The state added 2.1 million residents from 2010 to 2017 and is the second-highest state in population growth, behind Texas, from 2014 to 2018. In fact, the states GDP rose 4% in 2017 compared with 2016, and represented 5% of the nations GDP.
Florida ranks third in the country for job growth for the twelve months ended December 2018 and the states unemployment rate was 3.3%. Florida has a $10.8 billion DOT budget for fiscal year 2019 and continues to significantly invest in streets and highways. In fact, the state has a $46.6 billion five-year construction program that extends to 2021. In the 2018 elections, Florida voters approved six ballot initiatives benefitting infrastructure and totaling $24.9 billion. Florida is also experiencing growth in private-sector construction and leads the country in growth for single-family and total housing permits for the twelve months ended November 2018.
Iowa
Iowa has been a top-five Martin Marietta state for decades and has historically experienced a stable and steady economy. Iowa is the largest corn and pork-producing state in the nation and provides more than 7% of Americas food supply. The Companys agricultural lime shipment volumes are dependent on, among other things, weather, demand for agricultural commodities, including corn and soybeans, commodity prices, farm and land values. The Iowa economy has become consistently more diverse over the past several years, in part due to its ranking as sixth in the nation for lowest cost of doing business. The state is attractive for starting and expanding businesses due to enticing tax incentives. Consistent with these facts, the states unemployment rate, 2.4%, remains one of the lowest in the nation. With companies including Google and Microsoft continuing to expand operations in Iowa, nonresidential construction spending is expected to benefit. In May 2018, Facebook announced plans to further expand current operations in Iowa by investing an additional $1.5 billion. Additionally, Apple plans to build a $1.3 billion data center. The states infrastructure market has benefitted from the 2015
$0.10 per gallon increase in the state gas tax, raising an additional $515 million since enactment for state and local roads and bridges. This funding has resulted in new infrastructure projects being started and existing projects expected to be completed sooner than originally estimated. Further, Iowa is expected to increase wind-based energy production to reduce dependency on fossil fuels, another driver of economic expansion.
Growth markets with limited supply of indigenous stone must be served via a long-haul distribution network.
The U.S. Department of the Interiors geological map of the United States depicts the possible sources of indigenous surface rock and illustrates its limited supply in certain areas of the United States, including the coastal areas from Virginia to Texas. Further, certain interior United States markets may experience limited availability of locally sourced aggregates resulting from increasingly restrictive zoning, permitting and/or environmental laws and regulations. The Companys long-haul distribution network is used to supplement, or in many cases wholly supply, the local crushed stone needs in these areas.
The long-haul distribution network can diversify market risk for locations that engage in long-haul transportation of their aggregates products. Particularly where a producing quarry serves a local market and transports products via rail, water and/or truck to be sold in other markets, the risk of a downturn in one market may be somewhat mitigated by other markets served by the location.
Product shipments are moved by rail, water and truck through the Companys long-haul distribution network. The Companys rail network primarily serves its Texas, Florida, Colorado and Gulf Coast markets, while the Companys Bahamas and Nova Scotia locations transport materials via oceangoing ships. The Companys strategic focus includes expanding inland and offshore capacity and acquiring distribution yards and port locations to offload transported material. At December 31, 2018, the distribution network available to the Company consisted of 98 distribution facilities.
The Companys increased dependence on rail shipments has made it more reliant on railroad performance issues, including track congestion, crew and availability, the effects
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of adverse weather conditions and the ability to renegotiate favorable railroad shipping contracts. Further, changes in the operating strategy of rail transportation providers can create operational inefficiencies and increased costs from the Companys rail network.
A portion of railcars and all ships of the Companys long-haul distribution network are obtained with short- and long-term leases, some with purchase options, and contracts of affreightment. The limited availability of water and rail transportation providers, coupled with limited distribution sites, can adversely affect lease rates for such services and ultimately the freight rate. The Company has not purchased ships.
The Company has long-term agreements providing dedicated shipping capacity from its Bahamas and Nova Scotia operations to its coastal ports. These contracts of affreightment are take-or-pay contracts with minimum and maximum shipping requirements. The Companys waterborne contracts of affreightment have varying expiration dates ranging from 2023 to 2027 and generally contain renewal options. However, there can be no assurance that such contracts can be renewed upon expiration or that terms will continue without significant increases.
Public infrastructure, the Companys largest end-use market, is funded through a combination of federal, state and local sources.
Public-sector construction projects are funded through a combination of federal, state and local sources. The federal highway bill provides annual funding for public-sector highway construction projects and includes spending authorizations, which represent the maximum financial obligation that will result from the immediate or future outlays of federal funds for highway and transit programs. The federal governments surface transportation programs are financed mostly through the receipts of highway user taxes placed in the Highway Trust Fund, which is divided into the Highway Account and the Mass Transit Account. Revenues credited to the Highway Trust Fund are primarily derived from a federal gas tax, a federal tax on certain other motor fuels and interest on the accounts accumulated balances. Of the currently imposed federal gas tax of $0.184 per gallon, which has been static since 1993, $0.15 is allocated to the Highway Account of the Highway Trust Fund.
Federal highway laws require Congress to annually appropriate funding levels for highways and other programs. Once the annual appropriation is passed, federal funds are distributed to each state based on formulas (apportionments) or other procedures (allocations). Apportioned and allocated funds generally must be spent on specific programs as outlined in the federal legislation. Most federal funds are available for four years. Once the federal government approves a state project, funds are committed and considered expended regardless of when the cash is actually spent by the state and reimbursed by the federal government. According to the Federal Highway Administration, funds are generally spent by the state over a period of years, with 27% in the year of funding authorization, 41% in the succeeding year, 16% in the third year and the remaining 16% in the fourth year and beyond.
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The FAST Act, a five-year, $305 billion federal highway bill, reauthorizes federal highway and public transportation programs and stabilizes the Highway Trust Fund. The FAST Act retains the programs supported under its predecessor legislation, Moving Ahead for Progress in the 21st Century (MAP-21), but with some changes. Specifically, TIFIA, a U.S. Department of Transportation alternative funding mechanism, which under MAP-21 provided three types of federal credit assistance for nationally or regionally significant surface transportation projects, now allows more diversification of projects. TIFIA is designed to fill market gaps and leverage substantial private co-investment by providing projects with supplemental or subordinate debt which is not subject to national debt ceiling challenges or sequestration. Since inception, TIFIA has provided more than $25 billion of credit assistance to over 50 projects representing over $90 billion in infrastructure investment. As of January 2019, TIFIA-funded projects for the Companys top five sales-generating states approximated $30 billion. Under the FAST Act, annual TIFIA funding ranges from $275 million to $300 million, but no longer requires the 20% matching funds from state DOTs. Consequently, states can advance construction projects immediately with potentially no upfront outlay of state DOT dollars. TIFIA requires projects to have a revenue source to pay back the credit assistance within a 30-to-40-year period. Therefore, the TIFIA program has the ability to significantly leverage construction dollars. Private investment in transportation projects funded through TIFIA is particularly attractive, in part due to the subordination of public investment to private. Management believes TIFIA could provide a substantial boost for state DOT construction programs well above what is currently budgeted.
Excluding TIFIA-approved projects, states are required to match funds at a predetermined rate in order to receive federal funds for highways. Matching levels vary depending on the type of project. If a state is unable to match its allocated federal funds, funding is forfeited and reallocated to states providing the appropriate matching funds. Although a significant portion of state highway construction programs are financed from highway user fees, significant increases in federal infrastructure funding typically require state governments to increase highway user fees to match federal spending. While states rarely forfeit federal highway funds, the possibility of forfeiture increases when states face declining tax revenues and struggle to balance budgets.
Given that most states are required to balance their budgets, reductions in revenues generally require a reduction in states expenditures. However, the impact of state revenue reductions on highway spending will vary depending on whether the spending comes from dedicated revenue sources, such as highway user fees, or whether portions are funded with general funds. Based on national averages, user taxes represent the largest component of highway revenues, averaging 42% in fiscal year 2015, the latest available statistic. The use of general funds as a percentage of each states highway revenues varies, with a national average of 4% in fiscal year 2015, the latest available statistic. Therefore, state budget spending cuts typically only affect a small percentage of a states highway spending.
States continue to play an expanding role in infrastructure investment. In addition to federal appropriations, each state funds its infrastructure investment from specifically allocated amounts collected from various user taxes, typically gasoline taxes and vehicle fees. Over the past several years, states have taken on a significantly larger role in funding infrastructure investment, including initiating special-purpose taxes and raising gas taxes. Management believes
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that financing at the state level, such as bond issuances, toll roads and tax initiatives, will grow at a faster rate than federal funding. State spending on infrastructure generally leads to increased growth opportunities for the Company. The level of state public-works spending is varied across the nation and dependent upon individual state economies. The degree to which the Company could be affected by a reduction or slowdown in infrastructure spending varies by state. The state economies of the Building Materials business five largest sales-generating states may disproportionately affect the Companys financial performance.
Governmental appropriations and expenditures are typically less interest rate-sensitive than private-sector spending. Obligations of federal funds is a leading indicator of highway construction activity in the United States. Before a state or local department of transportation can solicit bids on an eligible construction project, it enters into an agreement with the Federal Highway Administration to obligate the federal government to pay its portion of the project cost. Federal obligations are subject to annual funding appropriations by Congress.
The need for surface transportation improvements continues to significantly outpace the amount of available funding. A large number of roads, highways and bridges built following the establishment of the Interstate Highway System in 1956 are now in need of major repair or reconstruction. According to The Road Information Program (TRIP), a national transportation research group, vehicle travel on United States highways increased 16% from 2000 to 2016, while new lane road mileage increased only 5% over the same period. TRIP also reports that 45% of the nations major roads are in poor or mediocre condition and 9% of the nations bridges are structurally deficient or functionally obsolete. Currently, the Federal Highway Administration estimates that $142.5 billion is needed in annual capital investment through 2032 to significantly improve the current conditions and performance of the nations highways. While state DOTs and contractors are slowly addressing their labor constraints, the Company believes that if an enhanced infrastructure bill was enacted, those efforts would be more rapidly addressed. However, even in the absence of an enhanced infrastructure bill, strong customer confidence and improving sentiment leads management to believe that infrastructure activity for 2019 and
beyond should benefit from the FAST Act, the Tax Cuts and Jobs Act of 2017 (2017 Tax Act), and additional state and local infrastructure initiatives.
Transportation investments generally boost the national economy by enhancing mobility and access and by creating jobs, which is a priority of many of the governments economic plans. According to the Federal Highway Administration, every $1 billion in federal highway investment creates approximately 28,000 jobs. The number of jobs created is often dependent on the nature and aggregates intensity of the projects. Approximately half of the Building Materials business total revenues from the infrastructure end-use market come from federal funding authorizations, including matching funds from the states. For each dollar spent on road, highway and bridge improvements, the Federal Highway Administration estimates an average benefit of $5.20 is recognized in the form of reduced vehicle maintenance costs, reduced delays, reduced fuel consumption, improved safety, reduced road and bridge maintenance costs and reduced emissions as a result of improved traffic flow.
In addition to highways and bridges, transportation infrastructure includes aviation, mass transit, and ports and waterways. Public-sector construction related to transportation infrastructure can be aggregates intensive.
Railroad construction continues to benefit from economic growth, which ultimately generates a need for additional maintenance and improvements. According to the American Road & Transportation Builders Association, subway and light rail work is expected to benefit slightly from the FAST Act.
Erratic weather can significantly impact operations.
Production and shipment levels for the Building Materials business correlate with general construction activity, most of which occurs outdoors and, as a result, is affected by erratic weather, seasonal changes and other weather-related conditions which can significantly affect the business. Typically, due to a general slowdown in construction activity during winter months, the first and fourth quarters generally experience lower production and shipment activity. As such, temperature plays a significant role in the months of March and November, meaningfully affecting the Companys first- and fourth-quarter results, respectively, where warm and/or
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moderate temperatures in March and November allow the construction season to start earlier and end later, respectively. NOAA reports that since 1895, the contiguous United States has experienced an average temperature increase of 1.5°F per century, with 2018 averaging 1.5°F above the 20th century average. In 2018, the nation experienced near-average temperatures for March. Colorado and Texas reported above-average temperatures while Florida, North Carolina, South Carolina and Virginia reported cooler-than-average temperatures in March 2018. For November 2018, the average temperature for the nation was below average, where the Midwestern and southwestern states, namely Texas, Oklahoma, Kansas, Arkansas and Iowa, were below or much below average temperatures.
Nationally, 2018 marked the third-wettest year on record and the sixth consecutive year with above-average precipitation. 2018 marked the wettest year for nine states, including North Carolina, Maryland, Virginia, West Vriginia and Tennessee. The last few years have brought an unprecedented amount of precipitation to many areas in the United States. Excessive rainfall jeopardizes production efficiencies, shipments and profitability in all markets served by the Company. In particular, the Companys operations in the southeastern and Gulf Coast regions of the United States and the Bahamas are at risk for hurricane activity, most notably in August, September and October. In September
2018, Hurricane Florence, the second-wettest storm in 70 years and ranking only behind Hurricane Harvey, made landfall in the Carolinas as a Category 4 storm, bringing with it 13 trillion gallons of rain. In August 2017, Hurricane Harvey, a Category 4 storm that made landfall in Houston, brought nearly 20 trillion gallons of precipitation. In the Southeast, Hurricane Irma, also a Category 4 storm, made landfall in Florida in September 2017 and brought excessive rainfall to the southeastern United States, notably Florida and Georgia. In October 2016, rainfall along the eastern seaboard of the United States from Hurricane Matthew, a Category 5 hurricane, approximated 13.6 trillion gallons. Hurricane Matthew was the first major hurricane on record to make landfall in the Bahamas.
Capital investment decisions driven by capital intensity of the Building Materials business and focus on land.
The Companys organic capital program is designed to take advantage of construction market growth through investment in both permanent and portable facilities at the Companys operations. Over an economic cycle, the Company typically invests organic capital at an annual level that approximates depreciation expense. At mid-cycle and through cyclical peaks, organic capital investment typically exceeds depreciation expense, as the Company supports current capacity needs and invests for future capacity growth. Conversely, at a cyclical trough, the Company can reduce levels of capital investment. Regardless of cycle, the Company sets a priority of investing capital to ensure safe, environmentally-sound and efficient operations and to provide the highest quality of customer service and establish a foundation for future growth.
The Company is diligent in its focus on land opportunities, including greensites and expanding locations. Land purchases are usually opportunistic and require the Company to be flexible in its ability to secure the land. Land purchases can include contiguous property around existing quarry locations. Such property can serve as buffer property or additional mineral reserve capacity, assuming regulatory hurdles can be cleared and the underlying geology supports economical aggregates mining. In either instance, the acquisition of additional property around an existing quarry allows the expansion of the quarry footprint and an extension of quarry life.
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Magnesia Specialties Business
The Magnesia Specialties business produces and sells dolomitic lime from its Woodville, Ohio facility. Additionally, at its Manistee, Michigan facility, Magnesia Specialties manufactures magnesia-based chemicals products for industrial, agricultural and environmental applications. In 2018, this business achieved record total revenues and earnings from operations of $287.7 million and $88.1 million, respectively. Of 2018 total revenues, 70% were attributable to chemicals products, 29% were attributable to lime and 1% was attributable to stone.
In 2018, 81% of the lime produced was sold to third-party customers, while the remaining 19% was used internally as a raw material for the business manufacturing of chemicals products. Dolomitic lime products sold to external customers are primarily used by the steel industry, and overall, 33% of Magnesia Specialties 2018 total revenues related to products used in the steel industry. Accordingly, a portion of the segments revenues and profits is affected by production and inventory trends within the steel industry, which are guided by the rate of consumer consumption, the flow of offshore imports and other economic factors. Steel production in 2018 increased 6.2% compared with 2017. The dolomitic lime business runs most profitably at 70% or greater steel capacity utilization; domestic capacity utilization averaged 78% in 2018. The chemical products business focuses on higher-margin specialty chemicals that can be produced at volumes that support efficient operations.
Total revenues of the Magnesia Specialties business in 2018 were predominantly from North America, but a small amount was derived from overseas. No single foreign country accounted for 10% or more of the total revenues for the Company. Financial results can be affected by foreign currency exchange rates, increasing transportation costs or weak economic conditions in foreign markets. To mitigate the short-term effect of currency exchange rates, foreign transactions are denominated in United States dollars. However, the current strength of the United States dollar in foreign markets is affecting the overall price of Magnesia Specialties products when compared to foreign-domiciled competitors.
A significant portion of the Magnesia Specialties business costs is of a fixed or semi-fixed nature. The production process requires the use of natural gas, coal and petroleum coke. Therefore, fluctuations in their pricing directly affect operating results. To help mitigate this risk, the Company has fixed price agreements for approximately 100% of its 2019 coal needs, approximately 50% of its 2019 natural gas needs and 100% of its 2019 petroleum coke needs. For 2018, the segments average cost per MCF (thousand cubic feet) for natural gas decreased 4% versus 2017. Given high fixed costs, low capacity utilization can negatively affect the segments results of operations. Management expects future organic profit growth to result from increased pricing, rationalization of the current product portfolio and/or further cost reductions.
Martin Marietta | Page 59
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The Magnesia Specialties business is highly dependent on rail transportation, particularly for movement of dolomitic lime from Woodville to Manistee and direct customer shipments of dolomitic lime and magnesia chemicals products from both Woodville and Manistee. The segment can be affected by the risks mentioned in the long-haul distribution discussion in the Building Materials Business Key Considerations section.
All of Magnesia Specialties hourly workforce belongs to a labor union. Union contracts cover hourly employees at the Manistee, magnesia-based chemicals plant and the Woodville, lime plant. The labor contracts for the Manistee and Woodville locations expire in August 2019 and June 2022, respectively.
Environmental Regulation and Litigation
The expansion and growth of the aggregates industry is subject to increasing challenges from environmental and political advocates aiming to control the pace and direction of future development. Certain environmental groups have published lists of targeted municipal areas, including areas within the Companys marketplace, for environmental and suburban growth control. The effect of these initiatives on the Companys growth is typically localized. Further challenges are expected as the momentum of these initiatives ebb and flow across the United States. Rail and other transportation alternatives are being heralded by these special-interest groups as solutions to mitigate road traffic congestion and overcrowding.
The Companys 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 Companys operations may occasionally use substances classified as toxic or hazardous. The Company regularly monitors and reviews its operations, procedures and policies for compliance with these laws and regulations. Despite these compliance efforts, risk of environmental liability is inherent in the operation of the Companys businesses, as it is with other companies engaged in similar businesses.
Environmental operating permits are, or may be, required for certain of the Companys operations; such permits are subject to modification, renewal and revocation. New permits are generally required for opening new sites or for expansion at existing operations and can take several years to obtain. In the area of land use, rezoning and special or
conditional use permits are increasingly difficult to obtain. Once a permit is issued, the location is required to generally operate in accordance with the approved site plan.
As is the case with others in the cement industry, the Companys cement operations produce varying quantities of cement kiln dust (CKD). This by-product consists of fine-grained, solid, highly alkaline material removed from cement kiln exhaust gas by air pollution control devices. Because much of the CKD is actually unreacted raw materials, it is generally permissible to recycle the CKD back into the production process, and large amounts are often treated in such manner. CKD that is not returned to the production process is disposed in landfills. CKD is currently exempted from federal hazardous waste regulations under Subtitle C of the Resource Conservation and Recovery Act (RCRA).
The Clean Air Act, originally passed in 1963 and periodically updated by amendments, is the United States national air pollution control program that granted the Environmental Protection Agency (EPA) authority to set limits on the level of various air pollutants. To be in compliance with National Ambient Air Quality Standards (NAAQS), a defined geographic area must be below established limits for six pollutants. Environmental groups have been successful in lawsuits against the federal and certain state departments of transportation, delaying highway construction in municipal areas not in compliance with the Clean Air Act. The EPA designates geographic areas as nonattainment areas when the level of air pollutants exceeds the national standard. Nonattainment areas receive deadlines to reduce air pollutants by instituting various control strategies or otherwise face fines or control by the EPA. Included as nonattainment areas are several major metropolitan areas in the Companys markets, such as Houston/Brazoria/Galveston, Texas; Dallas/Fort Worth, Texas; Denver, Colorado; Boulder, Colorado; Fort Collins/Greeley/ Loveland, Colorado; Council Bluffs, Iowa; Atlanta, Georgia; and Indianapolis, Indiana. Federal transportation funding has been directly tied to compliance with the Clean Air Act.
Martin Marietta | Page 60
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Large emitters (facilities that emit 25,000 metric tons or more per year) of greenhouse gases (GHG) must report GHG generation to comply with the EPAs Mandatory Greenhouse Gases Reporting Rule (GHG Rule). The Company files annual reports in accordance with the GHG Rule relating to operations at its Magnesia Specialties facilities in Woodville, Ohio, and Manistee, Michigan, as well as the two cement plants in Texas, each of which emit certain GHG, including carbon dioxide, methane and nitrous oxide. If Congress passes legislation on GHG, these operations will likely be subject to the new program. Under President Trumps administration, it is unknown whether the EPA is likely to impose additional regulatory restrictions on emissions of GHG. However, the Company believes that any increased operating costs or taxes related to GHG emission limitations at its Woodville or cement operations would be passed on to its customers. The Manistee facility may have to absorb extra costs due to the regulation of GHG emissions in order to maintain competitive pricing in its markets. The Company cannot reasonably predict how much those increased costs may be.
The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. In the opinion of management, based upon currently available facts, the likelihood is remote that the ultimate outcome of any litigation or other proceedings, including those pertaining to environmental matters, relating to the Company and its subsidiaries, will have a material adverse effect on the overall results of the Companys operations, cash flows or financial position.
FINANCIAL OVERVIEW
The Company set a record for total revenues and earnings before interest, taxes, depreciation and amortization (EBITDA) in 2018, despite volume headwinds in the Building Materials business, including erratic weather, government uncertainty, tight labor markets and logistical challenges, which were prevalent throughout much of the year. The Magnesia Specialties business achieved record revenues and profitability.
Highlights of 2018 Financial Performance
(all comparisons are versus 2017)
● | Earnings per diluted share of $7.43 compared with $11.25; 2017 includes $4.07 per diluted share benefit from the provisional assessment of the 2017 Tax Act |
● | Net earnings attributable to Martin Marietta of $470.0 million in 2018 compared with $713.3 million in 2017; 2017 includes the $258.1 million one-time income tax benefit from the remeasurement of deferred tax assets and liabilities following enactment of the 2017 Tax Act |
● | Record consolidated EBITDA of $1.05 billion compared with $1.00 billion |
● | Record consolidated total revenues of $4.24 billion compared with $3.97 billion, an increase of 7.0% |
● | Heritage aggregates pricing increase of 3.0%; heritage aggregates volume relatively flat |
● | Cement total product revenues of $387.8 million and gross profit of $126.2 million |
● | Magnesia Specialties total revenues of $287.7 million, a record, and gross profit of $98.7 million |
● | Consolidated earnings from operations of $690.7 million compared with $700.4 million |
Results of Operations
The discussion and analysis that follow reflect managements assessment of the financial condition and results of operations of the Company and should be read in conjunction with the audited consolidated financial statements. As discussed in more detail herein, the Companys 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, financial results for any year presented, or year-to-year comparisons of reported results, may not be indicative of future operating results.
The Companys Building Materials business generated the majority of consolidated total revenues and earnings from operations. The following comparative analysis and discussion should be read within this context. Further, sensitivity analysis and certain other data are provided to enhance the readers understanding of Managements Discussion and Analysis of Financial Condition and Results of Operations and are not intended to be indicative of managements judgment of materiality.
Martin Marietta | Page 61
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The Companys consolidated operating results and operating results as a percentage of total revenues are as follows:
years ended December 31 (add 000, except for % of net sales) |
2018 |
% of
Total revenues |
2017 |
% of
Total revenues |
2016 |
% of
Total revenues |
||||||||||||||||||||||||||
Product and service revenues |
$ | 3,980,351 | $ | 3,723,478 | $ | 3,578,650 | ||||||||||||||||||||||||||
Freight revenues |
263,914 | 242,116 | 240,099 | |||||||||||||||||||||||||||||
Total revenues |
4,244,265 | 100.0 | % | 3,965,594 | 100.0 | % | 3,818,749 | 100.0 | % | |||||||||||||||||||||||
Cost of sales |
3,009,810 | 2,749,488 | 2,665,029 | |||||||||||||||||||||||||||||
Freight and delivery costs |
267,878 | 244,166 | 241,982 | |||||||||||||||||||||||||||||
Total cost of revenues |
3,277,688 | 77.2 | 2,993,654 | 75.5 | 2,907,011 | 76.1 | ||||||||||||||||||||||||||
Gross profit |
966,577 | 22.8 | 971,940 | 24.5 | 911,738 | 23.9 | ||||||||||||||||||||||||||
Selling, general and administrative expenses |
280,554 | 6.6 | 262,128 | 6.6 | 241,606 | 6.3 | ||||||||||||||||||||||||||
Acquisition related expenses, net |
13,479 | 8,638 | 909 | |||||||||||||||||||||||||||||
Other operating (income) and expenses, net |
(18,193 | ) | 793 | (8,043 | ) | |||||||||||||||||||||||||||
Earnings from operations |
690,737 | 16.3 | 700,381 | 17.7 | 677,266 | 17.7 | ||||||||||||||||||||||||||
Interest expense |
137,069 | 91,487 | 81,677 | |||||||||||||||||||||||||||||
Other nonoperating income, net |
(22,413 | ) | (10,034 | ) | (11,439 | ) | ||||||||||||||||||||||||||
Earnings before income tax expense (benefit) |
576,081 | 618,928 | 607,028 | |||||||||||||||||||||||||||||
Income tax expense (benefit) |
105,705 | (94,457 | ) | 181,584 | ||||||||||||||||||||||||||||
Consolidated net earnings |
470,376 | 11.1 | 713,385 | 18.0 | 425,444 | 11.1 | ||||||||||||||||||||||||||
Less: Net earnings attributable to noncontrolling interests |
378 | 43 | 58 | |||||||||||||||||||||||||||||
Net Earnings Attributable to |
||||||||||||||||||||||||||||||||
Martin Marietta |
$ | 469,998 | 11.1 | % | $ | 713,342 | 18.0 | % | $ | 425,386 | 11.1 | % |
EBITDA is a widely accepted financial indicator of a companys ability to service and/or incur indebtedness. EBITDA is not defined by generally accepted accounting principles (GAAP) and, as such, should not be construed as an alternative to net earnings or operating cash flow. Management utilizes EBITDA as a meaningful measure of the Companys operating performance. Additionally, management presents EBITDA to provide investors additional information with regard to the Companys ability to meet working capital requirements, service debt and return capital to its shareholders.
The following table presents a reconciliation of net earnings attributable to Martin Marietta to consolidated EBITDA:
Consolidated EBITDA
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Net earnings attributable to Martin Marietta |
$ | 469,998 | $ | 713,342 | $ | 425,386 | ||||||
Add back (deduct): |
||||||||||||
Interest expense |
137,069 | 91,487 | 81,677 | |||||||||
Income tax expense (benefit) for controlling interests |
105,637 | (94,401 | ) | 181,524 | ||||||||
Depreciation, depletion and amortization expense |
340,006 | 293,951 | 283,003 | |||||||||
Consolidated EBITDA |
$ | 1,052,710 | $ | 1,004,379 | $ | 971,590 |
Martin Marietta | Page 62
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Total Revenues
Total revenues by reportable segment are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
||||||||||||
Mid-America Group |
$ | 1,223,236 | $ | 1,053,326 | $ | 1,017,098 | ||||||
Southeast Group |
423,382 | 362,555 | 321,078 | |||||||||
West Group |
2,309,924 | 2,279,723 | 2,223,515 | |||||||||
Total Building
|
3,956,542 | 3,695,604 | 3,561,691 | |||||||||
Magnesia Specialties |
287,723 | 269,990 | 257,058 | |||||||||
Total Consolidated Revenues |
$ | 4,244,265 | $ | 3,965,594 | $ | 3,818,749 |
Total revenues by product line are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
||||||||||||
Aggregates |
$ | 2,578,007 | $ | 2,341,540 | $ | 2,267,574 | ||||||
Cement |
404,125 | 384,112 | 375,814 | |||||||||
Ready Mixed Concrete |
964,751 | 936,979 | 903,803 | |||||||||
Asphalt and Paving Services |
273,896 | 296,984 | 261,612 | |||||||||
Less: Interproduct revenues |
(264,237 | ) | (264,011 | ) | (247,112 | ) | ||||||
Total Building
|
3,956,542 | 3,695,604 | 3,561,691 | |||||||||
Magnesia Specialties |
287,723 | 269,990 | 257,058 | |||||||||
Total Consolidated
|
$ | 4,244,265 | $ | 3,965,594 | $ | 3,818,749 |
Products and Services Revenues
Products and services revenues by reportable segment are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
||||||||||||
Mid-America Group |
$ | 1,133,754 | $ | 982,214 | $ | 945,193 | ||||||
Southeast Group |
409,543 | 348,675 | 304,722 | |||||||||
West Group |
2,168,418 | 2,139,867 | 2,086,351 | |||||||||
Total Building
|
3,711,715 | 3,470,756 | 3,336,266 | |||||||||
Magnesia Specialties |
268,636 | 252,722 | 242,384 | |||||||||
Total Consolidated Products and Services Revenues |
$ | 3,980,351 | $ | 3,723,478 | $ | 3,578,650 |
Products and services revenues by product line for the Company are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
||||||||||||
Aggregates |
$ | 2,355,673 | $ | 2,134,927 | $ | 2,058,687 | ||||||
Cement |
387,830 | 371,233 | 364,139 | |||||||||
Ready Mixed Concrete |
963,770 | 936,037 | 902,678 | |||||||||
Asphalt and Paving Services |
268,679 | 292,571 | 257,873 | |||||||||
Less: Interproduct revenues |
(264,237 | ) | (264,012 | ) | (247,111 | ) | ||||||
Total Building Materials Business |
3,711,715 | 3,470,756 | 3,336,266 | |||||||||
Magnesia Specialties |
268,636 | 252,722 | 242,384 | |||||||||
Total Consolidated Products and Services Revenues |
$ | 3,980,351 | $ | 3,723,478 | $ | 3,578,650 |
Aggregates.
Aggregates average selling price increases compared to the prior year are as follows:
years ended December 31 | 2018 | 2017 | 2016 | |||||||||
Heritage Operations: |
||||||||||||
Mid-America Group |
3.8 | % | 5.0 | % | 4.3 | % | ||||||
Southeast Group |
3.0 | % | 8.7 | % | 7.1 | % | ||||||
West Group |
2.0 | % | 1.7 | % | 10.6 | % | ||||||
Total Heritage Aggregates 1 |
3.0 | % | 4.5 | % | 7.3 | % | ||||||
Total Aggregates 2 |
1.9 | % | 4.5 | % | 7.3 | % |
1 |
Heritage aggregates operations exclude acquisitions that have not been included in prior-year operations for the comparable period. |
2 |
Total aggregates operations include acquisitions from the date of acquisition and divestitures through the date of disposal. |
The average selling price per ton for aggregates was $13.71, $13.46 and $12.88 for 2018, 2017 and 2016, respectively.
Pricing growth in 2018 was negatively affected by product and geographic mix. Total aggregates pricing growth reflects the lower selling price for the legacy Bluegrass operations, which average 10% to 15% below the heritage Company average. Average selling price increases in 2017 and 2016 exceeded the Companys 20- and 30-year annual growth rate.
Martin Marietta | Page 63
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The following presents aggregates shipments for each reportable segment of the Building Materials business:
years ended December 31 Tons (add 000) |
2018 | 2017 | 2016 | |||||||||
Heritage Operations: |
||||||||||||
Mid-America Group |
73,647 | 72,539 | 73,060 | |||||||||
Southeast Group |
20,161 | 20,429 | 19,396 | |||||||||
West Group |
64,099 | 64,730 | 66,170 | |||||||||
Heritage Aggregates Operations |
157,907 | 157,698 | 158,626 | |||||||||
Acquisitions |
12,929 | | | |||||||||
Total Aggregates Operations |
170,836 | 157,698 | 158,626 |
Aggregates shipments sold externally to customers and tons used in other product lines are as follows:
years ended December 31 Tons (add 000) |
2018 | 2017 | 2016 | |||||||||
Heritage Operations: |
||||||||||||
Tons to external customers |
147,330 | 146,818 | 148,198 | |||||||||
Internal tons used in other product lines |
10,577 | 10,880 | 10,428 | |||||||||
Heritage Aggregates Tons |
157,907 | 157,698 | 158,626 |
Aggregates volume variance compared to the prior year by reportable segment is as follows:
years ended December 31 | 2018 | 2017 | 2016 | |||||||||
Heritage Operations: |
||||||||||||
Mid-America Group |
1.5 | % | (0.7 | %) | 6.5 | % | ||||||
Southeast Group |
(1.3 | %) | 5.3 | % | (0.4 | %) | ||||||
West Group |
(1.0 | %) | (2.2 | %) | (3.2 | %) | ||||||
Total Heritage Aggregates 1 |
0.1 | % | (0.6 | %) | 1.4 | % | ||||||
Total Aggregates 2 |
8.3 | % | (0.6 | %) | 1.4 | % |
1 |
Heritage aggregates operations exclude acquisitions that have not been included in prior-year operations for the comparable period. |
2 |
Total aggregates operations include acquisitions from the date of acquisition and divestitures through the date of disposal. |
Heritage shipments in 2018 were relatively flat compared with prior year as volumes were suppressed by excessive rainfall during peak construction season, namely in the southeastern United States and Texas. The Southeast Group was negatively affected by Hurricanes Florence and Matthew. The West Groups decline reflected Texas experiencing its wettest February, September and October on record. Shipments at the legacy Bluegrass operations were also negatively affected by wet weather, notably in Maryland and the southeastern United States. Further, Hurricane Florence disrupted shipments in the Mid-America and Southeast Groups. Additionally, continued project delays, customer- and Department of Transportation-related labor constraints and
government uncertainty hindered 2018 shipments. 2017 shipments reflect strength in private sector construction offset by underinvestment in public infrastructure. Rainfall and labor constraints negatively affected shipments in 2017. Notably, the southwestern region of the United States experienced the fourth-wettest year on record. Notwithstanding these headwinds, the Southeast Groups 5.3% increase in shipments demonstrates the underlying strength of the Georgia and Florida markets.
Cement, Ready Mixed Concrete, Asphalt and Paving Services. The Companys cement and downstream operations, namely ready mixed concrete, asphalt and paving services, are located in the West Group, notably in the high-growth states of Texas and Colorado.
Average selling prices for cement, ready mixed concrete and asphalt are as follows:
years ended December 31 | 2018 | 2017 | 2016 | |||||||||
Cement - per ton |
$ | 109.38 | $ | 105.97 | $ | 101.96 | ||||||
Ready Mixed Concrete -per cubic yard |
$ | 108.83 | $ | 107.27 | $ | 104.26 | ||||||
Asphalt - per ton |
$ | 44.60 | $ | 43.41 | $ | 39.20 |
Unit shipments for cement, ready mixed concrete and asphalt are as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Cement: |
||||||||||||
Tons to external customers |
2,286 | 2,271 | 2,331 | |||||||||
Internal tons used in ready mixed concrete |
1,222 | 1,196 | 1,194 | |||||||||
Total cement tons |
3,508 | 3,467 | 3,525 | |||||||||
Ready Mixed Concrete - cubic yards |
8,685 | 8,559 | 8,490 | |||||||||
Asphalt: |
||||||||||||
Tons to external customers |
1,076 | 1,123 | 1,023 | |||||||||
Internal tons used in paving operations |
1,857 | 2,167 | 2,131 | |||||||||
Total asphalt tons |
2,933 | 3,290 | 3,154 |
Cement and ready mixed concrete shipments in 2018 and 2017 were hindered by significant amounts of precipitation in Texas. Asphalt shipments in 2018 declined compared with 2017 primarily due to project delays and permitting issues. The 2017 increase in shipments in the asphalt and ready mixed concrete is primarily attributable to more favorable weather in the Front Range region of Colorado.
Martin Marietta | Page 64
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Magnesia Specialties. In 2018, Magnesia Specialties reported record total revenues of $287.7 million, an increase of 6.6%, gross profit of $98.7 million, an increase of 9.4%, and earnings from operations of $88.1 million, an increase of 10.9%, all compared with 2017. The improved results are attributable to an increase in both the chemicals and lime product lines. Total revenues in 2017 of $270.0 million increased 5.0% compared with 2016, primarily attributable to volume increases in the chemicals product line.
Cost of Sales
Cost of sales increased 9.5% in 2018 and 3.2% in 2017, both compared with the prior year. The increase in 2018 and 2017 is attributable to acquired operations coupled with higher personnel, diesel and depreciation expenses. On average, the Company paid $2.29 per gallon of diesel fuel in 2018 compared with $1.81 in 2017.
Cost of sales also includes internal freight costs incurred when the Company transports building material products, either by truck, rail or water, from one location to another. These freight costs are included in the Building Materials business cost of sales and were $266.2 million, $250.7 million and $242.2 million for 2018, 2017 and 2016, respectively.
Gross Profit
Gross profit (loss) by product line is as follows:
years ended December 31 (add 000) |
2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
||||||||||||
Aggregates |
$ | 606,759 | $ | 599,670 | $ | 556,131 | ||||||
Cement |
126,213 | 117,021 | 119,894 | |||||||||
Ready Mixed Concrete |
74,175 | 91,646 | 99,085 | |||||||||
Asphalt and Paving Services |
52,917 | 64,693 | 53,025 | |||||||||
Products and Services |
860,064 | 873,030 | 828,135 | |||||||||
Freight |
259 | 2,602 | 2,501 | |||||||||
Building Materials Business |
860,323 | 875,632 | 830,636 | |||||||||
Magnesia Specialties: |
||||||||||||
Products and Services |
102,905 | 94,050 | 93,987 | |||||||||
Freight |
(4,223 | ) | (4,652 | ) | (4,384 | ) | ||||||
Magnesia Specialties |
98,682 | 89,398 | 89,603 | |||||||||
Corporate |
7,572 | 6,910 | (8,501 | ) | ||||||||
Total Consolidated Gross Profit |
$ | 966,577 | $ | 971,940 | $ | 911,738 |
The following presents a rollforward of the Companys consolidated gross profit:
(add 000) | 2018 | 2017 | ||||||
Consolidated gross profit, prior year |
$ | 971,940 | $ | 911,738 | ||||
Aggregates: |
||||||||
Pricing |
64,155 | 93,727 | ||||||
Volume |
155,812 | (17,951 | ) | |||||
Production costs |
(136,652 | ) | (30,048 | ) | ||||
Internal freight costs |
(14,136 | ) | (6,870 | ) | ||||
Other costs, net |
(62,090 | ) | 4,681 | |||||
Change in aggregates gross profit |
7,089 | 43,539 | ||||||
Cement and downstream operations products and services |
(20,055 | ) | 1,356 | |||||
Magnesia Specialties products |
8,855 | 63 | ||||||
Corporate |
662 | 15,411 | ||||||
Freight |
(1,914 | ) | (167 | ) | ||||
Change in consolidated gross profit |
(5,363 | ) | 60,202 | |||||
Consolidated gross profit, current year |
$ | 966,577 | $ | 971,940 |
The decline in gross profit in 2018 compared with prior year is primarily attributable to production cost inefficiencies caused by weather and higher maintenance costs and lower inventory build, partially offset by the contribution from acquired operations and a 110-basis-point improvement in the Magnesia Specialties segment. The growth in gross profit in 2017 compared with 2016 reflects pricing strength and disciplined cost management, led by the aggregates product line.
Corporate gross profit (loss) includes intercompany royalty and rental revenue and expenses, depreciation on capitalized interest and unallocated operational expenses excluded from the Companys evaluation of business segment performance. Corporate gross profit for 2016 reflects an unfavorable diesel fuel contract that expired December 31, 2016.
Gross profit (loss) by reportable segment is as follows:
years ended December 31 | ||||||||||||
(add 000) | 2018 | 2017 | 2016 | |||||||||
Building Materials Business: |
||||||||||||
Mid-America Group |
$ | 366,762 | $ | 335,499 | $ | 306,631 | ||||||
Southeast Group |
77,974 | 74,908 | 57,556 | |||||||||
West Group |
415,328 | 462,623 | 463,948 | |||||||||
Products and Services |
860,064 | 873,030 | 828,135 | |||||||||
Freight |
259 | 2,602 | 2,501 | |||||||||
Building Materials Business |
860,323 | 875,632 | 830,636 | |||||||||
Magnesia Specialties: |
||||||||||||
Products and Services |
102,905 | 94,050 | 93,987 | |||||||||
Freight |
(4,223 | ) | (4,652 | ) | (4,384 | ) | ||||||
Magnesia Specialties |
98,682 | 89,398 | 89,603 | |||||||||
Corporate |
7,572 | 6,910 | (8,501 | ) | ||||||||
Total Consolidated Gross Profit |
$ | 966,577 | $ | 971,940 | $ | 911,738 |
Martin Marietta | Page 65
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Products and services gross margin by reportable segment and total products and services consolidated gross margin are as follows:
years ended December 31 | ||||||||||||
(add 000) | 2018 | 2017 | 2016 | |||||||||
Mid-America Group |
32.3% | 34.2% | 32.4% | |||||||||
Southeast Group |
19.0% | 21.5% | 18.9% | |||||||||
West Group |
19.2% | 21.6% | 22.2% | |||||||||
Total Building Materials Business |
23.2% | 25.2% | 24.8% | |||||||||
Magnesia Specialties |
38.3% | 37.2% | 38.8% | |||||||||
Total Consolidated |
24.2% | 26.0% | 25.8% |
Significant weather-related events hindered production efficiencies and negatively affected operating leverage, resulting in a slight increase in aggregates direct production cost per ton across all reportable groups for 2018 versus 2017. Magnesia Specialties business 2018 gross margin improvement is attributable to effective cost control relative to the increase in sales volume and increased production improvements creating greater efficiency in plant operations. Magnesia Specialties 2017 gross margin decline compared with 2016 was due to higher maintenance and contract services costs, coupled with an increase in natural gas prices.
Selling, General and Administrative Expenses
SG&A expenses for 2018 and 2017 were 6.6% of total revenues. The increase of 30 basis points in 2017 compared with 2016 reflects higher personnel and share-based compensation costs.
Acquisition-Related Expenses, Net
The Company incurs business development and acquisition integration costs in connection with its strategic growth plan, and at times may recognize nonrecurring transaction costs related to the acquisition (collectively acquisition-related expenses, net). On April 27, 2018, the Company completed its acquisition of Bluegrass. As part of the agreement with the U.S. Department of Justice (DOJ), the Company divested its heritage Forsyth aggregates quarry north of Atlanta, Georgia, and the legacy Bluegrass Beaver Creek aggregates quarry in western Maryland. In connection with the sale of its Forsyth quarry, the Company recognized a pretax gain of $14.8 million, which is included in acquisition-related expenses, net, in the consolidated statements of earnings and comprehensive earnings for the year ended December 31, 2018. There was no gain or loss on the Beaver Creek divestiture. The 2018 and 2017 acquisition-related expenses, net, were primarily related to the Bluegrass acquisition.
Other Operating (Income) and Expenses, Net
Other operating income and expenses, net, are comprised generally of gains and losses on the sale of assets; gains and losses related to certain customer accounts receivable; rental, royalty and services income; accretion expense, depreciation expense and gains and losses related to asset retirement obligations. These net amounts represented income of $18.2 million in 2018 and $8.0 million in 2016 and expense of $0.8 million in 2017. The 2018 income reflects a $7.7 million net gain on legal settlements and $25.3 million gain on the sale of assets, primarily excess land, partially offset by an asset and portfolio rationalization charge of $18.8 million. The asset and portfolio rationalization charge relates to the Companys Southwest ready mixed concrete operations reported in the West Group reportable segment. The asset and portfolio rationalization charge reflects the Companys evaluation of the recoverability of certain long-lived assets, including property, plant and equipment and intangible assets, for underperforming operations in this business and a reduction in headcount. Of the total charge, $17.0 million is noncash and $1.8 million will be settled in cash. Other operating expenses, net, for 2017 primarily reflect $19.4 million of gains on the sale of assets, offset by $12.7 million of nonrecurring repair costs related to certain of the Companys leased railcars and approximately $10.8 million of executive retirement expense.
Earnings from Operations
Consolidated earnings from operations were $690.7 million, $700.4 million and $677.3 million in 2018, 2017 and 2016, respectively.
Interest Expense
Interest expense was $137.1 million in 2018, $91.5 million in 2017 and $81.7 million in 2016. The 2018 increase is due to higher outstanding debt throughout the year that was used to finance the Bluegrass acquisition. The Company issued $1.1 billion of long-term debt in December 2017 in anticipation of completing the transaction. This debt also resulted in the increase in 2017 compared with 2016
Other Nonoperating (Income) and Expenses, Net
Other nonoperating income and expenses, net, is comprised generally of interest income; foreign currency transaction gains and losses; pension and postretirement benefit cost, excluding service cost; and net equity earnings from nonconsolidated investments. Consolidated other nonoperating income and expenses, net, was income of $22.4 million, $10.0 million
Martin Marietta | Page 66
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
and $11.4 million, in 2018, 2017 and 2016, respectively. The increase in 2018 reflects higher interest income and lower pension expense. The income in 2017 reflects increased earnings from nonconsolidated investments.
Income Tax Expense (Benefit)
In December 2017, the President signed the 2017 Tax Act into law. As a result, the Company remeasured its deferred tax assets and liabilities as of the enactment date at the new federal statutory corporate income tax rate of 21% and recorded a provisional one-time income tax benefit of $258.1 million. The 2018 income tax rate reflects the lower federal statutory tax rate and includes the final repricing of deferred tax liabilities resulting in a tax benefit of $21.5 million, both provisions of the 2017 Tax Act.
Variances in the estimated effective income tax rates, when compared with the statutory corporate income tax rate, are due primarily to the remeasurement of deferred taxes due to provisions of the 2017 Tax Act, the statutory depletion deduction for mineral reserves, the effect of state income taxes, the domestic production deduction for years prior to 2018, stock compensation deductions, and the impact of foreign income or losses for which no tax expense or benefit is recognized. Additionally, certain acquisition-related expenses, net, have limited deductibility for income tax purposes.
The permanent benefit associated with the statutory depletion deduction for mineral reserves is typically the significant driver of the estimated effective income tax rate. The statutory depletion deduction is calculated as a percentage of sales subject to certain limitations. Due to these limitations, changes in sales volumes and pretax earnings may not proportionately affect the statutory depletion deduction and the corresponding impact on the effective income tax rate. However, the impact of the depletion deduction on the estimated effective tax rate is inversely affected by increases or decreases in pretax earnings.
The Companys estimated effective income tax rate for the years ended December 31 are as follows:
2018 | 18.3% | |||
2017 |
(15.3%) | |||
2016 |
29.9% |
Net Earnings Attributable to Martin Marietta and
Earnings Per Diluted Share
Net earnings attributable to Martin Marietta were $470.0
million, or $7.43 per diluted share, for 2018 and $713.3 million, or $11.25 per diluted share, for 2017. The 2017 amount includes the income tax benefit from the 2017 Tax Act of $258.1 million, or $4.07 per diluted share. For 2016, net earnings attributable to Martin Marietta were $425.4 million, or $6.63 per diluted share.
Liquidity and Cash Flows
Operating Activities
Generally, the Companys primary source of liquidity is cash generated from operating activities. Operating cash flow is substantially derived from consolidated net earnings, before deducting depreciation, depletion and amortization, and offset by working capital requirements. Cash provided by operations was $705.1 million in 2018, $657.6 million in 2017 and $688.9 million in 2016. Cash provided by operations in 2018 reflects $162.3 million of contributions to the Companys pension plans, the majority of which is attributable to the 2017 plan year. As a result, the Company recognized a cash tax benefit equal to 35%, the federal tax rate in effect for the plan year. For comparative purposes, pension plan contributions were $30.9 million and $44.8 million in 2017 and 2016, respectively. Cash provided by operations in 2017 reflects a higher buildup of inventories resulting from lower-than-expected shipment volumes.
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MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Depreciation, depletion and amortization were as follows:
years ended December 31 | ||||||||||||
(add 000) | 2018 | 2017 | 2016 | |||||||||
Depreciation |
$ | 296,835 | $ | 262,382 | $ | 253,028 | ||||||
Depletion |
29,261 | 17,391 | 15,907 | |||||||||
Amortization |
17,937 | 17,389 | 16,318 | |||||||||
Total |
$ | 344,033 | $ | 297,162 | $ | 285,253 |
The increase in 2018 depreciation and depletion expense reflects the acquisition of Bluegrass and increased levels of capital spending during 2015 through 2018 as investments were made to address several years of relatively low capital spending during 2009 through 2013.
Investing Activities
Net cash used for investing activities was $1.95 billion in 2018, $386.2 million in 2017 and $555.0 million in 2016.
Property, plant and equipment capitalized by reportable segment, excluding acquisitions, was as follows:
years ended December 31 | ||||||||||||
(add 000) | 2018 | 2017 | 2016 | |||||||||
Mid-America Group |
$ | 176,797 | $ | 139,445 | $ | 150,490 | ||||||
Southeast Group |
41,575 | 34,636 | 30,588 | |||||||||
West Group |
145,643 | 234,853 | 204,495 | |||||||||
Total Building
|
364,015 | 408,934 | 385,573 | |||||||||
Magnesia Specialties |
12,450 | 11,129 | 8,944 | |||||||||
Corporate |
4,838 | 12,291 | 9,031 | |||||||||
Total |
$ | 381,303 | $ | 432,354 | $ | 403,548 |
Spending for the Mid-America Group for 2018 included the ongoing new underground mine project at the Fort Calhoun operation in Nebraska. Spending for the West Group for 2017 and 2016 included the completion of Hunter Stone Plant, a new aggregates operation that consolidates mining operations with Hunter Cement Plant, and a rail-served facility in Colorado.
The Company paid cash of $1.64 billion, $12.1 million and $178.8 million for acquisitions in 2018, 2017 and 2016, respectively. 2018 primarily reflects the purchase of Bluegrass.
Proceeds from divestitures and sales of assets were $69.1 million in 2018, $35.9 million in 2017 and $6.5 million in 2016. This pretax cash is generated from the sales of surplus land and equipment. In 2018, the amount includes the divestitures of the legacy Martin Marietta Forsyth Quarry and the legacy Bluegrass Beaver Creek Quarry as part of an agreement with
the U.S. DOJ, approved by the federal district court for the District of Columbia, which resolved all competition issues with respect to the Bluegrass acquisition.
Financing Activities
The Company used $158.4 million and $252.3 million of cash for financing activities during 2018 and 2016, respectively. Cash provided by financing activities was $1.12 billion in 2017.
Net borrowings of long-term debt were $89.9 million in 2018, $1.34 billion in 2017 and $110.7 million in 2016. As discussed in Note H to the audited consolidated financial statements, in May 2017, the Company issued $300 million aggregate principal amount of Floating Rate Senior Notes due in 2020 (the 2020 Floating Rate Notes) and $300 million aggregate principal amount of 3.450% Senior Notes due in 2027. The 2020 Floating Rate Notes bear interest at a rate, reset quarterly, equal to the three-month LIBOR for U.S. dollars plus 0.65% (or 65 basis points). The net proceeds from the issuance of these notes were used to repay $300 million aggregate principal amount of floating rate notes that matured in June 2017 and to pay down borrowings under the Revolving Facility and the Trade Receivable Facility (as defined below). Additionally, in December 2017, the Company issued $300 million aggregate principal amount of Floating Rate Senior Notes due 2019 (the 2019 Floating Rate Notes), $500 million aggregate principal amount of 3.500% Senior Notes due 2027 and $600 million aggregate principal amount of 4.250% Senior Notes due 2047. The 2019 Floating Rate Notes will mature on December 20, 2019 and bear interest at a per annum floating rate, reset quarterly, equal to three-month LIBOR for U.S. dollars plus 0.500% (or 50 basis points). Net proceeds were used to repay the $300 million 6.6% Senior Notes in April 2018 and, in part, to finance the Bluegrass acquisition.
The Company repurchased 0.5 million shares of its common stock for a total cost of $100.4 million, or $192.61 per share in 2018; 0.5 million shares for a total cost of $100.0 million, or $218.46 per share in 2017; and 1.6 million shares for a total cost of $259.2 million, or $163.24 per share.
For the years ended December 31, 2018, 2017 and 2016, the Board of Directors approved total cash dividends on the Companys common stock of $1.84 per share, $1.72 per share and $1.64 per share, respectively. Total cash dividends were $116.4 million in 2018, $108.9 million in 2017 and $105.0 million in 2016.
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MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Cash provided by issuances of common stock, which represents the exercises of stock options, excluding the impact of shares withheld for taxes, was $7.2 million, $10.1 million and $27.3 million in 2018, 2017 and 2016, respectively.
Capital Structure and Resources
Long-term debt, including current maturities, was $3.12 billion at December 31, 2018, and was principally in the form of publicly-issued long-term notes and debentures.
In April 2018, the Company, through a wholly-owned special-purpose subsidiary, increased the borrowing capacity of the trade receivable securitization facility (the Trade Receivable Facility) to $400 million. In September 2018, the Company extended the maturity of the Trade Receivable Facility to September 25, 2019. The Trade Receivable Facility is backed by eligible trade receivables, as defined. Borrowings are limited to the lesser of the facility limit or the borrowing base, as defined. These receivables are originated by the Company and then sold or contributed to the wholly-owned special-purpose subsidiary. The Company continues to be responsible for the servicing and administration of the receivables purchased by the wholly-owned special-purpose subsidiary. The Trade Receivable Facility contains a cross-default provision to the Companys other debt agreements.
The $700 million five-year senior unsecured revolving facility (the Revolving Facility) requires the Companys ratio of consolidated net debt-to-consolidated EBITDA, as defined, for the trailing-twelve month period (the Ratio) to not exceed 3.50x as of the end of any fiscal quarter, provided that the Company may exclude from the Ratio debt incurred in connection with certain acquisitions during the quarter or the three preceding quarters so long as the Ratio calculated without such exclusion does not exceed 3.75x. Additionally, if there are no amounts outstanding under the Revolving Facility and the Trade Receivable Facility, consolidated debt, including debt for which the Company is a co-borrower, may be reduced by the Companys unrestricted cash and cash equivalents in excess of $50 million, such reduction not to exceed $200 million, for purposes of the covenant calculation. In 2018, the Company extended the maturity of the Revolving Facility to December 2023.
At December 31, 2018, the Companys ratio of consolidated net debt-to-consolidated EBITDA, as defined by the Companys Credit Agreement, for the trailing-twelve month EBITDA was 2.76 times and was calculated as follows (dollars in thousands):
Twelve-Month Period January 1, 2018 to December 31, 2018 |
||||
Net earnings attributable to Martin Marietta |
$ | 469,998 | ||
Add back: |
||||
Interest expense |
137,069 | |||
Income tax expense |
105,637 | |||
Depreciation, depletion and amortization expense |
339,858 | |||
Stock-based compensation expense |
29,253 | |||
Acquisition-related expenses, net |
32,040 | |||
Bluegrass EBITDA (Pre-acquisition January 1, 2018 to April 27, 2018) |
16,607 | |||
Noncash portion of asset rationalization impairment charges |
16,970 | |||
Deduct: |
||||
Interest income |
(7,027 | ) | ||
|
|
|||
Consolidated EBITDA, as defined by the Companys Credit Agreement |
$ | 1,140,405 | ||
|
|
|||
Consolidated debt, as defined and including debt for which the Company is a co-borrower, at December 31, 2018 |
$ | 3,144,071 | ||
|
|
|||
Consolidated debt-to-consolidated EBITDA, as defined by the Companys Credit Agreement, at December 31, 2018 for trailing-twelve month EBITDA |
2.76x | |||
|
|
Total equity was $4.95 billion at December 31, 2018. At that date, the Company had an accumulated other comprehensive loss of $143.6 million, primarily resulting from unrecognized actuarial losses and prior service costs related to pension and postretirement benefits.
Pursuant to authority granted by its Board of Directors, the Company can repurchase up to 20 million shares of common stock. As of December 31, 2018, the Company had 14.1 million shares remaining under the repurchase authorization. The Company expects to allocate capital for additional share repurchases based on available excess free cash flow, defined as operating cash flow less capital expenditures and dividends, subject to a leverage target (net debt-to-consolidated EBITDA) of 2.0 times to 2.5 times and with consideration of other capital needs. Future repurchases are expected to be carried out through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share purchase
Martin Marietta | Page 69
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
transactions, or any combination of such methods. Share repurchases will be executed based on then-current business and market factors so the actual return of capital in any single quarter may vary. The repurchase program may be modified, suspended or discontinued by the Board of Directors at any time without prior notice.
At December 31, 2018, the Company had $45 million in cash and short-term investments that are considered cash equivalents. The Company manages its cash and cash equivalents to ensure short-term operating cash needs are met and excess funds are managed efficiently. The Company subsidizes shortages in operating cash through credit facilities. The Company utilizes excess cash to either pay-down credit facility borrowings or invest in money market funds, money market demand deposit accounts or offshore time deposit accounts. Money market demand deposits and offshore time deposit accounts are exposed to bank solvency risk. Money market demand deposit accounts are FDIC insured up to $250,000. The Companys investments in bank funds generally exceed the $250,000 FDIC insurance limit.
Cash on hand, along with the Companys projected internal cash flows and availability of financing resources, including its access to debt and equity capital markets, is expected to continue to be sufficient to provide the capital resources necessary to support anticipated operating needs, cover debt service requirements, meet capital expenditures and discretionary investment needs, fund certain acquisition opportunities that may arise and allow for payment of dividends for the foreseeable future. Borrowings under the Revolving Facility are unsecured and may be used for general corporate purposes. The Companys ability to borrow or issue securities is dependent upon, among other things, prevailing economic, financial and market conditions. At December 31, 2018, the Company had $707.7 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility.
The Company may be required to obtain additional financing in order to fund certain strategic acquisitions or to refinance outstanding debt. Any strategic acquisition of size would likely require an appropriate balance of newly-issued equity with debt in order to maintain a composite investment-grade credit rating. Furthermore, the Company is exposed to credit markets through the interest cost related to its variable-rate debt, which includes the 2019 Floating
Rate Notes, the 2020 Floating Rate Notes and borrowings under its Revolving Facility and Trade Receivable Facility.
Contractual and Off Balance Sheet Obligations
Postretirement medical benefits will be paid from the Companys assets. The obligation, if any, for retiree medical payments is subject to the terms of the plan. At December 31, 2018, the Companys recorded benefit obligation related to these benefits totaled $13.3 million.
The Company has other retirement benefits related to pension plans. At December 31, 2018, the qualified pension plans were underfunded by $32.0 million. Inclusive of required amounts, the Company estimates that it will make contributions of $25.0 million to qualified pension plans in 2019. Any contributions beyond 2019 are currently undeterminable and will depend on the investment return on the related pension assets. However, managements practice is to fund at least the service cost annually. At December 31, 2018, the Company had a total obligation of $98.0 million related to unfunded nonqualified pension plans and expects to make contributions of $7.0 million to these plans in 2019.
At December 31, 2018, the Company had $24.1 million accrued for uncertain tax positions, excluding interest and correlative effects. Such liabilities may become payable if the tax positions are not sustained upon examination by a taxing authority.
In connection with normal, ongoing operations, the Company enters into market-rate leases for property, plant and equipment and royalty commitments principally associated with leased land and mineral reserves. Additionally, the Company enters into equipment rentals to meet shorter-term, nonrecurring and intermittent needs. At December 31, 2018, the Company had $10.9 million in capital lease obligations. Amounts due for operating leases and royalty agreements are expensed in the period incurred. Management anticipates that, in the ordinary course of business, the Company will enter into additional royalty agreements for land and mineral reserves during 2019.
The Company has purchase commitments for property, plant and equipment of $118.7 million as of December 31, 2018. The Company also has other purchase obligations related to energy and service contracts which totaled $106.4 million as of December 31, 2018.
Martin Marietta | Page 70
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The Companys contractual commitments as of December 31, 2018 are as follows:
(add 000) | Total | < 1 Year | 1 to 3 Years | 3 to 5 Years | > 5 Years | |||||||||||||||
ON BALANCE SHEET: |
||||||||||||||||||||
Long-term debt |
$ | 3,120,481 | $ | 390,042 | $ 299,080 | $ | 299,350 | $ | 2,132,009 | |||||||||||
Postretirement benefits |
13,293 | 950 | 2,911 | 2,598 | 6,834 | |||||||||||||||
Qualified pension plan contributions 1 |
25,028 | 25,028 | | | | |||||||||||||||
Unfunded pension plan contributions |
98,014 | 6,993 | 28,687 | 15,176 | 47,158 | |||||||||||||||
Uncertain tax positions |
24,100 | | 24,100 | | | |||||||||||||||
Capital leases - principal portion |
10,879 | 3,250 | 3,865 | 1,395 | 2,369 | |||||||||||||||
Other commitments |
370 | 64 | 128 | 128 | 50 | |||||||||||||||
OFF BALANCE SHEET: |
||||||||||||||||||||
Interest on publicly-traded long-term debt and capital lease obligations |
1,433,261 | 113,714 | 192,465 | 187,271 | 939,811 | |||||||||||||||
Operating leases 2 |
669,004 | 105,955 | 130,860 | 114,042 | 318,147 | |||||||||||||||
Royalty agreements 2 |
119,948 | 14,614 | 21,699 | 17,654 | 65,981 | |||||||||||||||
Purchase commitments - capital |
118,664 | 118,664 | | | | |||||||||||||||
Other commitments - energy and services |
106,360 | 63,104 | 20,441 | 5,620 | 17,195 | |||||||||||||||
Total |
$ | 5,739,402 | $ | 842,378 | $ 724,236 | $ | 643,234 | $ | 3,529,554 |
1 Qualified pension plan contributions beyond 2019 are not determinable at this time
2 Represents future minimum payments
Notes A, H, J, K, M and O to the audited consolidated financial statements contain additional information regarding these commitments and should be read in conjunction with the above table.
Contingent Liabilities and Commitments
The Company has a $5 million short-term line of credit. No amounts were outstanding under this line of credit at December 31, 2018.
The Company has entered into standby letter of credit agreements relating to certain insurance claims, contract performance and permit requirements. At December 31, 2018, the Company had contingent liabilities guaranteeing its own performance under these outstanding letters of credit of $36.1 million, of which $2.3 million were issued under the Companys Revolving Facility.
In the normal course of business, at December 31, 2018, the Company was contingently liable for $375.6 million in surety bonds underwritten by Liberty Mutual and W. R. Berkley, which guarantee its own performance and are required by certain states and municipalities and their related agencies. Five of these bonds are for certain construction contracts and reclamation obligations and total $77.6 million, or 21% of all outstanding surety bonds. The Company has indemnified the underwriting insurance companies against any exposure under the surety bonds. In the Companys past experience, no material claims have been made against these financial instruments.
The Company is a co-borrower with an unconsolidated affiliate for a revolving line of credit agreement with Branch Banking & Trust. The line of credit was amended in January 2018 to extend the maturity to March 2020 and reduce the line of credit from $25.0 million to $15.5 million. The affiliate has agreed to reimburse and indemnify the Company for any payments and expenses the Company may incur from this agreement. The Company holds a lien on the affiliates membership interest in a joint venture as collateral for payment under the revolving line of credit.
Quantitative and Qualitative Disclosures about Market Risk
As discussed earlier, the Companys operations are highly dependent upon the interest rate-sensitive construction and steelmaking industries. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs (see
Business Environment section).
Management has considered the current economic environment and its potential impact to the Companys business. Demand for aggregates products, particularly in the infrastructure construction market, is affected by federal and state budget and deficit issues. Further, delays or cancellations of capital projects in the nonresidential and residential construction
Martin Marietta | Page 71
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
markets could occur if companies and consumers are unable to obtain financing for construction projects or if consumer confidence is eroded by economic uncertainty.
Demand in the residential construction market is affected by interest rates. During 2018, the Federal Reserve raised the federal funds rate to 2.5%. The residential construction market accounted for approximately 22% of the Companys aggregates product line shipments in 2018.
Aside from these inherent risks from within its operations, the Companys earnings are also affected by changes in short-term interest rates. However, rising interest rates are not necessarily predictive of weaker operating results. Historically, the Companys profitability has increased during periods of rising interest rates. In essence, the Companys underlying business generally serves as a natural hedge to rising interest rates.
Variable-Rate Borrowing Facilities
At December 31, 2018, the Company had a $700 million Revolving Facility and a $400 million Trade Receivable Facility. The Company also has $600 million of variable-rate senior notes outstanding. Borrowings under these facilities bear interest at a variable interest rate. A hypothetical 100-basis-point increase in interest rates on borrowings of $990 million, which was the collective outstanding balance at December 31, 2018, would increase interest expense by $9.9 million on an annual basis.
Pension Expense
The Companys results of operations are affected by its pension expense. Assumptions that affect pension expense include the discount rate and, for the defined benefit pension plans only, the expected long-term rate of return on assets. Therefore, the Company has interest rate risk associated with these factors. The impact of hypothetical changes in these assumptions on the Companys annual pension expense is discussed in the section Critical Accounting Policies and Estimates Pension Expense Selection of Assumptions .
Energy Costs
Energy costs, including diesel fuel, natural gas, coal and liquid asphalt, represent significant production costs of the Company. The cement product line and Magnesia Specialties business each have fixed-price agreements on their coal requirements. The cement product lines contract
covers 95% and 100% of the Midlothian and Hunter plants needs, respectively, while the Magnesia Specialties contract covers 100% of its coal requirements. A hypothetical 10% change in the Companys energy prices in 2019 as compared with 2018, assuming constant volumes, would change 2019 energy expense by $28.3 million.
Commodity Risk
Cement is a commodity and competition is based principally on price, which is highly sensitive to changes in supply and demand. Prices are often subject to material changes in response to relatively minor fluctuations in supply and demand, general economic conditions and other market conditions beyond the Companys control. Increases in the production capacity of industry participants or increases in cement imports tend to create an oversupply of such products leading to an imbalance between supply and demand, which can have a negative impact on product prices. There can be no assurance that product prices will not decline in the future or that such declines will not have a material adverse effect on the Companys business, financial condition and results of operations. A hypothetical 10% change in sales price of the cement product line would impact total revenues by $38.8 million.
Cement is a key raw material in the production of ready mixed concrete. A hypothetical 10% change in cement costs in 2019 compared with 2018, assuming constant volumes, would change ready mixed concrete cost of sales by $24.9 million.
OTHER FINANCIAL INFORMATION
Critical Accounting Policies and Estimates
The Companys audited consolidated financial statements include certain critical estimates regarding the effect of matters that are inherently uncertain. These estimates require managements subjective and complex judgments. Amounts reported in the Companys consolidated financial statements could differ materially if management used different assumptions in making these estimates, resulting in actual results differing from those estimates. Methodologies used and assumptions selected by management in making these estimates, as well as the related disclosures, have been reviewed by and discussed with the Companys Audit Committee. Managements determination of the critical nature of accounting estimates and judgments may change from time to time depending on facts and circumstances that management cannot currently predict.
Martin Marietta | Page 72
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Impairment Review of Goodwill
Goodwill is required to be tested annually for impairment. An interim review is performed between annual tests if facts and circumstances indicate a potential impairment may exist. The impairment review of goodwill is a critical accounting estimate because goodwill represents 25% of the Companys total assets at December 31, 2018. Further, the review requires management to apply judgment and make assumptions which may result in an impairment charge that could be material to the Companys financial condition and results of operations. The Company performs its impairment evaluation as of October 1, which represents the annual evaluation date.
The Companys reporting units, which represent the level at which goodwill is tested for impairment, are based on the operating segments of the Building Materials business. There is no goodwill related to the Magnesia Specialties business. As of October 1, 2018, the reporting units for the Building Materials business were as follows:
|
Mid-Atlantic Division , which includes Maryland, North Carolina, Pennsylvania, South Carolina and Virginia; |
|
Mideast Division , which includes Indiana, Kentucky, Ohio, and West Virginia; |
|
Midwest Division , which includes Iowa, northern Kansas, Minnesota, Missouri, eastern Nebraska and Washington; |
|
Southeast Division , which includes Alabama, Florida, Georgia, Tennessee and offshore operations in the Bahamas and Nova Scotia; |
|
Southwest Division , which includes the aggregates product line operations in Arkansas, southern Kansas, Louisiana, Oklahoma and Texas; |
|
Cement and Southwest Ready Mix Division , which includes the cement operations in Texas and the ready mixed concrete operations in Arkansas, Louisiana and Texas; and |
|
Rocky Mountain Division , which includes Colorado, western Nebraska, Nevada, Utah and Wyoming. |
Certain of the aforementioned reporting units within the Building Materials business meet the aggregation criteria and are consolidated as reportable segments for financial reporting purposes.
Goodwill is assigned to the respective reporting unit(s) based on the location of acquisitions at the time of consummation. Goodwill is tested for impairment by comparing the reporting units fair value to its carrying value, which represents a Step-1 analysis. However, prior to Step 1, the Company may perform an optional qualitative assessment. As part of the qualitative assessment, the Company considers, among other things, the following events and circumstances: macroeconomic conditions, industry and market conditions, cost factors, overall financial performance and other business or reporting unit-specific events. If the Company concludes it is more-likely-than-not (i.e., a likelihood of more than 50%) that a reporting units fair value is higher than its carrying value, the Company does not perform any further goodwill impairment testing for that reporting unit. Otherwise, it proceeds to Step 1 of its goodwill impairment analysis. The Company may bypass the qualitative assessment for any reporting unit in any period and proceed directly with the quantitative calculation in Step 1. When the Company validates its conclusion by measuring fair value, it may resume performing a qualitative assessment for a reporting unit in any subsequent period. If the reporting units fair value exceeds its carrying value, no further calculation is necessary. A reporting unit with a carrying value in excess of its fair value constitutes a Step 1 failure and may lead to an impairment charge.
In 2018, the Company performed a Step-1 analysis for the Cement and Southwest Ready Mix Division. The fair value was calculated using a discounted cash flow model. Key assumptions included managements estimates of changes in sales price, shipment volumes and production costs as well as assumptions of future profitability, capital requirements, a discount rate of 10.0% and a terminal growth rate of 3.5%. The fair value of the Cement and Southwest Ready Mix Division reporting unit exceeded its carrying value by 19%, or $382 million. For sensitivity purposes, a 100-basis-point increase in the discount rate, holding all other assumptions constant, would result in the Cement and Southwest Ready Mix Division reporting unit passing the Step-1 analysis by $16 million, or 1%. The Cement and Southwest Ready Mix Division reporting unit had $941 million of goodwill at December 31, 2018.
Martin Marietta | Page 73
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Price, cost and volume changes, profitability, efficiency improvements, the discount rate and the terminal growth rate are significant assumptions in performing a Step-1 analysis. These assumptions are interdependent and have a significant impact on the results of the test.
Future profitability and capital requirements are, by their nature, estimates. Price, cost and volume assumptions were based on current forecasts, including the use of external sources, and market conditions. Capital requirements included maintenance-level needs, efficiency projects and known capacity-increasing initiatives.
A discount rate is calculated for each reporting unit that requires a Step-1 analysis and represents its weighted average cost of capital. The calculation of the discount rate includes the following components, which are primarily based on published sources: equity risk premium, historical beta, risk-free interest rate, small-stock premium, company-specific premium and borrowing rate.
The terminal growth rate was based on average annual increase in GDP.
Management believes that all assumptions used were reasonable based on historical operating results and expected future trends. However, if future operating results are unfavorable as compared with forecasts, the results of future goodwill impairment evaluations could be negatively affected. Further, mineral reserves, which represent underlying assets producing the reporting units cash flows for the aggregates product line, are depleting assets by their nature. The potential write off of goodwill from future evaluations represents a risk to the Company.
Pension Expense-Selection of Assumptions
The Company sponsors noncontributory defined benefit pension plans that cover substantially all employees and a Supplemental Excess Retirement Plan (SERP) for certain retirees (see Note K to the audited consolidated financial statements). Annual pension expense (inclusive of SERP expense) consists of several components:
|
Service Cost , which represents the present value of benefits attributed to services rendered in the current year, measured by expected future salary levels. |
|
Interest Cost , which represents one years additional interest on the outstanding liability. |
|
Expected Return on Assets , which represents the expected investment return on pension plan assets. |
|
Amortization of Prior Service Cost and Actuarial Gains and Losses , which represents components that are recognized over time rather than immediately. Prior service cost represents credit given to employees for years of service prior to plan inception, of which there is an insignificant amount at December 31, 2018. Actuarial gains and losses arise from changes in assumptions regarding future events or when actual returns on pension assets differ from expected returns. At December 31, 2018, the unrecognized actuarial loss was $233.7 million. Pension accounting rules currently allow companies to amortize the portion of the unrecognized actuarial loss that represents more than 10% of the greater of the projected benefit obligation or pension plan assets, using the average remaining service life for the amortization period. Therefore, the $233.7 million unrecognized actuarial loss consists of $148.9 million currently subject to amortization in 2019 and $84.8 million not subject to amortization in 2019. $15.7 million of amortization of the actuarial loss is estimated to be a component of 2019 annual pension expense. |
These components are calculated annually to determine the pension expense reflected in the Companys results of operations.
Management believes the selection of assumptions related to the annual pension expense is a critical accounting estimate due to the high degree of volatility in the expense dependent on selected assumptions. The key assumptions are as follows:
|
The discount rate is used to present value the pension obligation and represents the current rate at which the pension obligations could be effectively settled. |
|
The expected long-term rate of return on pension plan assets is used to estimate future asset returns and should reflect the average rate of long-term earnings on assets invested to provide for the benefits included in the projected benefit obligation. |
|
The mortality table represents published statistics on the expected lives of people. |
|
The rate of increase in future compensation levels is used to project the pay-related pension benefit formula and should estimate actual future compensation levels. |
Martin Marietta | Page 74
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Managements selection of the discount rate is based on an analysis that estimates the current rate of return for high-quality, fixed-income investments with maturities matching the payment of pension benefits that could be purchased to settle the obligations. The Company selected a hypothetical portfolio of Moodys Aa bonds, with maturities that mirror the benefit obligations, to determine the discount rate. At December 31, 2018, the Company selected a discount rate assumption of 4.38%, a 62-basis-point increase over the prior-year assumption. Of the four key assumptions, the discount rate is generally the most volatile and sensitive estimate. Accordingly, a change in this assumption has the most significant impact on the annual pension expense.
Managements selection of the rate of increase in future compensation levels is generally based on the Companys historical salary increases, including cost of living adjustments and merit and promotion increases, giving consideration to any known future trends. A higher rate of increase results in higher pension expense. The assumed long-term rate of increase is 4.5%.
Managements selection of the expected long-term rate of return on pension fund assets is based on a building-block approach, whereby the components are weighted based on the allocation of pension plan assets. Given that these returns are long term, there are generally not significant fluctuations in the expected rate of return from year to year. Based on the currently projected returns on these assets and related expenses, the Company selected an expected return on assets of 6.75%, the same as the prior-year rate. The following table presents the expected return on pension assets as compared with the actual return on pension assets:
(add 000) |
Expected Return on Pension Assets |
Actual Return on Pension Assets |
||
2018 | $46,011 | $(40,823) | ||
2017 | $39,759 | $ 83,091 | ||
2016 | $37,699 | $ 35,432 |
The difference between expected return on pension assets and the actual return on pension assets is not immediately recognized in the consolidated statements of earnings.
Rather, pension accounting rules require the difference to be included in actuarial gains and losses, which are amortized into annual pension expense as previously described.
The Company estimates the remaining lives of participants in the pension plans using the Society of Actuaries RP-2014 Base Mortality Table. The no-collar table was used for salaried participants and the blue-collar table, reflecting the experience of the Companys participants, was used for hourly participants. The Company selected the MP-2018 scale for mortality improvement.
Assumptions are selected on December 31 to calculate the succeeding years expense. For the 2018 pension expense, assumptions selected at December 31, 2017 were as follows:
Discount rate |
3.76% | |||
Rate of increase in future compensation levels |
4.50% | |||
Expected long-term rate of return on assets |
6.75% | |||
Average remaining service period for participants |
10 years | |||
Mortality Tables: |
||||
Base Table |
RP-2014 | |||
Mortality Improvement Scale |
MP-2017 |
Using these assumptions, 2018 pension expense was $34.7 million. A change in the assumptions would have had the following impact on 2018 expense:
|
A 25-basis-point change in the discount rate would have changed 2018 expense by approximately $3.6 million. |
|
A 25-basis-point change in the expected long-term rate of return on assets would have changed the 2018 expense by approximately $1.7 million. |
For 2019 pension expense, assumptions selected at December 31, 2018 were as follows:
Discount rate |
4.38% | |||
Rate of increase in future compensation levels |
4.50% | |||
Expected long-term rate of return on assets |
6.75% | |||
Average remaining service period for participants |
10 years | |||
Mortality Tables: |
||||
Base Table |
RP-2014 | |||
Mortality Improvement Scale |
MP-2018 |
Martin Marietta | Page 75
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Using these assumptions, 2019 pension expense is expected to be approximately $36.9 million based on current demographics and structure of the plans. Changes in the underlying assumptions would have the following estimated impact on the 2019 expected expense:
|
A 25-basis-point change in the discount rate would change the 2019 expected expense by approximately $3.7 million. |
|
A 25-basis-point change in the expected long-term rate of return on assets would change the 2019 expected expense by approximately $1.8 million. |
The Company made pension plan contributions of $162.3 million in 2018 and $317.5 million during the five-year period ended December 31, 2018. Despite these contributions, the Companys pension plans are underfunded (projected benefit obligation exceeds the fair value of plan assets) by $130.0 million at December 31, 2018. The Companys projected benefit obligation was $847.9 million at December 31, 2018, a decrease of $31.4 million versus the prior year, driven by the higher discount rate. The Company expects to make pension plan and SERP contributions of $32.0 million in 2019.
Estimated Effective Income Tax Rate
The Company uses the liability method to determine its provision for income taxes. Accordingly, the annual provision for income taxes reflects estimates of the current liability for income taxes, estimates of the tax effect of financial reporting versus tax basis differences using statutory income tax rates and managements judgment with respect to any valuation allowances on deferred tax assets. The result is managements estimate of the annual effective tax rate (the ETR).
Income for tax purposes is determined through the application of the rules and regulations under the United States Internal Revenue Code and the statutes of various foreign, state and local tax jurisdictions in which the Company conducts business. Changes in the statutory tax rates and/or tax laws in these jurisdictions can have a material effect on the ETR. The effect of these changes, if any, is recognized when the change is enacted.
As prescribed by these tax regulations, as well as generally accepted accounting principles, the manner in which revenues and expenses are recognized for financial reporting
and income tax purposes is not always the same. Therefore, these differences between the Companys pretax income for financial reporting purposes and the amount of taxable income for income tax purposes are treated as either temporary or permanent, depending on their nature.
Temporary differences reflect revenues or expenses that are recognized in financial reporting in one period and taxable income in a different period. An example of a temporary difference is the use of the straight-line method of depreciation of machinery and equipment for financial reporting purposes and the use of an accelerated method for income tax purposes. Temporary differences result from differences between the financial reporting basis and tax basis of assets or liabilities and give rise to deferred tax assets or liabilities (i.e., future tax deductions or future taxable income). Therefore, when temporary differences occur, they are offset by a corresponding change in a deferred tax account. As such, total income tax expense as reported in the Companys consolidated statements of earnings is not changed by temporary differences.
The Company has deferred tax liabilities, primarily for property, plant and equipment, partnerships and joint ventures, pension and postretirement benefits, and goodwill. The deferred tax liabilities attributable to property, plant and equipment relate to accelerated depreciation and depletion methods used for income tax purposes as compared with the straight-line and units of production methods used for financial reporting purposes. These temporary differences will reverse over the remaining useful lives of the related assets. The deferred tax liabilities attributable to partnerships and joint ventures relate to the difference between the tax basis of the investments in partnerships and joint ventures when compared to the basis for financial reporting purposes. The temporary difference reverses through differences recognized over life of investment or through divestiture. The deferred tax liabilities attributable to employee pension and postretirement benefits relate to deductions as plans are funded for income tax purposes compared with deductions for financial reporting purposes based on accounting standards. The reversal of these differences depends on the timing of the Companys contributions to the related benefit plans as compared to the annual expense for financial reporting purposes. The deferred tax liabilities attributable to goodwill arise as a result of amortizing goodwill for income tax purposes but not for financial reporting purposes. This temporary difference reverses when
Martin Marietta | Page 76
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
goodwill is written off for financial reporting purposes, either through divestitures or an impairment charge. The timing of such events cannot be estimated.
The Company has deferred tax assets, primarily for unvested stock-based compensation awards, employee pension and postretirement benefits, valuation reserves, inventories, net operating loss carryforwards and tax credit carryforwards. The deferred tax assets attributable to unvested stock-based compensation awards relate to differences in the timing of deductibility for financial reporting purposes versus income tax purposes. For financial reporting purposes, the fair value of the awards is deducted ratably over the requisite service period. For income tax purposes, no deduction is allowed until the award is vested or no longer subject to substantial risk of forfeiture. The Company records all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event in the period in which the award vests or settles, increasing volatility in the income tax rate from period to period. The deferred tax assets attributable to valuation reserves and inventories relate to the deduction of estimated cost reserves and various period expenses for financial reporting purposes that are deductible in a later period for income tax purposes. The reversal of these differences depends on facts and circumstances, including the timing of deduction for income tax purposes for reserves previously established and the establishment of additional reserves for financial reporting purposes.
At December 31, 2018, the Company had federal and state net operating loss carryforwards of $3.2 million and $168.1 million, respectively, with varying expiration dates through 2037 and related federal and state deferred tax assets of $0.7 million and $10.3 million, respectively. The Company recorded a valuation allowance of $8.6 million for these deferred tax assets based on the uncertainty of generating future taxable income in the respective jurisdictions during the limited period that the net operating loss carryforwards can be utilized under state statutes.
Business Combinations Allocation of Purchase Price
The Companys Board of Directors and management regularly review strategic long-term plans, including potential investments in value-added acquisitions of related or similar businesses, which would increase the Companys market share and/or are related to the Companys existing markets.
When an acquisition is completed, the Companys consolidated statements of earnings include the operating results of the acquired business starting from the date of acquisition, which is the date control is obtained. The purchase price is determined based on the fair value of assets and equity interests given to the seller and any future obligations to the seller as of the date of acquisition. Additionally, conversion of the sellers equity awards into equity awards of the Company can affect the purchase price. The Company allocates the purchase price to the fair values of the tangible and intangible assets acquired and liabilities assumed as valued at the date of acquisition. Goodwill is recorded for the excess of the purchase price over the net of the fair value of the identifiable assets acquired and liabilities assumed as of the acquisition date. The purchase price allocation is a critical accounting policy because the estimation of fair values of acquired assets and assumed liabilities is judgmental and requires various assumptions. Further, the amounts and useful lives assigned to depreciable and amortizable assets versus amounts assigned to goodwill and indefinite-lived intangible assets, which are not amortized, can significantly affect the results of operations in the period of and for periods subsequent to a business combination.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, and, therefore, represents an exit price. A fair-value measurement assumes the highest and best use of the asset by market participants, considering the use of the asset that is physically possible, legally permissible, and financially feasible at the measurement date. The Company assigns the highest level of fair value available to assets acquired and liabilities assumed based on the following options:
|
Level 1 Quoted prices in active markets for identical assets and liabilities |
|
Level 2 Observable inputs, other than quoted prices, for similar assets or liabilities in active markets |
|
Level 3 Unobservable inputs, used to value the asset or liability which includes the use of valuation models |
Level 1 fair values are used to value investments in publicly-traded entities and assumed obligations for publicly-traded long-term debt.
Martin Marietta | Page 77
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Level 2 fair values are typically used to value acquired receivables, inventories, machinery and equipment, land, buildings, deferred income tax assets and liabilities, and accruals for payables, asset retirement obligations, environmental remediation and compliance obligations, and contingencies. Additionally, Level 2 fair values are typically used to value assumed contracts at other-than-market rates.
Level 3 fair values are used to value acquired mineral reserves and mineral interests produced and sold as final products, and separately-identifiable intangible assets. The fair values of mineral reserves and mineral interests are determined using an excess earnings approach, which requires management to estimate future cash flows, net of capital investments in the specific operation and contributory asset charges. The estimate of future cash flows is based on available historical information and future expectations and assumptions determined by management, but is inherently uncertain. Key assumptions in estimating future cash flows include changes in sales price, shipment volumes and production costs as well as capital needs. The present value of the projected net cash flows represents the fair value assigned to mineral reserves and mineral interests. The discount rate is a significant assumption used in the valuation model and is based on the required rate of return that a hypothetical market participant would require if purchasing the acquired business, with an adjustment for the risk of these assets not generating the projected cash flows.
The Company values separately-identifiable acquired intangible assets which may include, but are not limited to, permits, customer relationships, water rights and non-competition agreements. The fair values of these assets are typically determined by an excess earnings method, a replacement cost method or, in the case of water rights, a market approach.
The useful lives of amortizable intangible assets and the remaining useful lives for acquired machinery and equipment have a significant impact on earnings. The selected lives are based on the expected periods that the assets will provide value to the Company subsequent to the business combination.
The Company may adjust the amounts recognized for a business combination during a measurement period after the acquisition date. Any such adjustments are based on the Company obtaining additional information that existed at the acquisition date regarding the assets acquired or the liabilities assumed. Measurement-period adjustments are generally recorded as increases or decreases to the goodwill recognized in the transaction. The measurement period ends once the Company has obtained all necessary information that existed as of the acquisition date, but does not extend beyond one year from the date of acquisition. Any adjustments to assets acquired or liabilities assumed beyond the measurement period are recorded through earnings.
Property, Plant and Equipment
Net property, plant and equipment represent 54% of total assets at December 31, 2018. Accordingly, accounting for these assets represents a critical accounting policy. Useful lives of the assets can vary depending on factors, including production levels, geographic location, portability and maintenance practices. Additionally, climate and inclement weather can reduce the useful life of an asset. Historically, the Company has not recognized significant losses on the disposal or retirement of fixed assets.
The Company evaluates aggregates reserves, including those used in the cement manufacturing process, in several ways, depending on the geology at a particular location and whether the location is a potential new site (greensite), an acquisition or an existing operation. Greensites require an extensive drilling program before any significant investment is made in terms of time, site development or efforts to obtain appropriate zoning and permitting (see Environmental Regulation and Litigation section). The depth of overburden and the quality and quantity of the aggregates reserves are significant factors in determining whether to pursue opening the site. Further, the estimated average selling price for products in a market is also a significant factor in concluding that reserves are economically mineable. If the Companys analysis based on these factors is satisfactory, the total aggregates reserves available are calculated and a determination is made whether to open the location. Reserve evaluation at existing locations is typically performed to evaluate purchasing adjoining properties, for quality control, calculating overburden volumes and
Martin Marietta | Page 78
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
for mine planning. Reserve evaluation of acquisitions may require a higher degree of sampling to locate any problem areas that may exist and to verify the total reserves.
Well-ordered subsurface sampling of the underlying deposit is basic to determining reserves at any location. This subsurface sampling usually involves one or more types of drilling, determined by the nature of the material to be sampled and the particular objective of the sampling. The Companys objectives are to ensure that the underlying deposit meets aggregates specifications and the total reserves on site are sufficient for mining and economically recoverable. Locations underlain with hard rock deposits, such as granite and limestone, are drilled using the diamond core method, which provides the most useful and accurate samples of the deposit. Selected core samples are tested for soundness, abrasion resistance and other physical properties relevant to the aggregates industry and depending on its use. The number and depth of the holes are determined by the size of the site and the complexity of the site-specific geology. Some geological factors that may affect the number and depth of holes include faults, folds, chemical irregularities, clay pockets, thickness of formations and weathering. A typical spacing of core holes on the area to be tested is one hole for every four acres, but wider spacing may be justified if the deposit is homogeneous.
Despite previous drilling and sampling, once accessed, the quality of reserves within a deposit can vary. Construction contracts, for the infrastructure market in particular, include specifications related to the aggregates material. If a flaw in the deposit is discovered, the aggregates material may not meet the required specifications. Although it is possible that the aggregates material can still be used for non-specification uses, this can have an adverse effect on the Companys ability to serve certain customers or on the Companys profitability. In addition, other issues can arise that limit the Companys ability to access reserves in a particular quarry, including geological occurrences, blasting practices and zoning issues.
Locations underlain with sand and gravel are typically drilled using the auger method, whereby a 6-inch corkscrew brings up material from below the ground which is then sampled. Deposits in these locations are typically limited in thickness, and the quality and sand-to-gravel ratio of the deposit can vary both horizontally and vertically. Hole spacing at these locations is approximately one hole for every acre to ensure a representative sampling.
The geologist conducting the reserve evaluation makes the decision as to the number of holes and the spacing in accordance with standards and procedures established by the Company. Further, the anticipated heterogeneity of the deposit, based on U.S. geological maps, also dictates the number of holes drilled.
The generally accepted reserve categories for the aggregates industry and the designations the Company uses for reserve categories are summarized as follows:
Proven Reserves These reserves are designated using closely spaced drill data as described above and a determination by a professional geologist that the deposit is relatively homogeneous based on the drilling results and exploration data provided in U.S. geologic maps, the U.S. Department of Agriculture soil maps, aerial photographs and/or electromagnetic, seismic or other surveys conducted by independent geotechnical engineering firms. The proven reserves that are recorded reflect reductions incurred through quarrying that result from leaving ramps, safety benches, pillars (underground) and the fines (small particles) that will be generated during processing. Proven reserves are further reduced by reserves that are under the plant and stockpile areas, as well as setbacks from neighboring property lines. The Company typically assumes a loss factor of 25%. However, the assumed loss factor at coastal operations is approximately 40% due to the nature of the material. The assumed loss factor for underground operations is 35% primarily due to pillars.
Probable Reserves These reserves are inferred utilizing fewer drill holes and/or assumptions about the economically recoverable reserves based on local geology or drill results from adjacent properties.
The Companys proven and probable reserves reflect reasonable economic and operating constraints as to maximum depth of overburden and stone excavation, and also include reserves at the Companys inactive and undeveloped sites, including some sites where permitting and zoning applications will not be filed until warranted by expected future growth. The Company has historically been successful in obtaining and maintaining appropriate zoning and permitting (see Environmental Regulation and Litigation section).
Martin Marietta | Page 79
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Mineral reserves and mineral interests, when acquired in connection with a business combination, are valued using an excess earnings approach for the life of the proven and probable reserves.
The Company uses proven and probable reserves as the denominator in its units-of-production calculation to record depletion expense for its mineral reserves and mineral interests. For 2018, depletion expense was $29.3 million.
The Company begins capitalizing quarry development costs at a point when reserves are determined to be proven or probable, economically mineable and when demand supports investment in the market. Capitalization of these costs ceases when production commences. Capitalized quarry development costs are classified as land improvements.
New mining areas may be developed at existing quarries in order to access additional reserves. When this occurs, management reviews the facts and circumstances of each situation in making a determination as to the appropriateness of capitalizing or expensing the related pre-production development costs. If the additional mining location operates in a separate and distinct area of a quarry, the costs are capitalized as quarry development costs and depreciated over the life of the uncovered reserves. Further, a separate asset retirement obligation is created for additional mining areas when the liability is incurred. Once a new mining area enters the production phase, all post-production stripping costs are expensed as incurred as periodic inventory production costs.
Inventory Standards
The Company values its finished goods inventories under the first-in, first-out methodology using standard costs. For quarries, standards are developed using production costs for a twelve-month period, in addition to complying with the principle of lower of cost or net realizable value, and adjusting, if necessary, for normal capacity levels and abnormal costs. In addition to production costs, standards for distribution yards include a freight component for the cost of transporting the inventory from a quarry to the distribution yard and materials handling costs. Pre-operating start-up costs are expensed as incurred and not capitalized as part of inventory costs. In periods in which production costs, in particular, energy costs, and/or production volumes have
changed significantly from the prior period, the revision of standards can have a significant impact on the Companys operating results (see Cost Structure section).
Standard costs for the aggregates product lines are recalculated on a quarterly basis to match finished goods inventory values with changes in production costs and production volumes.
The Companys geographic footprint has attractive underlying market fundamentals, including notable employment gains, population growth and superior state fiscal health all attributes that promote steady and sustainable construction growth for the foreseeable future. Supported by third-party forecasts, Martin Marietta believes the current construction cycle will expand further in 2019 for each of the Companys three primary construction end-use markets. Notably:
● |
Infrastructure construction activity, particularly for aggregates-intensive highways and streets, should benefit from recent accelerations in state lettings and con- tract awards in key Martin Marietta states, continued FAST Act funding and regulatory reform allowing for reduced permitting time for large projects. Importantly, the partial federal government shutdown did not meaningfully delay awarded contracts and construction spending as the FAST Act, and not the federal general fund, supports federal transportation programs. Additionally, state and local initiatives that support infrastructure funding, including gas tax increases, bond programs and other ballot initiatives, will continue to play an expanded role in public-sector activity as they garner voter approval at historically high levels. Further, third-party forecasts also support increased infrastructure investment in 2019 and beyond. |
● |
Nonresidential construction activity should increase in both the commercial and heavy industrial sectors for the next several years across many of the Companys key markets. Both the Architectural Billings Index and Dodge Momentum Index suggest commercial and institutional construction activity will remain healthy throughout 2019. Continued federal regulatory approvals should notably contribute to increased aggregates |
Martin Marietta | Page 80
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
consumption from the next wave of large energy-sector projects, particularly along the Gulf Coast. To date, management has not seen a slowdown in the regulatory permitting and investing decisions for these projects despite the recent pullback in oil prices. Construction activity for these projects is expected to begin in earnest in 2019 and continue for several years thereafter. |
● |
Residential construction should continue to grow. While mortgage rate increases temporarily paused new residential construction, now stabilized, the residential market is expected to adapt and further strengthen. Housing starts of 1.3 million units for the trailing twelve months ended November 2018 remain below the 50-year average of 1.5 million annual starts despite notable population gains. Further, management believes a shortage of single-family housing units exists, particularly for entry-level homes; a need the homebuilding industry is now beginning to address. Martin Mariettas leading positions in southeastern and southwestern states offer superior opportunities for gains in single-family housing driven by a multitude of factors, such as affordable land, lower taxes and fewer regulatory barriers. Continued strength in residential construction supports future infrastructure and nonresidential activity. |
Specifically:
● |
Aggregates shipments by end-use market compared with 2018 levels are as follows: |
- |
Infrastructure shipments to increase in the high-single digits. |
- |
Nonresidential shipments to increase in the mid- to high-single digits. |
- |
Residential shipments to increase in the mid-single digits. |
- |
ChemRock/Rail shipments to be up slightly. |
2019 GUIDANCE
(dollars and tons in millions, except per ton)
Low | High | |||||||
Consolidated Results |
||||||||
Consolidated total revenues 1 |
$ | 4,480 | $ | 4,680 | ||||
Consolidated gross profit |
$ | 1,110 | $ | 1,210 | ||||
SG&A |
$ | 300 | $ | 310 | ||||
Interest expense |
$ | 130 | $ | 140 | ||||
Estimated tax rate (excluding discrete events) |
20% | 22% | ||||||
Net earnings attributable to Martin Marietta |
$ | 520 | $ | 620 | ||||
EBITDA 2 |
$ | 1,170 | $ | 1,280 | ||||
Capital expenditures |
$ | 350 | $ | 400 | ||||
Building Materials Business |
||||||||
Aggregates Product Line
|
||||||||
Volume (total tons) 3 |
180 | 185 | ||||||
% growth 3 |
6% | 8% | ||||||
Average selling price per ton |
$ | 14.15 | $ | 14.40 | ||||
% growth 4 |
3% | 5% | ||||||
Total revenues |
$ | 2,800 | $ | 2,910 | ||||
Gross profit |
$ | 755 | $ | 810 | ||||
Cement Product Line |
||||||||
Total revenues |
$ | 420 | $ | 450 | ||||
Gross profit |
$ | 130 | $ | 150 | ||||
Ready Mixed Concrete and
|
||||||||
Total revenues |
$ | 1,240 | $ | 1,310 | ||||
Gross profit |
$ | 130 | $ | 150 | ||||
Magnesia Specialties |
||||||||
Total revenues |
$ | 290 | $ | 300 | ||||
Gross profit |
$ | 100 | $ | 105 |
1 |
2019 consolidated total revenues exclude $270 million to $290 million related to estimated interproduct sales. |
2 |
EBITDA is a non-GAAP financial measure. See below for a reconciliation of net earnings attributable to Martin Marietta to EBITDA. |
3 |
Represents 2019 total aggregates volumes, which includes approximately 10.9 million internal tons. Volume growth ranges are in comparison with total volumes of 170.8 million tons for 2018, which included 10.6 million internal tons and 0.3 million tons from the Companys Forsyth, Georgia, quarry that was divested in April 2018. |
4 |
ASP growth range is in comparison with ASP of $13.71 per ton for 2018. |
Reconciliation of 2019 Guidance Net earnings attributable to Martin Marietta to EBITDA
(dollars in millions) |
||||
Net earnings attributable to Martin Marietta |
$ | 570 | ||
Add back: |
||||
Interest expense |
135 | |||
Income tax expense for controlling interests |
150 | |||
Depreciation, depletion and amortization expense |
370 | |||
EBITDA |
$ | 1,225 |
Martin Marietta | Page 81
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Risks To Outlook
The outlook includes managements assessment of the likelihood of certain risks and uncertainties that may affect performance, including but not limited to: both price and volume, and a widespread decline in aggregates pricing, including a decline in aggregates volume negatively affecting aggregates price; the termination, capping and/or reduction of the federal and/or state gasoline tax(es) or other revenue related to infrastructure construction; a significant change in the level and timing of funding patterns for traditional federal, state and/or local infrastructure projects, most particularly in Texas, North Carolina, Iowa, Colorado, Georgia and Maryland; the volatility in the commencement of infrastructure projects; the performance of the United States economy; shipment declines resulting from economic events beyond the Companys control; the history of both cement and ready mixed concrete being subject to significant changes in supply, demand and price fluctuations; the ability of states and/or other entities to finance approved projects either with tax revenues or alternative financing structures; levels of construction spending in the markets the Company serves; a reduction in defense spending, and the subsequent impact on construction activity on or near military bases; a decline in the commercial component of the nonresidential construction market, notably office and retail space; a further decline in energy-related construction activity resulting from a sustained period of low global oil prices or changes in oil production patterns in response to this decline, particularly in Texas; a slowdown in residential construction recovery; continuing unfavorable weather conditions, particularly Atlantic Ocean and Gulf Coast hurricane activity, excessive rainfall in the markets served by the Company and the early onset of winter, any of which can significantly affect production schedules, volumes, product and/or geographic mix and profitability; the volatility of fuel costs, particularly diesel fuel, and the impact on the cost, or the availability generally, of other consumables, namely steel, explosives, tires and conveyor belts, and with respect to the Companys Magnesia Specialties business, natural gas; continued increases in the cost of other repair and supply parts; continuing construction labor shortages and/ or supply-chain challenges; unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to production facilities; increase cost of compliance with governmental regulation, including environmental laws; increased transportation
costs, including increases from higher or fluctuating passed-through energy costs or fuel surcharges, and other costs to comply with tightening regulations, as well as higher volumes of rail and water shipments; availability of trucks and licensed drivers for transport of the Companys materials; availability and cost of construction equipment in the United States; weakening in the steel industry markets served by the Companys dolomitic lime products; a trade dispute with one or more nations impacting the U.S. economy, including the impact of tariffs on the steel industry; unplanned changes in costs or realignment of customers that introduce volatility to earnings, including that of the Magnesia Specialties business that is running at capacity; proper functioning of information technology and automated operating systems to manage or support operations; inflation and its effect on both production and interest costs; the concentration of customers in construction markets and the increased risk of potential losses on customer receivables; the impact of the level of demand in the Companys end-use markets, production levels and management of production costs on the operating leverage and therefore profitability of the Company; the possibility that the expected synergies from acquisitions will not be realized or will not be realized within the expected time period, including achieving anticipated profitability to maintain compliance with the Companys leverage ratio debt covenant; changes in tax laws, the interpretation of such laws and/or administrative practices that would increase the Companys tax rate; violation of the Companys debt covenant if price and/or volumes return to previous levels of instability; continued downward pressure on the Companys common stock price and its impact on goodwill impairment evaluations; reduction of the Companys credit rating to non-investment grade resulting from strategic acquisitions; and the United States Congress inability to reach agreement among themselves or with the current Administration on policy issues that impact the federal budget or another government shutdown. Further, increased highway construction funding pressures resulting from either federal or state issues can affect profitability. If these negatively affect transportation budgets more than in the past, construction spending could be reduced. Cement is subject to cyclical supply and demand and price fluctuations. The Magnesia Specialties business essentially runs at capacity; therefore, any unplanned changes in costs or realignment of customers introduce volatility to the earnings of this segment.
Martin Marietta | Page 82
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
The Companys principal business serves customers in construction markets. This concentration could increase the risk of potential losses on customer receivables; however, payment bonds normally posted on public projects, together with lien rights on private projects, mitigate the risk of uncollectible receivables. The level of demand in the Companys end-use markets, production levels and the management of production costs will affect the operating leverage of the Building Materials business and, therefore, profitability. Production costs in the Building Materials business are also sensitive to energy and raw material prices, both directly and indirectly. Diesel fuel, coal and other consumables change production costs directly through consumption or indirectly by increased energy-related input costs, such as steel, explosives, tires and conveyor belts. Fluctuating diesel fuel pricing also affects transportation costs, primarily through fuel surcharges in the Companys long-haul distribution network. The Magnesia Specialties business is sensitive to changes in domestic steel capacity utilization as well as the absolute price and fluctuation in the cost of natural gas.
Transportation in the Companys long-haul network, particularly the supply of rail cars and locomotive power and condition of rail infrastructure to move trains, affects the Companys efficient transportation of aggregates products in certain markets, most notably Texas, Colorado, Florida, North Carolina and the Gulf Coast. In addition, availability of rail cars and locomotives affects the Companys movement of essential dolomitic lime for magnesia chemicals to both the Companys plant in Manistee, Michigan, and its customers. The availability of trucks, drivers and railcars to transport the Companys product, particularly in markets experiencing high growth and increased demand, is also a risk and pressures the associated costs.
All of the Companys businesses are also subject to weather-related risks that can significantly affect production schedules and profitability. The first and fourth quarters are most adversely affected by winter weather. Hurricane activity in the Atlantic Ocean and Gulf Coast generally is most active during the third and fourth quarters. In fact, in September and October 2018, respectively, Hurricanes Florence and Michael generated winds, rainfall and flooding which disrupted operations in the Carolinas, Florida and Georgia. However, after flood waters recede, management typically expects an increase in construction activity as roads, homes and businesses are repaired.
Risks to the outlook also include shipment declines resulting from economic events beyond the Companys control.
Martin Marietta | Page 83
MANAGEMENTS DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATIONS (continued)
Forward-Looking Statements Safe Harbor Provisions
|
||||
If you are interested in Martin Marietta Materials, Inc. stock, management recommends that, at a minimum, you read the Companys Forms 10-K, 10-Q and 8-K reports to the Securities and Exchange Commission (SEC) over the past year, in addition to the Annual Report. The Companys recent proxy statement for the annual meeting of shareholders also contains important information. These and other materials that have been filed with the SEC are accessible through the Companys website at www.martinmarietta.com and are also available at the SECs website at www.sec.gov . You may also write or call the Companys Corporate Secretary, who will provide copies of such reports.
Investors are cautioned that all statements in this Annual Report that relate to the future 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. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give the investor the Companys expectations or forecasts of future events. These statements can be identified by the fact that they do not relate only to historical or current facts. They may use words such as anticipate, expect, should be, believe, will, and other words of similar meaning in connection with future events or future operating or financial performance. Any or all of the Companys forward-looking statements here and in other publications may turn out to be wrong.
Factors that the Company currently believes could cause actual results to differ materially from the forward-looking statements in this Annual Report include but are not limited to those listed above in Risks to Outlook and other risk factors listed from time to time found in the Companys filings with the SEC, including, but not limited to, the discussion of Competition in the Companys Annual Report on Form 10-K and in Item 1A of the Companys Annual Report on Form 10-K, Note A: Accounting Policies and Note O: Commitments and Contingencies of the Notes to Financial Statements of the audited consolidated financial statements included in this Annual Report.
|
|
Martin Marietta | Page 84
QUARTERLY PERFORMANCE (UNAUDITED) (add 000, except per share and stock prices)
|
|
Total Revenues | Gross Profit |
Consolidated Net
Earnings |
Net Earnings Attributable to Martin Marietta |
|||||||||||||||||||||||||||||
Quarter | 2018 | 2017 | 2018 2,3 | 2017 | 2018 2,3,4,5 | 2017 6,7,8 | 2018 2,3,4,5 | 2017 6,7,8 | ||||||||||||||||||||||||
First |
$ | 802,004 | $ | 843,859 | $ | 110,392 | $ | 147,067 | $ | 10,040 | $ | 42,307 | $ | 10,023 | $ | 42,334 | ||||||||||||||||
Second |
1,202,403 | 1,063,524 | 315,917 | 274,094 | 185,503 | 142,241 | 185,377 | 142,279 | ||||||||||||||||||||||||
Third |
1,219,640 | 1,087,732 | 312,984 | 291,678 | 180,353 | 151,539 | 180,221 | 151,546 | ||||||||||||||||||||||||
Fourth |
1,020,218 | 970,479 | 227,284 | 259,101 | 94,480 | 377,298 | 94,377 | 377,183 | ||||||||||||||||||||||||
Totals |
$ | 4,244,265 | $ | 3,965,594 | $ | 966,577 | $ | 971,940 | $ | 470,376 | $ | 713,385 | $ | 469,998 | $ | 713,342 |
Per Common Share | ||||||||||||||||
Basic Earnings 1 | Diluted Earnings 1 | |||||||||||||||
Quarter | 2018 2,3,4,5 | 2017 6,7,8 | 2018 2,3,4,5 | 2017 6,7,8 | ||||||||||||
First |
$ | 0.16 | $ | 0.67 | $ | 0.16 | $ | 0.67 | ||||||||
Second |
$ | 2.94 | $ | 2.26 | $ | 2.92 | $ | 2.25 | ||||||||
Third |
$ | 2.86 | $ | 2.40 | $ | 2.85 | $ | 2.39 | ||||||||
Fourth |
$ | 1.50 | $ | 5.98 | $ | 1.50 | $ | 5.95 | ||||||||
Full Year |
$ | 7.46 | $ | 11.30 | $ | 7.43 | $ | 11.25 |
1 |
The sum of per-share earnings by quarter may not equal earnings per share for the year due to changes in average share calculations. This is in accordance with prescribed reporting requirements. |
2 |
Gross profit for the second quarter of 2018 was $10.2 million lower due to the impact of selling acquired inventory after its mark up to fair value as part of acquisition accounting. Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per common share for the second quarter of 2018 were reduced by $13.2 million, or $0.21 per basic and diluted share, as a result of acquisition-related expenses, net, primarily attributable to the acquisition of Bluegrass Materials Company, and by $7.8 million, or $0.12 per basic and diluted share, for the impact of selling acquired inventory after its mark up to fair value as part of acquisition accounting. |
3 |
Gross profit for the third quarter of 2018 was $8.3 million lower due to the impact of selling acquired inventory after its mark up to fair value as part of acquisition accounting. Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per common share for the third quarter of 2018 were $5.6 million, or $0.09 per basic and diluted share, lower due to an asset and portfolio rationalization charge and $6.4 million, or $0.10 per basic and diluted share, lower due to the impact of selling acquired inventory after its mark up to fair value as part of acquisition accounting. |
4 |
Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per share for the third quarter ended September 30, 2018 were increased $21.2 million, or $0.34 per basic and diluted share, as a result of measurement period adjustments related to the 2017 Tax Act. |
5 |
Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per common share for the fourth quarter of 2018 were $9.1 million, or $0.14 per basic and diluted share, lower due to an asset and portfolio rationalization charge. |
6 |
Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per common share for the second quarter of 2017 were $3.8 million, or $0.06 per basic and diluted share, lower due to the expense related to a retirement agreement and $8.3 million, or $0.13 per basic and diluted share, higher as a result of a gain on the sale of real property. |
7 |
Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per common share for the third quarter of 2017 were $7.9 million, or $0.13 per basic and diluted share, lower due to nonrecurring repair costs related to certain of the Companys leased railcars. |
8 |
Consolidated net earnings, net earnings attributable to Martin Marietta, and basic and diluted earnings per common share for the fourth quarter of 2017 were $258.1 million, or $4.09 and $4.07 per basic and diluted share, respectively, higher as a result of the impact of the 2017 Tax Act. |
At February 15, 2019, there were 878 shareholders of record.
Martin Marietta | Page 85
FIVE YEAR SELECTED FINANCIAL DATA (add 000, except per share) |
|
2018 |
2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||
Consolidated Operating Results |
||||||||||||||||||||||||||||
Products and services revenues 1 |
$ | 3,980,351 | $ | 3,723,478 | $ | 3,578,650 | $ | 3,269,148 | $ | 2,681,626 | ||||||||||||||||||
Freight revenues 1 |
263,914 | 242,116 | 240,099 | 270,422 | 276,325 | |||||||||||||||||||||||
Total revenues |
4,244,265 | 3,965,594 | 3,818,749 | 3,539,570 | 2,957,951 | |||||||||||||||||||||||
Cost of revenues - products and services |
3,009,810 | 2,749,488 | 2,665,029 | 2,541,196 | 2,159,471 | |||||||||||||||||||||||
Cost of revenues - freight |
267,878 | 244,166 | 241,982 | 271,454 | 278,856 | |||||||||||||||||||||||
Total cost of revenues 2 |
3,277,688 | 2,993,654 | 2,907,011 | 2,812,650 | 2,438,327 | |||||||||||||||||||||||
Gross Profit 2 |
966,577 | 971,940 | 911,738 | 726,920 | 519,624 | |||||||||||||||||||||||
Selling, general and administrative expenses 2 |
280,554 | 262,128 | 241,606 | 210,754 | 168,102 | |||||||||||||||||||||||
Acquisition-related expenses, net 2 |
13,479 | 8,638 | 909 | 6,346 | 29,239 | |||||||||||||||||||||||
Other operating (income) expenses and, net |
(18,193 | ) | 793 | (8,043 | ) | 15,653 | (4,649 | ) | ||||||||||||||||||||
Earnings from Operations 2 |
690,737 | 700,381 | 677,266 | 494,167 | 326,932 | |||||||||||||||||||||||
Interest expense |
137,069 | 91,487 | 81,677 | 76,287 | 66,057 | |||||||||||||||||||||||
Other nonoperating (income) and expenses, net 2 |
(22,413 | ) | (10,034 | ) | (11,439 | ) | 4,079 | 11,697 | ||||||||||||||||||||
Earnings from continuing operations before income tax expense (benefit) |
576,081 | 618,928 | 607,028 | 413,801 | 249,178 | |||||||||||||||||||||||
Income tax expense (benefit) |
105,705 | (94,457 | ) | 181,584 | 124,863 | 94,847 | ||||||||||||||||||||||
Earnings from Continuing Operations |
470,376 | 713,385 | 425,444 | 288,938 | 154,331 | |||||||||||||||||||||||
Discontinued operations, net of taxes |
| | | | (37 | ) | ||||||||||||||||||||||
Consolidated net earnings |
470,376 | 713,385 | 425,444 | 288,938 | 154,294 | |||||||||||||||||||||||
Less: Net earnings (loss) attributable to noncontrolling interests |
378 | 43 | 58 | 146 | (1,307 | ) | ||||||||||||||||||||||
Net Earnings Attributable to Martin Marietta |
$ | 469,998 | $ | 713,342 | $ | 425,386 | $ | 288,792 | $ | 155,601 | ||||||||||||||||||
Net Earnings Attributable to Martin Marietta Per Common Share (see Note A): |
||||||||||||||||||||||||||||
Basic attributable to common shareholders |
$ | 7.46 | $ | 11.30 | $ | 6.66 | $ | 4.31 | $ | 2.73 | ||||||||||||||||||
Diluted attributable to common shareholders |
$ | 7.43 | $ | 11.25 | $ | 6.63 | $ | 4.29 | $ | 2.71 | ||||||||||||||||||
Cash Dividends Per Common Share |
$ | 1.84 | $ | 1.72 | $ | 1.64 | $ | 1.60 | $ | 1.60 | ||||||||||||||||||
2018 3 |
2017 3 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||
Condensed Consolidated Balance Sheet Data |
||||||||||||||||||||||||||||
Total current assets 4 |
$ | 1,365,816 | $ | 2,631,160 | $ | 1,086,385 | $ | 1,081,635 | $ | 1,043,646 | ||||||||||||||||||
Property, plant and equipment, net |
5,157,229 | 3,592,813 | 3,423,395 | 3,156,000 | 3,402,770 | |||||||||||||||||||||||
Goodwill |
2,399,118 | 2,160,290 | 2,159,337 | 2,068,235 | 2,068,799 | |||||||||||||||||||||||
Other intangibles, net |
501,282 | 506,349 | 511,312 | 510,552 | 595,205 | |||||||||||||||||||||||
Other noncurrent assets 4 |
127,974 | 101,899 | 120,476 | 141,189 | 104,097 | |||||||||||||||||||||||
Total Assets |
$ | 9,551,419 | $ | 8,992,511 | $ | 7,300,905 | $ | 6,957,611 | $ | 7,214,517 | ||||||||||||||||||
Current liabilities other |
$ | 396,708 | $ | 394,307 | $ | 366,552 | $ | 347,945 | $ | 382,312 | ||||||||||||||||||
Current maturities of long-term debt 4 |
390,042 | 299,909 | 180,036 | 18,713 | 13,803 | |||||||||||||||||||||||
Long-term debt 4 |
2,730,439 | 2,727,294 | 1,506,153 | 1,550,061 | 1,566,355 | |||||||||||||||||||||||
Pension, postretirement and postemployment benefits, noncurrent |
134,469 | 244,043 | 248,086 | 224,538 | 249,333 | |||||||||||||||||||||||
Deferred income taxes, net |
705,564 | 410,723 | 663,019 | 583,459 | 489,945 | |||||||||||||||||||||||
Other noncurrent liabilities |
244,785 | 233,758 | 194,469 | 172,718 | 160,021 | |||||||||||||||||||||||
Shareholders equity |
4,946,363 | 4,679,600 | 4,139,978 | 4,057,284 | 4,351,166 | |||||||||||||||||||||||
Noncontrolling interests |
3,049 | 2,877 | 2,612 | 2,893 | 1,582 | |||||||||||||||||||||||
Total Liabilities and Equity |
$ | 9,551,419 | $ | 8,992,511 | $ | 7,300,905 | $ | 6,957,611 | $ | 7,214,517 |
1 |
Amounts for 2014-2017 may not equal amounts reported in the Companys prior years Forms 10-K as amounts have been reclassified to conform to current year revenue presentation. |
2 |
Amounts for 2014-2016 may not equal amounts reported in the Companys prior years Forms 10-K as amounts have been reclassified to reflect the adoption of the Accounting Standards Update 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost . |
3 |
The 2018 balance sheet reflects the acquisition of Bluegrass Materials Company (Bluegrass) completed on April 27, 2018. The 2017 balance sheet reflects $1.1 billion of cash and long-term debt issued in anticipation of closing the Bluegrass acquisition. |
4 |
Balance sheets reflect the adoption of Accounting Standards Update 2015-03, Simplifying the Presentation of Debt Issuance Costs . |
Martin Marietta | Page 86
COMMON STOCK PERFORMANCE GRAPH
The following graph compares the performance of the Companys common stock to that of the Standard and Poors (S&P) 500 Index and the S&P 500 Materials Index.
2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||
Martin Marietta |
$100.00 | $127.60 | $137.45 | $153.67 | $192.23 | $314.62 | $316.43 | $248.28 | ||||||||
S&P 500 Index |
$100.00 | $116.00 | $153.57 | $174.60 | $177.01 | $198.18 | $241.45 | $230.86 | ||||||||
S&P 500 Materials Index |
$100.00 | $114.97 | $144.40 | $154.38 | $141.44 | $165.05 | $204.40 | $174.35 |
1 Assumes that the investment in the Companys common stock and each index was $100, with quarterly reinvestment of dividends.
Martin Marietta | Page 87
EXHIBIT 21.01
SUBSIDIARIES OF MARTIN MARIETTA MATERIALS, INC.
AS OF JANUARY 31, 2019
1 |
Alamo Gulf Coast Railroad Company is owned by Martin Marietta Materials Southwest, LLC, (99.5%) and certain individuals (0.5%). |
2 |
Alamo North Texas Railroad Company is owned by Martin Marietta Materials Southwest, LLC, (99.5%) and certain individuals (0.5%). |
3 |
American Materials Technologies, LLC is a wholly owned subsidiary of Meridian Aggregates Company, a Limited Partnership. |
4 |
Martin Marietta Materials, Inc. owns a 50% interest in American Stone Company. |
5 |
Bluegrass Blue Mount, LLC is a wholly owned subsidiary of Bluegrass Materials Company, LLC. |
6 |
Bluegrass Materials Company, LLC is a wholly owned subsidiary of Panadero Midco, LLC. |
7 |
Bluegrass-St. Marys, LLC is a wholly owned subsidiary of Bluegrass Materials Company, LLC. |
8 |
Brookhollow of Alexandria, Inc. is a wholly owned subsidiary of Brookhollow Corporation. |
9 |
Brookhollow Corporation is a wholly owned subsidiary of Texas Industries, Inc. |
10 |
Brook Hollow Properties, Inc. is a wholly owned subsidiary of Brookhollow Corporation. |
11 |
California Natural Aggregates, Inc. is a wholly owned subsidiary of Texas Industries, Inc. |
12 |
Campbells C-Ment Contracting, Inc. is a wholly-owned subsidiary of Suburban Acquisition Company. |
13 |
Creole Corporation is a wholly owned subsidiary of Texas Industries, Inc. |
14 |
FRI Ready Mix of Tennessee, LLC is a wholly owned subsidiary of American Materials Technologies, LLC. |
15 |
Granite Canyon Quarry is owned 51% by Meridian Granite Company and 49% by Martin Marietta Materials Real Estate Investments, Inc. |
16 |
Kent Sand & Gravel Company, LLC is a wholly owned subsidiary of Bluegrass Materials Company, LLC. |
17 |
Mardell Trucking Company, Inc. is owned 50% by Bluegrass Materials Company, LLC and 50% by Petrillo Brothers, Inc. |
18 |
Martin Marietta Bluegrass, LLC is owned 61.61% by Panadero Corp. and f38.39% by Martin Marietta Materials, Inc. |
19 |
Martin Marietta Fleet Management LLC, is a wholly owned subsidiary of Martin Marietta Materials Southwest, LLC |
20 |
Martin Marietta Kansas City, LLC is owned 95% by Martin Marietta Materials, Inc. and 5% by Martin Marietta Materials of Missouri, Inc. |
21 |
Martin Marietta Materials Southwest, LLC is a wholly owned subsidiary of Texas Industries, Inc. |
22 |
Material Producers, Inc. is a wholly owned subsidiary of Martin Marietta Materials Southwest, LLC |
23 |
Maryland Materials, Inc. is owned 50% by Bluegrass Materials Company, LLC and 50% by Petrillo Brothers, Inc. |
24 |
Meridian Aggregates Company, a Limited Partnership, is owned 98% by Meridian Aggregates Investments, LLC. The remaining 2% is owned by Martin Marietta Materials, Inc. |
25 |
Martin Marietta Materials Southwest, LLC is the sole member of Meridian Aggregates Company Southwest, LLC. |
26 |
Meridian Aggregates Investments, LLC is owned 99% by Martin Marietta Materials, Inc. and 1% by Martin Marietta Materials Real Estate Investments, Inc. |
27 |
Meridian Granite Company is a wholly owned subsidiary of Meridian Aggregates Company, a Limited Partnership. |
28 |
Martin Marietta Magnesia Specialties, LLC, a wholly owned subsidiary of Martin Marietta Materials, Inc., owns a 50% interest in MTD Pipeline LLC. |
29 |
North East Land and Material Company, Inc. is a wholly owned subsidiary of Maryland Materials, Inc. |
30 |
Panadero Midco, LLC is a wholly owned subsidiary of Martin Marietta Bluegrass, LLC. |
31 |
Partin Limestone Products, Inc. is a wholly owned subsidiary of Riverside Cement Company. |
32 |
Petrillo Brothers, Inc. is a wholly owned subsidiary of Bluegrass Materials Company, LLC. |
33 |
Powderly Transportation, Inc. is a wholly owned subsidiary of Meridian Aggregates Company, a Limited Partnership. |
34 |
Martin Marietta Materials, Inc. is the manager of and owns a 90% interest in R&S Sand & Gravel, LLC. The other 10% is owned by Harding Street Corporation, a wholly owned subsidiary of Martin Marietta Materials, Inc. |
35 |
Ratliff Mix Management, LLC is a wholly owned subsidiary of TXI Operations, LP. |
36 |
Ratliff Ready-Mix, LP is owned 99% by TXI Operations, LP and 1% by Ratliff Mix Management, LLC. |
37 |
Riverside Cement Company is owned 49% by TXI California, Inc. and 51% by TXI Riverside Inc. |
38 |
Riverside Cement Holdings Company is a wholly owned subsidiary of Riverside Cement Company. |
39 |
Rocky Mountain Ready Mix Concrete, Inc. is a wholly owned subsidiary of Campbells C-Ment Contracting, Inc. |
40 |
Rock & Rail LLC, a wholly owned subsidiary of Martin Marietta Materials, Inc., owns a 50% interest in Royal Gorge Express, LLC |
41 |
Southwestern Financial Corporation is a wholly owned subsidiary of TXI Operations, LP. |
42 |
St. Marys Sand Company, LLC is a wholly owned subsidiary of Bluegrass-St. Marys, LLC. |
43 |
Texas Industries Holdings, LLC is a wholly owned subsidiary of Texas Industries, Inc. |
44 |
Texas Industries Trust is owned 100% by Texas Industries Holdings, LLC. |
45 |
Martin Marietta Materials, Inc. is the manager of and owns a 60.7% interest in Theodore Holdings, LLC. |
46 |
TXI Aviation, Inc. is a wholly owned subsidiary of Texas Industries, Inc. |
47 |
TXI California Inc. is a wholly owned subsidiary of Texas Industries, Inc. |
48 |
TXI Cement Company is a wholly owned subsidiary of Texas Industries, Inc. |
49 |
TXI, LLC is a wholly owned subsidiary of Texas Industries, Inc. |
50 |
TXI Operating Trust is owned 100% by TXI LLC. |
51 |
TXI Operations, LP is owned 99% by Texas Industries Trust and owned 1% by TXI Operating Trust. |
52 |
TXI Power Company is a wholly owned subsidiary of Texas Industries, Inc. |
53 |
TXI Riverside Inc. is a wholly owned subsidiary of Texas Industries, Inc. |
54 |
TXI Transportation Company is a wholly owned subsidiary of Texas Industries, Inc. |
55 |
Martin Marietta Materials, Inc. is the manager of and owns a 50% interest in Valley Stone LLC. |
EXHIBIT 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-115918, 333-85608, 333-15429, 333-211735, and 333-197201) and Form S-3 (No. 333-217991) of Martin Marietta Materials, Inc. of our report dated February 22, 2019 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 22, 2019 relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 25, 2019
EXHIBIT 31.01
CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934
RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, C. Howard Nye, certify that:
1. |
I have reviewed this Form 10-K of Martin Marietta Materials, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 25, 2019 |
By: |
/s/ C. Howard Nye |
||
C. Howard Nye |
||||
Chairman, President and |
||||
Chief Executive Officer |
EXHIBIT 31.02
CERTIFICATION PURSUANT TO SECURITIES AND EXCHANGE ACT OF 1934
RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATIONS
I, James A. J. Nickolas, certify that:
1. |
I have reviewed this Form 10-K of Martin Marietta Materials, Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: February 25, 2019 |
By: |
/s/ James A. J. Nickolas |
||
James A. J. Nickolas |
||||
Senior Vice President and |
||||
Chief Financial Officer |
EXHIBIT 32.01
WRITTEN STATEMENT PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the 2018 Annual Report on Form 10-K (the Report) of Martin Marietta Materials, Inc. (the Registrant), as filed with the Securities and Exchange Commission, I, C. Howard Nye, the Chief Executive Officer of the Registrant, certify that:
(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ C. Howard Nye |
C. Howard Nye |
Chief Executive Officer |
Date: February 25, 2019
A signed original of this written statement required by Section 906 has been provided to Martin Marietta Materials, Inc. and will be retained by Martin Marietta Materials, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.02
WRITTEN STATEMENT PURSUANT TO 18 U.S.C. 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the 2018 Annual Report on Form 10-K (the Report) of Martin Marietta Materials, Inc. (the Registrant), as filed with the Securities and Exchange Commission, I, James A. J. Nickolas, the Chief Financial Officer of the Registrant, certify that:
(1) |
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
/s/ James A. J. Nickolas |
James A. J. Nickolas |
Chief Financial Officer |
Date: February 25, 2019
A signed original of this written statement required by Section 906 has been provided to Martin Marietta Materials, Inc. and will be retained by Martin Marietta Materials, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 95
MINE SAFETY DISCLOSURE EXHIBIT
The operation of the Companys U.S. aggregate quarries and mines (including the mining operations of the cement product line) is subject to regulation by the federal Mine Safety and Health Administration (MSHA) under the Federal Mine Safety and Health Act of 1977 (the Mine Act). MSHA inspects the Companys quarries and mines (and cement plants) on a regular basis and issues various citations and orders when it believes a violation has occurred under the Mine Act. Whenever MSHA issues a citation or order, it also generally proposes a civil penalty, or fine, related to the alleged violation. Citations or orders can be contested and appealed, and as part of that process, are often reduced in severity and amount, and are sometimes dismissed.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Company is required to present information regarding certain mining safety and health citations which MSHA has issued with respect to its aggregates mining operations in its periodic reports filed with the Securities and Exchange Commission (the SEC). In evaluating this information, consideration should be given to factors such as: (i) the number of citations and orders will vary depending on the size of the quarry or mine and type of operations (underground or surface), (ii) the number of citations issued will vary from inspector to inspector and location to location, and (iii) citations and orders can be contested and appealed, and in that process, may be reduced in severity and amount, and are sometimes dismissed.
We have provided information below in response to the rules and regulations of the SEC issued under Section 1503(a) of the Dodd-Frank Act. The disclosures reflect U.S. mining operations only, as the requirements of the Dodd-Frank Act and the SEC rules and regulations thereunder do not apply to our quarries and mines operated outside the United States.
The Company presents the following items regarding certain mining safety and health matters for the year ended December 31, 2018 (Appendix 1):
|
Total number of violations of mandatory health or safety standards that could significantly and substantially contribute to the cause and effect of a mine safety or health hazard under section 104 of the Mine Act for which the Company received a citation from MSHA (hereinafter, Section 104 S&S Citations). If MSHA determines that a violation of a mandatory health or safety standard is reasonably likely to result in a reasonably serious injury or illness under the unique circumstance contributed to by the violation, MSHA will classify the violation as a significant and substantial violation (commonly referred to as a S&S violation). MSHA inspectors will classify each citation or order written as a S&S violation or not. |
|
Total number of orders issued under section 104(b) of the Mine Act (hereinafter, Section 104(b) Orders). These orders are issued for situations in which MSHA determines a previous violation covered by a Section 104(a) citation has not been totally abated within the prescribed time period, so a further order is needed to require the mine operator to immediately withdraw all persons (except certain authorized persons) from the affected area of a quarry or mine. |
|
Total number of citations and orders for unwarrantable failure of the mine operator to comply with mandatory health or safety standards under Section 104(d) of the Mine Act (hereinafter, Section 104(d) Citations and Orders). These violations are similar to those described above, but the standard is that the violation could significantly and substantially contribute to the cause and effect of a safety or health hazard, but the conditions do not cause imminent danger, and the MSHA inspector finds that the violation is caused by an unwarranted failure of the operator to comply with the health and safety standards. |
|
Total number of flagrant violations under section 110(b)(2) of the Mine Act (hereinafter, Section 110(b)(2) Violations). These violations are penalty violations issued if MSHA determines that violations are flagrant, for which civil penalties may be assessed. A flagrant violation means a reckless or repeated failure to make reasonable efforts to eliminate a known violation of a mandatory health or safety standard that substantially and proximately caused, or reasonably could have been expected to cause, death or serious bodily injury. |
|
Total number of imminent danger orders issued under section 107(a) of the Mine Act (hereinafter, Section 107(a) Orders). These orders are issued for situations in which MSHA determines an imminent danger exists in the quarry or mine and results in orders of immediate withdrawal of all persons (except certain authorized persons) from the area of the quarry or mine affected by its condition until the imminent danger and the underlying conditions causing the imminent danger no longer exist. |
|
Total Dollar Value of MSHA Assessments Proposed. These are the amounts of proposed assessments issued by MSHA with each citation or order for the time period covered by the report. Penalties are assessed by MSHA according to a formula that considers a number of factors, including the mine operators history, size, negligence, gravity of the violation, good faith in trying to correct the violation promptly, and the effect of the penalty on the operators ability to continue in business. |
|
|
Total Number of Mining-Related Fatalities. Mines subject to the Mine Act are required to report all fatalities occurring at their facilities unless the fatality is determined to be non-chargeable to the mining industry. The final rules of the SEC require disclosure of mining-related fatalities at mines subject to the Mine Act. Only fatalities determined by MSHA not to be mining-related may be excluded. |
|
Receipt of written notice from MSHA of a pattern (or a potential to have such a pattern) of violations of mandatory health or safety standards that are of such nature as could have significantly and substantially contributed to the cause and effect of other mine health or safety hazards under section 104(e) of the Mine Act. If MHSA determines that a mine has a pattern of these types of violations, or the potential to have such a pattern, MSHA is required to notify the mine operator of the existence of such a thing. |
|
Legal Actions Pending as of the Last Day of Period. |
|
Legal Actions Initiated During Period. |
|
Legal Actions Resolved During Period. |
The Federal Mine Safety and Health Review Commission (the Commission) is an independent adjudicative agency that provides administrative trial and appellate review of legal disputes arising under the Mine Act. The cases may involve, among other questions, challenges by operators to citations, orders and penalties they have received from MSHA, or complaints of discrimination by miners under Section 105 of the Mine Act. Appendix 1 shows, for each of the Companys quarries and mines identified, as of December 31, 2018, the number of legal actions pending before the Commission, along with the number of legal actions initiated before the Commission during the year as well as resolved during the year. In addition, Appendix 1 includes a footnote to the column for legal actions before the Commission pending as of the last day of the period, which footnote breaks down that total number of legal actions pending by categories according to the type of proceeding in accordance with various categories established by the Procedural Rules of the Commission.
Appendix 1 attached
|
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Alexander Quarry |
|
BN5 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | |||||||||||||||||
Amelia Quarry |
4407372 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
American Stone |
3100189 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Anderson Creek Quarry |
4402963 | 0 | 0 | 0 | 0 | 0 | $ | 517 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Arrowood Quarry |
3100059 | 0 | 0 | 0 | 0 | 0 | $ | 427 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Asheboro Quarry |
3100066 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Bakers Quarry |
3100071 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Belgrade Quarry |
3100064 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Benson Quarry |
3101979 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Berkeley Quarry |
3800072 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Bessemer City Quarry |
3101105 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Black Ankle Quarry |
3102220 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Bonds Quarry |
3101963 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Boonesboro Quarry |
1800024 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Burlington Quarry |
3100042 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Caldwell Quarry |
3101869 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Calhoun Sand |
3800716 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Castle Hayne Quarry |
3100063 | 1 | 0 | 0 | 0 | 0 | $ | 738 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cayce |
3800016 | 0 | 0 | 0 | 0 | 0 | $ | 663 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Central Rock Quarry |
3100050 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Charlotte Quarry |
3100057 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Churchville Quarry |
1800012 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Clarks Quarry |
3102009 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Cumberland Quarry |
3102237 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Denver Quarry |
3101971 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Doswell Quarry VA |
4400045 | 0 | 0 | 0 | 0 | 0 | $ | 309 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
East Alamance Quarry |
3102021 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Edmund Sand |
3800662 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fountain Quarry |
3100065 | 1 | 0 | 0 | 0 | 0 | $ | 1,398 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Franklin Quarry |
3102130 | 1 | 0 | 0 | 0 | 0 | $ | 326 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Frederick Quarry |
1800013 | 0 | 0 | 0 | 0 | 0 | $ | 309 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fuquay Quarry |
3102055 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Garner Quarry |
3100072 | 1 | 0 | 0 | 0 | 0 | $ | 404 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Georgetown II Quarry |
3800525 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hickory Quarry |
3100043 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hicone |
3102088 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Jamestown Quarry |
3100051 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Kannapolis Quarry |
3100070 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Kent Sand & Gravel |
1800745 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Kings Mountain Quarry |
3100047 | 0 | 0 | 0 | 0 | 0 | $ | 413 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Lemon Springs Quarry |
3101104 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Loamy Sand Gravel |
3800721 | 0 | 0 | 0 | 0 | 0 | $ | 151 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Maiden Quarry |
3102125 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Mallard Creek Quarry |
3102006 | 0 | 0 | 0 | 0 | 0 | $ | 472 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Matthews Quarry |
3102084 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Medford Quarry |
1800035 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Midlothian Quarry |
4403767 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
North Columbia |
3800146 | 1 | 0 | 1 | 0 | 0 | $ | 3,543 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
North East Quarry |
1800417 | 1 | 0 | 0 | 0 | 0 | $ | 650 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Old Charleston Sand |
3800702 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Onslow Quarry |
3102120 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Pinesburg Quarry |
1800021 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Pomona Quarry |
3100052 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Raleigh Durham Quarry |
3101941 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Red Hill Quarry |
4400072 | 2 | 0 | 0 | 0 | 0 | $ | 1,217 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Reidsville Quarry |
3100068 | 1 | 0 | 0 | 0 | 0 | $ | 811 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Rock Hill Quarry |
3800026 | 0 | 0 | 0 | 0 | 0 | $ | 151 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Rocky Point Quarry |
3101956 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | no | no | 0 | 0 | 0 | |||||||||||||||||||
Rocky River Quarry |
3102033 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Salem Stone |
3102038 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Statesville Quarry |
3100055 | 2 | 0 | 0 | 0 | 0 | $ | 1,410 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Texas Quarry |
1800009 | 2 | 0 | 0 | 0 | 0 | $ | 8,576 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Thomasville Quarry |
3101475 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Warfordsburg Quarry |
3600168 | 0 | 0 | 0 | 0 | 0 | $ | 387 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Wilmington Sand |
3101308 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Wilson Quarry |
3102230 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Woodleaf Quarry |
3100069 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
(45) North Indianapolis SURFACE |
1200002 | 1 | 0 | 0 | 0 | 0 | $ | 758 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Apple Grove S G |
3301676 | 0 | 0 | 0 | 0 | 0 | $ | 374 | 0 | no | no | 0 | 0 | 0 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Belmont Sand |
1201911 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Bowling Green North Quarry |
1500065 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Bowling Green South Quarry |
1500025 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Burning Springs Mine |
4608862 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 1 | ||||||||||||||||||
Carmel Sand |
1202124 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cedarville Quarry |
3304072 | 2 | 0 | 0 | 0 | 0 | $ | 672 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cloverdale Quarry |
1201744 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cumberland Quarry |
1500037 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
E Town Sand Gravel |
3304279 | 1 | 0 | 0 | 0 | 0 | $ | 326 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fairfield Quarry |
3301396 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Franklin Gravel |
3302940 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Harlan Quarry |
1500071 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hartford Quarry |
1500095 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Kentucky Ave Mine |
1201762 | 4 | 0 | 0 | 0 | 0 | $ | 5,702 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Kokomo Mine |
1202105 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Kokomo Sand |
1202203 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Kokomo Stone |
1200142 | 1 | 0 | 0 | 0 | 0 | $ | 959 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Noblesville Sand |
1201994 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Noblesville Stone |
1202176 | 5 | 0 | 0 | 0 | 0 | $ | 7,239 | 0 | no | no | 0 | 0 | 1 | ||||||||||||||||||
North Indianapolis Quarry |
1201993 | 2 | 0 | 0 | 0 | 0 | $ | 1,346 | 0 | no | no | 0 | 0 | 1 | ||||||||||||||||||
Petersburg, Ky Gravel |
1516895 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Phillipsburg Quarry |
3300006 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Shamrock SG |
3304011 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Spring Valley Cook Rd SG |
3304534 | 0 | 0 | 0 | 0 | 0 | 236 | 0 | no | no | 0 | 0 | 0 | |||||||||||||||||||
Troy Gravel |
3301678 | 0 | 0 | 0 | 0 | 0 | 118 | 0 | no | no | 0 | 0 | 0 | |||||||||||||||||||
Waverly Sand |
1202038 | 0 | 0 | 0 | 0 | 0 | 118 | 0 | no | no | 0 | 0 | 0 | |||||||||||||||||||
Xenia Gravel |
3301393 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Appling Quarry |
901083 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Auburn Al Quarry |
100006 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Auburn, GA Quarry |
900436 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Augusta, GA Quarry |
900065 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Ball Ground Quarry |
900955 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Calhoun Quarry |
4003395 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Chattanooga Quarry |
4003159 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cumming Quarry |
900460 | 1 | 0 | 0 | 0 | 0 | $ | 558 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Douglasville Quarry |
900024 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Edgefield Quarry |
3800738 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Jefferson Quarry |
901106 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Junction City Quarry |
901029 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Lithonia Quarry |
900023 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Maylene Quarry |
100634 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Morgan County |
901126 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Newton Quarry |
900899 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
ONeal Plant Co 19 |
103076 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Paulding Quarry |
901107 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Perry Quarry |
801083 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Red Oak Quarry |
900069 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Ruby Quarry |
900074 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Six Mile Quarry |
901144 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 1 | 1 | 0 | ||||||||||||||||||
St. Marys Sand Company |
901199 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Tyrone Quarry |
900306 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Vance Quarry Co 19 |
103022 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Warrenton Quarry |
900580 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Alden Portable Plant #2 |
1302033 | 0 | 0 | 0 | 0 | 0 | $ | 281 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Alden Portable Sand |
1302037 | 0 | 0 | 0 | 0 | 0 | $ | 472 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Alden Quarry |
1300228 | 2 | 0 | 0 | 0 | 0 | $ | 1,648 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Ames Mine |
1300014 | 0 | 0 | 0 | 0 | 0 | $ | 1,634 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cedar Rapids Quarry |
1300122 | 1 | 0 | 0 | 0 | 0 | $ | 461 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Des Moines Portable (Plant 861) |
1300150 | 1 | 0 | 0 | 0 | 0 | $ | 3,314 | 0 | no | no | 0 | 0 | 1 | ||||||||||||||||||
Dubois Quarry |
2501046 | 1 | 0 | 0 | 0 | 0 | $ | 500 | 0 | no | no | 0 | 0 | 2 | ||||||||||||||||||
Durham Mine |
1301225 | 0 | 0 | 0 | 0 | 0 | $ | 2,076 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Earlham Quarry (Plant 862) |
1302123 | 1 | 0 | 0 | 0 | 0 | $ | 572 | 0 | no | no | 1 | 0 | 0 | ||||||||||||||||||
Ferguson Quarry |
1300124 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fort Calhoun Quarry |
2500006 | 1 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fort Calhoun UG |
2501300 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fort Dodge Mine |
1300032 | 6 | 0 | 0 | 0 | 0 | $ | 9,795 | 0 | no | no | 0 | 0 | 1 | ||||||||||||||||||
Greenwood Quarry New |
2300141 | 1 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 1 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Inactive Iowa Grading |
1302126 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Iowa Grading |
1302316 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Linn County Sand |
1302208 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Malcom Mine |
1300112 | 1 | 0 | 0 | 0 | 0 | $ | 1,134 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Marshalltown Sand |
1300718 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Midwest Division OH |
A2354 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Moore Quarry |
1302188 | 0 | 0 | 0 | 0 | 0 | $ | 472 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
New Harvey Sand |
1301778 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
North Valley Sand |
2501271 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Ottawa Quarry New |
1401590 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Pacific Quarry |
4500844 | 2 | 0 | 0 | 0 | 0 | $ | 1,590 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Parkville Mine New |
2301883 | 1 | 0 | 0 | 0 | 0 | $ | 361 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Pedersen Quarry |
1302192 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Portland Quarry |
1302122 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Raccoon River Sand |
1302315 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Randolph Deep Mine |
2302308 | 1 | 0 | 0 | 0 | 0 | $ | 1,706 | 0 | no | no | 0 | 0 | 3 | ||||||||||||||||||
Reasnor Sand |
1300814 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Saylorville Sand |
1302290 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
St Cloud Quarry |
2100081 | 0 | 0 | 0 | 0 | 0 | $ | 472 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Stamper Mine |
2302232 | 4 | 0 | 0 | 0 | 0 | $ | 4,695 | 0 | no | no | 0 | 0 | 3 | ||||||||||||||||||
Sully Mine |
1300063 | 0 | 0 | 0 | 0 | 0 | $ | 1,062 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Sunflower Qy Co 61 |
1401556 | 2 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Weeping Water Mine |
2500998 | 3 | 0 | 0 | 0 | 0 | $ | 5,857 | 0 | no | no | 1 | 3 | 3 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
West Center Sand |
2501231 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Yellow Medicine Quarry |
2100033 | 2 | 0 | 0 | 0 | 0 | $ | 163 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Beckmann Quarry |
4101335 | 1 | 0 | 0 | 0 | 0 | $ | 2,282 | 0 | no | no | 2 | 2 | 0 | ||||||||||||||||||
Bedrock Sand Gravel |
4103283 | 2 | 0 | 0 | 0 | 1 | $ | 944 | 0 | no | no | 2 | 3 | 1 | ||||||||||||||||||
Bells Savoy SG |
4104019 | 0 | 0 | 0 | 0 | 0 | $ | 1,121 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Black Rock Quarry |
300011 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Black Spur Quarry |
4104159 | 0 | 0 | 0 | 0 | 0 | $ | 738 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Blake Quarry |
1401584 | 2 | 0 | 0 | 0 | 1 | $ | 1,383 | 0 | no | no | 1 | 1 | 0 | ||||||||||||||||||
Bridgeport Stone |
4100007 | 0 | 0 | 0 | 0 | 0 | $ | 826 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Broken Bow SG |
3400460 | 2 | 0 | 0 | 0 | 0 | $ | 1,063 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Chico Quarry |
4103360 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Davis Quarry |
3401299 | 1 | 0 | 0 | 0 | 0 | $ | 882 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Garfield SG |
4103909 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Garwood Gravel |
4102886 | 5 | 0 | 0 | 0 | 0 | $ | 2,913 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
GMS TXI |
C335 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hatton Quarry |
301614 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Helotes |
4103137 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Highway 211 Quarry |
4103829 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 1 | 1 | 0 | ||||||||||||||||||
Hondo |
4104708 | 3 | 0 | 0 | 0 | 0 | $ | 2,551 | 0 | no | no | 1 | 5 | 4 | ||||||||||||||||||
Hondo West |
4104090 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hugo Quarry |
3400061 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hunter Stone |
4105230 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Idabel Quarry |
3400507 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Jena Aggregates |
1601298 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Jones Mill Quarry |
301586 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Medina Rock Rail |
4105170 | 0 | 0 | 0 | 0 | 0 | $ | 620 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Mill Creek Limestone |
3401859 | 2 | 0 | 0 | 0 | 0 | $ | 675 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Mill Creek Quarry |
3401285 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 1 | 1 | 0 | ||||||||||||||||||
Perryville Aggregates |
1601417 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Poteet Sand |
4101342 | 0 | 0 | 0 | 0 | 0 | $ | 472 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Rio Medina |
4103594 | 1 | 0 | 0 | 0 | 0 | $ | 1,047 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
San Pedro Quarry |
4101337 | 0 | 0 | 0 | 0 | 0 | $ | 354 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Sawyer Quarry |
3401634 | 0 | 0 | 0 | 0 | 0 | $ | 545 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Smithson Valley Quarry |
4104108 | 0 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Snyder Quarry |
3401651 | 0 | 0 | 0 | 0 | 0 | $ | 826 | 0 | no | no | 0 | 0 | 1 | ||||||||||||||||||
South Texas Port #2 |
4104204 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Tin Top SG |
4102852 | 1 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Washita Quarry |
3402049 | 1 | 0 | 0 | 0 | 0 | $ | 481 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Webberville |
4104363 | 0 | 0 | 0 | 0 | 0 | $ | 387 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Woodworth Aggregates |
1601070 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Cottonwood Sand Gravel |
504418 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Fountain Sand Gravel |
503821 | 0 | 0 | 0 | 0 | 0 | $ | 151 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Granite Canyon Quarry |
4800018 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Greeley 35th Ready Mix |
503215 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Greeley 35th Sand Gravel |
504613 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Guernsey Quarry |
4800004 | 2 | 0 | 0 | 0 | 0 | $ | 236 | 0 | no | no | 0 | 0 | 0 |
Location |
MSHA ID |
Section 104 S&S Citations (#) |
Section 104(b) Orders (#) |
Section 104(d) Citations and
Orders
|
Section 110(b)(2) Violations (#) |
Section 107(a) Orders (#) |
Total Dollar Value of MSHA Assessment/ $Proposed |
Total Number of Mining
Related
|
Received
of
|
Received
Notice of Potential to have Pattern under Section 104(e) (yes/no) |
Legal
Actions Pending as of Last Day of Period (#)* |
Legal
Actions Instituted During Period (#) |
Appendix 1*
Legal
|
|||||||||||||||||||
Milford Quarry Utah |
4202177 | 1 | 0 | 0 | 0 | 0 | $ | 1,255 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Parkdale Quarry |
504635 | 2 | 0 | 0 | 0 | 0 | $ | 1,262 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Parsons Sand Gravel |
504382 | 1 | 0 | 0 | 0 | 0 | $ | 756 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
PC Portable Plant 4 |
4801565 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Penrose Sand and Gravel |
504509 | 0 | 0 | 0 | 0 | 0 | $ | 269 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Portable Crushing |
503984 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Portable Plant 1 |
504359 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Portable Plant 21 |
504520 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Red Canyon Quarry |
504136 | 1 | 0 | 0 | 0 | 0 | $ | 1,340 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Riverbend Sand Gravel |
504841 | 0 | 0 | 0 | 0 | 0 | $ | 118 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Spanish Springs Quarry Co 2 |
2600803 | 6 | 0 | 0 | 0 | 1 | $ | 5,772 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Spec Agg Quarry |
500860 | 5 | 0 | 0 | 0 | 0 | $ | 3,561 | 0 | no | no | 0 | 1 | 1 | ||||||||||||||||||
Taft Sand Gravel |
504526 | 1 | 0 | 0 | 0 | 0 | $ | 1,062 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Taft Shop |
504735 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Hunter Cement |
4102820 | 1 | 0 | 0 | 0 | 0 | $ | 5,829 | 0 | no | no | 2 | 2 | 0 | ||||||||||||||||||
Midlothian Cement |
4100071 | 2 | 0 | 0 | 0 | 0 | $ | 5,297 | 0 | no | no | 3 | 2 | 2 | ||||||||||||||||||
Geology and Exploration |
B7127 | 0 | 0 | 0 | 0 | 0 | $ | 0 | 0 | no | no | 0 | 0 | 0 | ||||||||||||||||||
Woodville Stone |
3300156 | 3 | 0 | 0 | 0 | 0 | $ | 3,348 | 0 | no | no | 1 | 2 | 5 | ||||||||||||||||||
TOTAL |
106 | 0 | 1 | 0 | 3 | $ | 138,877 | 0 | 17 | 30 | 37 |
* |
Of the 17 legal actions pending on December 31, 2018, 10 were contests of citations or orders referenced in Subpart B of CFR Part 2700, which includes contests of citations and orders issued under Section 104 of the Mine Act and contests of imminent danger orders under Section 107 of the Mine Act and 7 were contests of proposed penalties referenced in Subpart C of 29 CFR Part 2700, which are administrative proceedings before the Commission challenging a civil penalty that MSHA has proposed for the violation contained in a citation or order. |