Description of Martin Marietta Materials Inc's Business Segments
Aggregates Business
The Aggregates business mines, processes and sells granite, limestone, sand,
gravel and other aggregates products for use in all sectors of the public infrastructure,
nonresidential and residential construction industries, as well as agriculture,
railroad ballast, chemical and other uses. The Aggregates business also includes
the operation of other construction materials businesses. These businesses,
located in the West Group, were acquired through continued selective vertical
integration by the Company, and include ready mixed concrete, and asphalt and
road paving operations in Arkansas, Colorado, Louisiana, Texas and Wyoming.
The Company is a leading supplier of aggregates for the construction industry
in the United States.
The Aggregates and Cement businesses market their products primarily to the
construction industry, with approximately 39% of the aggregates product line
shipments in 2016 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. However, after uncertainty regarding
the solvency of the highway bill in 2014, the Company experienced a slight retraction
in aggregates shipments to the infrastructure end-use market. Consistent with
this trend, the infrastructure market accounted for a lower percentage of the
Company’s aggregates product line shipments in 2016 and 2015 compared
with the most recent five-year average of 44%.
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 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 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 departments
of transportation. Consequently, states can advance construction projects immediately
with potentially zero upfront outlay of local state department of transportation
dollars. TIFIA requires projects to have a revenue source to pay back the credit
assistance within a 30 to 40 year period. Moreover, TIFIA funds may represent
up to 49% of total eligible project costs for a TIFIA-secured loan and 33% for
a TIFIA standby line of credit. Therefore, the TIFIA program has the ability
to significantly leverage construction dollars. Each dollar of federal funds
can provide up to $10 in TIFIA credit assistance and support up to $30 in transportation
infrastructure investment. 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 department of transportation construction programs well above
what is currently budgeted.
Transportation investments generally boost the national economy by enhancing
mobility and access and by creating jobs, which is a priority of many of the
government’s 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 dependent on the nature and aggregates intensity
of the projects. Approximately half of the Aggregates business’ net sales
to the infrastructure 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 Company’s Aggregates business covers a wide geographic area. The Company’s
five largest revenue-generating states (Texas, Colorado, North Carolina, Iowa
and Georgia) accounted for 73% of total 2016 net sales for the Aggregates business
by state of destination. The Company’s Aggregates business is accordingly
affected by the economies in these regions and has been adversely affected in
part by recessions and weaknesses in these economies from time to time. 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 Company’s
Aggregates business.
The Company’s Aggregates business is also highly seasonal, due primarily
to the effect of weather conditions on construction activity within its markets.
The operations of the Aggregates business that are concentrated in the northern
and midwestern United States and Canada typically experience more severe winter
weather conditions than operations in the southeastern and southwestern regions
of the United States. Excessive rainfall, flooding, or severe drought can also
jeopardize shipments, production, and profitability in all of the Company’s
markets. Subject to these factors, the Company’s second and third quarters
are typically the strongest, with the first quarter generally reflecting the
weakest results. Results in any quarter are not necessarily indicative of the
Company’s annual results. Similarly, the operations of the Aggregates
business in the coastal areas are at risk for hurricane activity, most notably
in August, September and October, and have experienced weather-related losses
from time to time.
Weather-related hindrances were exacerbated over the last two years by record
precipitation in many of the Company’s key markets. Net sales, production
and cost structure were adversely affected by the significant precipitation.
The National Oceanic and Atmospheric Administration (“NOAA”) has
tracked precipitation for 122 years. According to NOAA, 2015 represented the
wettest year on record for Texas and Oklahoma, while North Carolina, South Carolina,
Colorado and Iowa each experienced a top-ten precipitation year, and the nation
as a whole had its third-wettest year in NOAA recorded history. In 2016, many
areas in the United States again experienced significant amounts of precipitation.
Texas experienced its 18th wettest year in the state’s recorded history
per NOAA. Further, since March 2015, Texas and surrounding regions have experienced
18 major flood events. Additionally, 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 also the first major hurricane on record to make landfall in the
Bahamas, where the Company has a facility. Accordingly, the Company’s
financial results for any year, and notably 2016 and 2015, or year-to-year comparisons
of reported results, may not be indicative of future operating results.
Natural aggregates sources can be found in relatively homogeneous deposits in
certain areas of the United States. As a general rule, truck shipments from
an individual quarry are limited because the cost of transporting processed
aggregates to customers is high in relation to the price of the product itself.
As described below, the Company’s distribution system mainly uses trucks,
but also has access to a river barge and ocean vessel network where the per
mile unit cost of transporting aggregates is much lower. In addition, acquisitions
have enabled the Company to extend its customer base through increased access
to rail transportation. Proximity of quarry facilities to customers or to long-haul
transportation corridors is an important factor in competition for aggregates
businesses.
The Company also 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 aggregate 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 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 Company’s acquisitions and capital projects have expanded its ability
to ship material by rail, as discussed in more detail below. The Company has
added additional capacity in a number of locations that can now accommodate
larger unit train movements. These expansion projects have enhanced the Company’s
long-haul distribution network. The Company’s process improvement 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 Company’s expanded distribution
system. This distribution network moves aggregates materials from domestic and
offshore sources, via rail and water, to markets where aggregates supply is
limited.
As the Company continues to move more aggregates by rail and water, internal
freight costs are expected to reduce gross margins (excluding freight and delivery
revenues). This typically occurs where the Company transports aggregates from
a production location to a distribution location by rail or water, and the customer
pays a selling price that includes a freight component. Margins are negatively
affected because the Company typically does not charge the customer a profit
associated with the transportation component of the selling price of the materials.
Moreover, the Company’s expansion of its rail-based distribution network,
coupled with the extensive use of rail service in the Southeast and West Groups,
increases the Company’s dependence on and exposure to railroad performance,
including track congestion, crew availability, and power availability, and the
ability to renegotiate favorable railroad shipping contracts. The waterborne
distribution network, primarily located within the Southeast Group, also increases
the Company’s exposure to certain risks, including the ability to negotiate
favorable shipping contracts, demurrage costs, fuel costs, ship availability
and weather disruptions. The Company has entered into long-term agreements with
shipping companies to provide ships to transport the Company’s aggregates
to various coastal ports.
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. Further, in response to these issues, rail transportation providers
focused on increasing the number of cars per unit train under transportation
contracts and are generally requiring customers, through the freight rate structure,
to accommodate larger unit train movements. A unit train is a freight train
moving large tonnages of a single bulk product between two points without intermediate
yarding and switching. Certain of the Company’s 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 movements.
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 Company’s 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
southeastern and southwestern regions of the United States.
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 Company’s 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 has begun to recover from the protracted
recession. Opportunities include public and larger private, family-owned businesses,
as well as asset swaps and divestitures from companies rationalizing non-core
assets and repairing financially-constrained balanced sheets. The Company’s
Board of Directors and management continue to review and monitor the Company’s
strategic long-term plans, which include assessing business combinations and
arrangements with other companies engaged in similar businesses, increasing
the Company’s presence in its core businesses, investing in internal expansion
projects in high-growth markets, and pursuing new opportunities related to the
Company’s 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 ready mixed concrete, asphalt and paving construction operations,
trucking, and other businesses, which complement the Company’s aggregates
operations. The Company reports these operations within the Aggregates business
segment, and their results are affected by volatile factors, including fuel
costs, operating efficiencies, and weather, to an even greater extent than the
Company’s 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 raw materials directly
affect the Company’s operating results. During 2016, prices for liquid
asphalt were lower than 2015. 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 Company’s gross margins (excluding freight and delivery
revenues) to continue to improve for the legacy TXI aggregates-related downstream
operations, similar to the pattern experienced at the Colorado aggregates-related
downstream operations.
The Company continues to review aggregates-related downstream operations to
determine if they represent opportunities to divest underperforming assets in
an effort to redeploy capital for other opportunities. The Company also reviews
other independent aggregates-related downstream operations to determine if they
might present attractive acquisition opportunities in the best interest of the
Company, either as part of their own aggregates-related downstream 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 aggregates-related downstream operations, including
ready mixed concrete and asphalt and road paving businesses in the Denver, Colorado,
and San Antonio, Texas, markets. The 2014 business combination with TXI described
under General above further expanded the Company’s aggregates-related
downstream operations, with the addition of TXI’s aggregates and ready
mixed concrete operations. The TXI combination also added the cement operations
of TXI, which are accounted for as a separate business segment of the Company.
The 2016 transactions described under General above further added aggregates-related
downstream operations, with the addition of ready mixed concrete and asphalt
and paving and contracting operations along the Front Range in Colorado and
ready mixed concrete operations in central Texas.
Environmental and zoning regulations have made it increasingly difficult for
the aggregates industry to expand existing quarries and to develop new quarry
operations. Although it cannot be predicted what policies will be adopted in
the future by federal, state, and local governmental bodies regarding these
matters, the Company anticipates that future restrictions will likely make zoning
and permitting more difficult, thereby potentially enhancing the value of the
Company’s existing mineral reserves.
Management believes the Aggregates business’ raw materials, or aggregates
reserves, are sufficient to permit production at present operational levels
for the foreseeable future. The Company does not anticipate any material difficulty
in obtaining the raw materials that it uses for current production in its Aggregates
business. The Company’s aggregates reserves on the average exceed 60 years
of production, 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 products in its Aggregates business upon receipt
of orders or requests from customers. Accordingly, there is no significant order
backlog. The Company generally maintains inventories of aggregates products
in sufficient quantities to meet the requirements of customers.
Cement Business
The Cement 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 the Aggregates
business, 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 the leading cement position in Texas, with two production facilities,
one located in Midlothian, Texas, south of Dallas-Fort Worth, and the other
located 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 provides
an 800,000-ton-expansion opportunity at the Midlothian plant. In addition to
these production facilities, the Company also operates five cement distribution
terminals in Texas.
From July 1, 2014 through September 30, 2015, the Company also operated a cement
plant at Oro Grande, California, cement grinding and packaging facilities at
the Crestmore plant near Riverside, California, and two California-based cement
distribution terminals. During 2015, the Company sold all of its California
cement operations. It retained the real estate at the Crestmore facility, which
the Company expects to sell for non-cement use. These operations were not in
close proximity to other core assets of the Company and, unlike other marketplace
competitors, were not vertically integrated with ready mixed concrete production.
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. The majority of
all cement shipments, approximately 70 percent, 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.
Magnesia Specialties Business
The Company manufactures and markets, through its Magnesia Specialties business,
magnesia-based chemical products for industrial, agricultural and environmental
applications, and dolomitic lime for use primarily in the steel industry. These
chemical products have varying uses, including flame retardants, wastewater
treatment, pulp and paper production and other environmental applications.
Given the high fixed costs associated with operating this business, low capacity
utilization negatively affects its results of operations. A significant portion
of the costs related to the production of magnesia-based products and dolomitic
lime is of a fixed or semi-fixed nature. In addition, the production of certain
magnesia chemical products and lime products requires natural gas, coal, and
petroleum coke to fuel kilns. Price fluctuations of these fuels affect the profitability
of this business. The Company has sought to mitigate certain of these fluctuations
and risks by entering into fixed-price supply contracts for certain fuels, including
natural gas, coal and petroleum coke.
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 is the dolomitic lime portion of the Magnesia Specialties business.
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