Page 162 - Martin Marietta - 2023 Proxy Statement

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Generally, the significant components of costs of revenues for the aggregates product line are (1) labor and related benefits;
(2) internal freight; (3) depreciation, depletion and amortization; (4) repairs and maintenance; (5) energy; (6) supplies; and (7)
contract services. In 2022, these categories represented 82% of the aggregates product line's total costs of revenues.

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. 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. Accordingly, the Company’s operating leverage can be
substantial.

Generally, when the Company invests capital in facilities and equipment, increased capacity and productivity reduce labor and
repair costs, and can offset increased fixed depreciation costs. However, the increased productivity and related efficiencies
may not be fully realized in a lower‐demand environment, resulting in under‐absorption offixed costs.

Wage and benefit inflation and other 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, primarily
in the aggregates operations, 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. In certain markets, management can create production “super crews” that work on a
rotating basis at various locations. For example, within a market, a crew may work three days per week at one quarry and the
other two workdays at another quarry. This has allowed the Company to responsibly manage headcount in periods of lower
demand.
Cement production is a capital‐intensive operation with high fixed costs to run plants that operate continuously 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 2022 and 2021, the cement operations incurred outage costs of $33.3 million and $23.6 million,
respectively. The increase in outage costs in 2022 compared with 2021 is primarily attributable to the timing of planned and
unplanned kiln outages. The Company adjusts production levels in anticipation of planned maintenance shutdowns.
The production of ready mixed concrete and asphalt requires the use of cement and liquid asphalt raw materials, respectively.
Therefore, fluctuations in availability and prices for these raw materials directly affect the Company’s operating results.
Typically, diesel fuel represents the single‐largest component of energy costs for the Building Materials business. The average
cost per gallon was $4.01 and $2.36 in 2022 and 2021, respectively. Changes in energy costs also affect the prices that the
Company pays for related supplies, including explosives, conveyor belting and tires. Further, the Company’s 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 Companyif the price offuel moves outside a stated range.

Page 58 ♦ Annual Report