Page 181 - Martin Marietta - 2023 Proxy Statement

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

Business Combinations – Allocation of Purchase Price
The Company’s 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 Company’s market presence and/or are
related to the Company’s existing markets. When an acquisition is completed, the Company’s 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 equityinterests given to the seller and any
future obligations to the seller as of the date of acquisition. 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 offair 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. 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 financiallyfeasible 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.

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 significant judgment to estimate future cash flows, net of capital investments in the
specific operation and contributory asset charges. The estimate offuture cash flows is based on available historical information
and future expectations and assumptions determined by management, but is inherently uncertain. Significant assumptions
used to estimate future cash flows include changes in forecasted revenues based on sales price and shipment volumes as well
as forecasted expenses inclusive of production costs and 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 noncompetition 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

Annual Report ♦ Page 77