Page 161 - Martin Marietta - 2024 Proxy Statement

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

Costs of revenues for the Building Materials business are components of costs incurred at the quarries, mines, cement plants,
ready mixed concrete plants, asphalt plants, paving operations and distribution yards and facilities.Cost of revenues also includes
the cost of resale materials, freight expenses to transport materials from a producing quarry or cement plant to a distribution yard
or facility (internal freight), third‐partyfreight and delivery costs incurred by the Company and then billed to customers (external
freight) and production overhead costs.
Generally, the significant components of cost of revenues for the aggregates product line are (1) labor and benefits; (2) internal
freight; (3) repairs and maintenance; (4) depreciation, depletion and amortization; (5) external freight; (6) supplies; (7) energy; and
(8) contract services. In 2023, these categories represented 86% of the aggregates product line's total cost of revenues, excluding
inventory change.

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 driverin determining the levels ofvariable 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. 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 maywork 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 2023 and 2022, the cement operations incurred outage costs of $38.4 million and $33.3 million, respectively.
The increase in outage costs in 2023 compared with 2022 is primarily attributable to first‐time work on a clinker cooler and partial
shell replacements in two kilns. 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.

2023 Annual Report ♦ Page 59