SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
For the quarterly period ended September 30, 2000
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.
(Exact name of registrant as specified in its charter)
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 the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
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Exhibit Index is on Page 21
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended September 30, 2000
INDEX
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See accompanying notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
Third Quarter and Nine-Months Ended September 30, 2000 and 1999
OVERVIEW Martin Marietta Materials, Inc., (the “Corporation”) operates in two principal business segments: aggregates products and magnesia-based products. The Corporation’s sales and earnings are predominately derived from its aggregates segment, which processes and sells granite, sandstone, limestone, and other aggregates products from a network of approximately 300 quarries and distribution facilities in more than 20 states in the southeastern, southwestern, midwestern and central regions of the United States and in the Bahama Islands and Canada. The division’s products are used primarily by commercial customers principally in domestic construction of highways and other infrastructure projects and for commercial and residential buildings. The Corporation vertically integrated in other construction materials businesses in Louisiana, Arkansas and Texas, as a result of acquisitions of asphalt production, ready mixed concrete operations and road construction companies. The magnesia-based products segment produces refractory materials and dolomitic lime used in domestic and foreign basic steel production and produces chemicals products used in industrial, agricultural and environmental applications. The magnesia-based products segment derives a major portion of its sales and earnings from the products used in the steel industry.
RESULTS OF OPERATIONS Consolidated net sales for the quarter were $380.3 million, a 7% increase over 1999 third quarter sales of $353.8 million. Consolidated earnings from operations were $70.8 million for the quarter ended September 30, 2000 compared with $75.6 million for the quarter ended September 30, 1999. Consolidated net earnings for the quarter were $42.1 million, or $0.90 per diluted share, compared to 1999 third quarter net earnings of $44.0 million, or $0.94 per diluted share. Sales increased as a result of strong price increases and acquisition activity in 1999 and 2000. However, high energy-related costs continued to have a negative impact on earnings during the quarter.
Sales for the first nine months of 2000 increased 10% to $1.019 billion, from $923.7 million for the year-earlier period. Earnings from operations increased 4% to $162.6 million for the nine-months ended September 30, 2000, compared with $156.5 million for the same period in 1999. Year-to-date 2000 net earnings were $91.5 million, or $1.95 per diluted share, compared with $93.2 million, or $1.98 per diluted share, for the year-earlier period. Interest expense of $31.5 million for the nine-months ended 2000 increased 10% when compared with 1999 due to the effect of the current interest rate environment and higher levels of debt.
Sales for the Aggregates division increased 8% during the third quarter of 2000 to $347.0 million from 1999 third quarter sales of $320.4 million. Earnings from operations for the third quarter of 2000 were $68.9 million, compared with $72.6 million during third quarter 1999. Gross margin as a percentage of sales at heritage operations for aggregates and asphalt products combined was slightly better than the prior-year period in spite of cost pressures from energy. Selling, general and administrative expenses improved to 5.7% of Aggregates division sales for the quarter compared with 5.9% for the previous year’s third quarter. Operating margin for the division was 19.9%, compared with 22.7% in the prior year’s quarterly period, principally due to the negative impact of energy-related costs and lower margins related to certain acquired operations.
(Continued)
Energy-related costs include diesel fuel used to operate trucks and loaders in quarry production, natural gas and liquid asphalt used in asphalt production, and waterborne freight costs. The estimated combined cost of oil and natural gas-based products used in the Company’s heritage business increased $6.4 million in the third quarter and $15.2 million year-to-date when compared with the prior year period. In addition, waterborne freight costs have increased an estimated $3.4 million for the nine-month period, primarily as a result of an increase in fuel prices.
Total shipments for the quarter of 46.9 million tons remained relatively flat when compared with the third quarter 1999. However, heritage aggregates shipments volume during the third quarter declined 4.6% to 44.4 million tons as a result of lower demand for commercial and residential construction due to rising interest rates, as well as slower-than-anticipated rollout of TEA-21 infrastructure demand. Wet weather conditions in North Carolina also had a negative impact. Average selling prices for heritage aggregates operations have increased almost 4% for the quarter and nine-months ended September 30, 2000.
Year-to-date sales of $919.7 million and earnings from operations of $155.4 million exceeded the prior-year period by 11% and 2%, respectively.
Seasonal changes and other weather-related conditions significantly affect the Aggregates division’s business. Therefore, the Aggregates division’s production and shipment levels coincide with general construction activity levels, most of which occur in the division’s markets typically during the spring, summer, and fall seasons. Unusually wet weather experienced, principally in North Carolina, in the second quarter 2000 continued into July, the early part of August as well as in September. Further softening in commercial construction in some market areas, and unexpected delays in the ramp-up of TEA-21 spending on a state-by-state basis continues to negatively impact construction activity levels. Therefore, management believes that heritage annual aggregates shipments growth will decline slightly for 2000. Management also continues to believe that average selling prices for the year 2000 for heritage aggregates operations will increase 3% to 4%. Costs will continue at present levels due to significant increases for diesel fuel, liquid asphalt and natural gas.
The outlook for 2001 is positive for highways and other infrastructure projects, even though the rate of ramp-up related to TEA-21 spending will vary from state to state. However, residential and commercial construction building is expected to decline from current levels. The net result, based on current forecasts, is a flat to 2% volume growth for heritage aggregates operations in 2001, coupled with a 3% to 4% price increase. Management expects that production costs per ton for heritage aggregates operations will increase based on a moderate inflationary effect, assuming no reduction in energy-related costs. However, the rate of increase in the production costs per ton will be less than the expected increase in average selling prices. The Corporation expects, in 2001, to emphasize increasing operating cash flows. As part of this emphasis, the Corporation will, among other things, focus on controlling the increase in inventory levels, which were $18.2 million and $13.8 million for the nine-months ended September 30, 2000 and 1999, respectively. Due to the high level of fixed costs associated with aggregates production, operating leverage can be substantial. Therefore, attempts to control increases in inventory levels, if achieved, would impact earnings. Management cannot guarantee that its efforts will increase operating cash flows in 2001. As announced in its September 6, 2000, press release, management expects that the acquisition of Meridian will be neutral to slightly accretive to 2001 earnings.
Management cannot guarantee that the Corporation will achieve its expectations for 2001. The achievement of the 2001 expectations would be affected by many factors including, but not limited to, near-term general economic conditions, energy prices, and the interest rate environment. In addition, management’s outlook for 2001 is dependent on the economic, climatic, and construction-related environment in the Corporation’s markets, particularly in our largest revenue-generating states, namely North Carolina, Texas, Ohio, Iowa, Georgia and Indiana.
The Magnesia Specialties division’s third quarter 2000 sales of $33.3 million which were flat, as expected, when compared with the year-earlier period. The division’s third quarter earnings from operations were $1.9 million and $3.0 million, respectively, for 2000 and 1999. The decline in operating earnings results principally from higher energy-related costs for natural gas. Year-to-date sales were $99.2 million and earnings from operations were $7.2 million, increases of 1% and 69%, respectively.
The Magnesia Specialties division is not core to the Corporation. Therefore, the Corporation’s management continues to evaluate its strategic alternatives with respect to the Magnesia Specialties division, and in that regard, the Corporation has retained Banc of America Securities to act as financial advisors in connection with a possible sale of the division. However, there can be no assurance that management will complete a sale of the division.
The following table presents net sales, gross profit, selling, general and administrative expense, and earnings from operations data for the Corporation and each of its divisions for the nine-months ended September 30, 2000 and 1999. In each case, the data is stated as a percentage of net sales, of the Corporation or the relevant division, as the case may be:
Other income and expenses, net, for the quarter ended September 30, was $1.7 million in income in 2000 compared with $2.2 million in income in 1999. In addition to several offsetting amounts, other income and expenses, net, are comprised generally of interest income, gains and losses associated with the disposition of certain assets, gains and losses related to certain amounts receivable, income from non-operating services, costs associated with the commercialization of certain new technologies, and net equity earnings from non-consolidated investments. Other income and expenses, net, for the nine-months ended September 30, was $6.8 million in income in 2000 and $16.3 million in income in 1999. In 2000, other income includes a nonrecurring insurance settlement related to Hurricane Floyd, while other income and expenses, net, in 1999, included a nonrecurring settlement from an antitrust claim.
Interest expense was $10.7 million in the third quarter, compared to $9.8 million in the third quarter of 1999.
The Corporation’s estimated effective income for the first nine months was 33.6% in 2000 and 35.3% in 1999. The reduction in the estimated effective tax rate to 33.6% reflects the benefit of better-than-anticipated percentage depletion from the Redland Stone acquisition, credit carry forwards on certain other acquisitions, as well as continued focus on appropriate tax minimization strategies. See Note 5 of the Notes to Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities during the nine-months ended September 30, 2000 was $155.4 million compared with $146.6 million in the comparable period of 1999. The cash flow for both 2000 and 1999 was principally from earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. Depreciation, depletion and amortization was as follows (amounts in thousands):
The seasonal nature of the construction aggregates business impacts quarterly net cash provided by operating activities when compared with the year. Full year 1999 net cash provided by operating activities was $223.7 million, compared with $146.6 million provided by operations in the nine-months ended September 30, 1999.
Nine-month capital expenditures, exclusive of acquisitions, were $117.9 million in 2000 and $102.7 million in 1999. Capital expenditures are expected to be approximately $175 million for 2000, exclusive of acquisitions. Comparable full-year capital expenditures were $137.8 million in 1999. During the first nine-months ended September 30, 2000, the Corporation spent $36.7 million for acquisitions in continuation of its expansion strategy.
The Corporation continues to rely upon internally generated funds and access to capital markets, including its two revolving credit agreements and a cash management facility, to meet its liquidity requirements, finance its operations, and fund its capital requirements.
With respect to the Corporation’s ability to access the public market, currently, management has the authority to file a universal shelf registration statement with the Commission for up to $500 million in issuance of either debt or equity securities. It should be noted, however, that the Corporation has not determined the timing when, or the amount for which, it may file such shelf registration. The Corporation’s ability to borrow or issue debt securities is dependent, among other things, upon prevailing economic, financial and market conditions.
Based on prior performance and current expectations, the Corporation’s management believes that cash flows from internally generated funds and its access to capital markets are expected to continue to be sufficient to provide the capital resources necessary to fund the operating needs of its existing businesses, cover debt service requirements, and allow for payment of dividends in 2000. The Corporation will initially finance the acquisition of Meridian through its existing commercial paper program; however, the Corporation may access the public markets to reduce the increased amount of commercial paper obligations resulting from this transaction.
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Further, the Corporation may be required to obtain additional levels of financing in order to fund certain strategic acquisitions, in addition to Meridian, if any such opportunities arise. Currently, the Corporation’s senior unsecured debt is rated “A-” by Standard & Poor’s and “A3” by Moody’s. The Corporation’s commercial paper obligations are rated “A-2” by Standard & Poor’s, “P-2” by Moody’s and “F-1” by Fitch-The International Rating Agency. The Corporation’s senior unsecured debt was downgraded from “A” to “A-” and its commercial paper obligations were lowered from “A-1” to “A-2” by Standards & Poor’s, as a result of the additional debt required to finance the acquisition of Meridian. Fitch-The International Rating Agency has placed the Corporation on Rating Watch Negative, also as a result of the pending Meridian acquisition. While management believes its credit ratings will remain at an investment-grade level, no assurance can be given that these ratings will remain at the above-mentioned levels.
ACCOUNTING CHANGES The accounting changes that currently impact the Corporation are included in Note 7 to the Condensed Consolidated Financial Statements.
OTHER MATTERS Investors are cautioned that statements in this Quarterly Report on Form 10-Q that relate to the future are, by their nature, uncertain and dependent upon numerous contingencies – including political, economic, regulatory, climatic, competitive, and technological – any of which could cause actual results and events to differ materially from those indicated in such forward-looking statements. Additional information regarding these and other risk factors and uncertainties may be found in the Corporation’s other filings, which are made from time, to time with the Securities and Exchange Commission.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Part I. Item 3. Legal Proceedings of the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the year ended December 31, 1999.
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the third quarter of 2000.
Item 5. Other Information.
On August 18, 2000, the Corporation announced that the Board of Directors had declared a regular quarterly cash dividend of $0.14 per share on the Corporation’s common stock. This dividend, which represents a cash payout of $0.56 per share on an annualized basis, was payable September 29, 2000, to shareholders of record at the close of business on September 30, 2000.
On August 24, 2000, the Corporation announced that it had made an additional investment in Industrial Microwave Systems, Inc. (IMS), as a part of Series C financing for this startup company, which is located in Morrisville, NC. IMS manufactures patented microwave systems for industrial drying and food processing applications.
On September 6, 2000, the Corporation announced that it will purchase the remaining interests of Meridian Aggregates Company under the purchase option terms of the original October, 1998 investment agreement. The purchase which is structured as an asset transaction and is expected to be completed in late 2000 or early 2001, will give the Corporation 100% ownership of Meridian.
On October 4, 2000, the Corporation announced that it expects operating earnings to be lower than the record 1999 earnings.
On October 17, 2000, the Corporation reported financial results for the third quarter and nine-months ended September 30, 2000.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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SIGNATURES
Pursuant to the requirements 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.
Date: November 14, 2000
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EXHIBIT INDEX
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