SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
For the quarterly period ended June 30, 2001
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.
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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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended June 30, 2001
INDEX
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying notes to condensed consolidated financial statements.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES CONDENSEDCONSOLIDATED STATEMENTS OF EARNINGS
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the Quarter Ended June 30, 2001
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSSecond Quarter and Six-Months Ended June 30, 2001 and 2000
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, limestone, and other aggregates products from a network of approximately 300 quarries and distribution facilities in more than 27 states in the southeastern, southwestern, midwestern and central regions of the United States and in the Bahamas 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, Oklahoma and Texas, as a result of acquisitions of asphalt production, ready mixed concrete operations, road construction companies and trucking companies. The magnesia-based products segment produces chemicals products used in industrial, agricultural and environmental applications. The magnesia-based products segment sold its refractories business as discussed below. The magnesia-based products segment derives a significant portion of its sales and earnings from the products used in the steel industry.
PURCHASE OF MERIDIAN AGGREGATES COMPANY AND SALE OF MAGNESIA SPECIALTIES’ REFRACTORIES BUSINESS On April 3, 2001, the Corporation completed the purchase of the remaining interest of Meridian Aggregates Company (“Meridian”) under the purchase option terms of the original October 1998 investment agreement. The purchase price of Meridian, inclusive of the Corporation’s original $42 million investment, was approximately $235 million, plus the assumption of normal balance sheet liabilities. The purchase price is subject to normal post-closing adjustments and appropriate accruals.
The acquisition was accounted for under the purchase method of accounting and the operating results of Meridian were included with those of the Corporation from the April 3, 2001, acquisition date forward. In contemplation of the Meridian acquisition, the Corporation completed a private offering of $250 million of 6.875% Notes. See Note 3 of the Notes to Condensed Consolidated Financial Statements.
On May 1, 2001, the Corporation completed the sale of certain of its assets related to the Magnesia Specialties refractories business to a subsidiary of Minerals Technologies Inc. (“Minteq”) for $34 million. The Corporation retained certain current assets of the refractories business, including accounts receivable and certain current liabilities, which are expected to yield an additional $8 million to $12 million in net working capital. The Corporation recognized a net gain of $8.4 million on the sale of assets after the write-down of certain retained refractories assets, including assets at the Magnesia Specialties division’s Manistee, Michigan, operating facility, as the facility was repositioned to focus on production of chemicals products. Further, Magnesia Specialties will supply Minteq with certain refractories products for up to two years after the sale. The refractories business contributed
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSSecond Quarter and Six-Months Ended June 30, 2001 and 2000(Continued)
$57.3 million to Magnesia Specialties’ net sales in 2000. The Corporation also transferred the operating responsibility for its Woodville, Ohio, dolomitic lime facility to the MidAmerica Division of the Aggregates Division. However, the dolomitic lime operations will continue to be reported within the magnesia-based products segment until final determination of the strategic direction of the remaining Magnesia Specialties business.
RESULTS OF OPERATIONS Consolidated net sales for the quarter were $420.2 million, a 16% increase over 2000 second-quarter sales of $362.5 million. Consolidated earnings from operations were $64.5 million in the second quarter of 2001, compared with $71.6 million in the second quarter of 2000. Consolidated net earnings for the quarter were $39.0 million, or $0.82 per diluted share, compared to 2000 second quarter net earnings of $42.1 million, or $0.90 per diluted share.
Net sales for the first six months of 2001 increased 7% to $683.9 million, from $638.6 million for the year-earlier period. For the six-month period ended June 30, 2001, net earnings were $34.3 million, or $0.72 per diluted share; net earnings for the comparable prior-year period were $49.5 million, or $1.05 per diluted share.
Sales for the Aggregates division increased 20% to $393.9 million for the second quarter, compared with the year-earlier period, while the division’s earnings from operations for the quarter were $63.5 million, a decrease of 8% from the year-earlier period. Operating margin for the division was 16.1%, compared with 20.9% in the prior quarterly period. The increase in sales for the division results from a 16% increase in aggregates shipments, principally from acquisitions, including Meridian, coupled with a 2% increase in average selling prices during the quarter. However, operating margins during the quarter were negatively affected by lower volumes and higher costs associated with the significant impact of Tropical Storm Allison, unexpected delays on certain plant construction projects and other nonrecurring costs.
Tropical Storm Allison most significantly affected the Houston, Texas, area, which is the Corporation’s largest metropolitan sales area with over $100 million in net sales in 2000. The Houston area received over 30 inches of rain in some areas. The subsequent flooding extensively disrupted the Corporation’s aggregates and asphalt business in that area. The timing for restoration of full business levels is not known at this point. However, with the current focus on cleanup and repair, the Texas Department of Transportation (“DOT”) has indicated that major highway work in that area will likely be deferred until 2002. The two-week journey of the storm across the Gulf Coast, the southeastern United States and the Atlantic Coast affected areas where the Corporation is typically a leading aggregates supplier. Management believes that the effect of Tropical Storm Allison and other related market conditions, including but not limited to the deferral of Texas DOT highway work into 2002, reduced operating earnings by $6.5 million during the quarter. Management expects that the Houston metropolitan sales area will not achieve its profit expectations for the year 2001.
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Unexpected delays in replacing the crushing plant at the Corporation’s Columbus Limestone facility in Columbus, Ohio, resulted in $3.0 million in non-recoverable expenses, most of which were incurred during the second quarter 2001. The three-month delay, due primarily to soil conditions in the construction area, slowed construction and increased costs, while a major flood in May 2001 shut down crushing operations for two weeks. The Corporation utilized three portable crushing plants, as well as hauled aggregates from remote locations while absorbing additional freight costs, in order to meet customers’ demands. These operating conditions led to the nonrecoverable increase in production costs.
A labor dispute, and resulting strike, at three plants in the Indianapolis area resulted in over $1.0 million in nonrecurring costs during the quarter associated with lost production, security and the hiring and training of new employees. Management expects some additional costs will be incurred in the third quarter of 2001, as a result of this labor dispute.
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Total shipments for the quarter of 53.3 million tons increased 16% when compared with the second quarter 2000, due to acquisitions. Heritage aggregates shipments volume during the second quarter declined 0.4% to 45.1 million tons. Average selling prices for heritage aggregates operations have increased 3.4% for the quarter and 2.5% for the six-months ended June 30, 2001. The increase in average selling prices is skewed downward for the six-months ended June 30, 2001, due to increased sales volume of lower-priced materials.
Year-to-date sales of $626.6 million exceeded the prior-year period by 9% and earnings from operations of $65.9 million were 24% lower than the prior-year period.
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The Aggregates division’s business is significantly impacted by seasonal changes and other weather-related conditions. Consequently, 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. Further because of the potentially significant impact of weather on the Corporation’s operations, first half results are not necessarily indicative of expected performance for the year.
Management believes, given current forecasts of economic activity, that infrastructure demand will continue to grow and building construction will continue to slow during 2001 and 2002. Based on these estimates for the year 2001, the Corporation revised its earnings expectations on July 16, 2001, and now expects aggregates shipments to increase 9% to 12% compared with the prior year, with all growth coming from acquisitions. Pricing at heritage locations is expected to increase approximately 3% for the year, with total revenue increasing 12% to 15%. Consolidated net earnings are expected to increase 3% to 9%. The earnings increase is expected to be at a lower rate than revenue growth, due to goodwill charges associated with acquisitions prior to July 1, 2001, interest costs primarily associated with financing the Meridian acquisition, and other costs described in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Expected earnings include the benefit from the sale of the Magnesia Specialties refractories business and the potential sale of certain nonstrategic assets.
The Corporation outlined the risks associated with its aggregates operations in its Annual Report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission on March 22, 2001. Management continues to evaluate its exposure to all operating risks on an ongoing basis. However, due to current general economic conditions, adverse exposure to certain operating risks is heightened, including the ability of state and local governments to fund road construction and maintenance. Also, current levels of commercial and residential construction activity may be more negatively affected, if the general economic downturn continues or deteriorates.
The Magnesia Specialties division had second quarter 2001 net sales of $26.3 million, a decrease of 21%, compared with the first half of 2000, principally as a result of the sale of its refractories business. The division’s second quarter earnings from operations decreased to $1.0 million from $2.9 million in the second quarter of 2000, principally due to higher natural gas costs. For the first six months of 2001, net sales were $57.3 million and earnings from operations were $0.8 million, a decrease of $8.7 million and $4.5 million, respectively, from the prior-year period.
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RESULTS OF OPERATIONS 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 three months and six months ended June 30, 2001 and 2000. 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:
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Other income and expenses, net, for the quarter ended June 30, was $7.9 million in income in 2001 compared with $3.8 million in income in 2000. 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, accruals under certain partnership agreements, and net equity earnings from non-consolidated investments. Other income in the second quarter 2001 includes the recognition of an $8.4 million gain on the sale of the Magnesia Specialties refractories business. Further, in 2000, other income during the second quarter included a nonrecurring insurance settlement related to Hurricane Floyd. Other income and (expenses), net, was $9.2 million in income in 2001 on a year-to-date basis, compared to $5.2 million in the comparable prior year period.
Interest expense was $13.3 million in the second quarter, compared to $10.7 million in the second quarter of 2000, primarily due to the Meridian acquisition.
The Corporation’s estimated effective income for the second six months was 34.1% in 2001 and 35.0% in 2001. See Note 4 of the Notes to Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities during the first six months of 2001 was $44.3 million compared with $72.3 million in the comparable period of 2000. The decrease in cash flow provided by operating activities resulted principally from an increase in accounts receivable during the quarter. The increase in accounts receivable was exacerbated by the reduced shipping levels in the fourth quarter of 2000. The cash flow for both 2001 and 2000 was principally from earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. Depreciation, depletion and amortization was as follows:
The seasonal nature of the construction aggregates business impacts quarterly net cash provided by operating activities when compared with the year. Full year 2000 net cash provided by operating activities was $212.9 million, compared with $72.3 million provided by operations in the six-months ended June 30, 2000.
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Six-month capital expenditures, exclusive of acquisitions, were $102.1 million in 2001 and $73.3 million in 2000. Capital expenditures are expected to be approximately $180 million for 2001, exclusive of acquisitions. Comparable full year capital expenditures were $170.8 million in 2000. During the first six-months ended June 30, 2001, the Corporation spent $208.7 million in cash and issued approximately 1,276,000 shares of common stock, in continuation of its expansion strategy.
Net cash provided by financing activities was $232.8 million for the first six months of 2001 and $33.5 million for the first six months of 2000. The increase in net cash provided by financing activities resulted principally from the private offering of $250 million of 6.785% Notes. The Corporation exchanged $249,625,000 of these 6 7/8% Notes for Notes publicly registered with the Securities and Exchange Commission with substantially the same terms.
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. The Corporation terminated its revolving credit agreements and entered into new revolving credit agreements, which contain substantially similar terms to the prior credit agreements. The new revolving credit agreements extend the term of the 364-day Agreement, for $225 million, to August 2002, and extend the term of the five-year agreement, for $225 million, to August 2006.
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 2001. The Corporation may be required to obtain additional levels of financing in order to fund certain strategic acquisitions 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-2” by Fitch IBCA Duff & Phelps. In July 2001,
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Standard & Poor’s revised its outlook on the Corporation to negative from stable while reaffirming its ratings. The outlook revision reflects Standard & Poor’s belief that the Corporation’s acquisition activity could make it more difficult for the Corporation to restore its debt-to-capitalization to certain levels. 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 6 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. Investors are also cautioned that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete statement of all potential risks or uncertainties. These forward-looking statements are made as of the date hereof based on management’s current expectations and the Corporation does not undertake an obligation to update such statements, whether as a result of new information, future events or otherwise. 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, 2000.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on May 22, 2001, the shareholders of Martin Marietta Materials, Inc.:
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Item 5. Other Information.
On May 23, 2001, 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 June 29, 2001, to shareholders of record at the close of business on June 1, 2001.
On June 5, 2001, the Corporation announced the acquisition of operating rights of two limestone quarries and a sand and gravel operation located in central Indiana, from Jones Crushed Stone. No financial details were disclosed. The Corporation also announced the purchase of Adamsville Sand and Gravel, which is located near Savannah, Tennessee. The transaction was in cash and common stock, with the purchase price not disclosed.
On June 14, 2001, the Corporation announced the acquisition of Materials Producers, Inc., which operates a limestone quarry near Davis, Oklahoma. The purchase was for cash and common stock, with the purchase price not disclosed.
On July 10, 2001, the Corporation announced that it had extended the expiration of its offer to exchange up to $250,000,000 in aggregate principal amount of its 6-7/8% Notes due 2011 for up to $250,000,000 in aggregate principal amount of its outstanding 6-7/8% Notes due 2011 to 5 p.m., New York City time, on Thursday, July 12, 2001, unless extended.
On July 16, 2001, the Corporation announced that it was revising its revenue and earnings forecast for 2001, based on lower volumes and higher costs, primarily as a result of the significant impact of Tropical Storm Allison, unexpected delays on certain plant construction projects and certain other nonrecurring costs. However, full year 2001 revenues are still expected to increase by 12% to 15% and earnings are expected to grow 3% to 9%.
On July 19, 2001, the Corporation announced the purchase of the stock of Sha-Neva Incorporated and related companies, of Reno, Nevada. The purchase consideration was cash and Martin Marietta common stock. The purchase price was not disclosed. The Corporation also purchased the assets of two small quarries in southern Arkansas from the Rogers Group, Inc. The purchase was for cash, with the purchase price not disclosed. Martin Marietta also announced that it sold its asphalt business, in the Dallas-Fort Worth area, to APAC for an undisclosed sum.
On July 25, 2001, the Corporation reported its financial results for the second quarter and six months ended June 30, 2001.
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PART II — OTHER INFORMATION(Continued)
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: August 13, 2001
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EXHIBIT INDEX
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