SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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 2134 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 o
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
Exhibit Index is on Page 29
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended June 30, 2002
INDEX
Page 2 of 29
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
Page 3 of 29
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF EARNINGS
Page 4 of 29
MARTINS MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Page 5 of 29
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the Quarter Ended June 30, 2002
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Page 6 of 29
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Page 7 of 29
Page 8 of 29
Page 9 of 29
Page 10 of 29
Page 11 of 29
Item 2. MANAGEMENT’S DISUCSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONSSecond Quarter and Six Months Ended June 30, 2002 and 2001
OVERVIEW Martin Marietta Materials, Inc. (the “Corporation”), operates in two principal business segments: aggregates products division and magnesia-based products division. 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 339 quarries and distribution facilities in 28 states in the southeastern, southwestern, midwestern and central regions of the United States and in the Bahamas and Canada. The Aggregates 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 magnesia-based products division produces magnesia-based chemicals products used in industrial, agricultural and environmental applications, and dolomitic lime sold primarily to customers in the steel industry.
CRITICAL ACCOUNTING POLICIES The Corporation outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002. Management continues to evaluate its accounting policies to identify those policies that are considered critical. Effective January 1, 2002, the evaluation of impairment for goodwill and indefinite-lived intangible assets in accordance with the criteria prescribed in Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets (“FAS 142”) became a critical accounting policy. As discussed in Note 6 to the consolidated financial statements on pages 8 through 11, the Corporation has completed Step 1 of the initial evaluation and will need to complete Step 2 for the road paving business reporting unit. The Corporation currently expects the pretax goodwill impairment charge to be up to $15 million.
The direct influence of long-term interest rates and investment returns, and the volatility that changes in these factors can have on retirement and postretirement benefit expense, supported the selection of retirement and postretirement benefits as a critical accounting policy in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002. Continued current volatility in the economy and the resulting effect on investment returns of the assets invested in the retirement benefit plan may require additional cash contributions in 2003, result in an additional minimum pension liability with a corresponding charge to equity, and/or significantly increase the pension expense. See Note I and the "Capital Structure and Resources" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001, for further information.
Page 12 of 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS(Continued)Second Quarter and Six Months Ended June 30, 2002 and 2001
RESULTS OF OPERATIONS Consolidated net sales for the quarter were $424.8 million, a 1% increase over 2001 second quarter sales of $420.2 million. Consolidated earnings from operations were $81.9 million in the second quarter of 2002 compared with $64.5 million in the second quarter of 2001. Interest expense for the quarter was $11.2 million as compared to $13.3 million in the second quarter 2001. Other income and expenses, net was $13.7 million in income for the second quarter 2002, an increase of $5.7 million over the prior-year quarter. Consolidated net earnings for the quarter were $53.4 million, or $1.09 per diluted share, compared to 2001 second quarter net earnings of $39.0 million, or $0.82 per diluted share.
Consolidated net sales for the first six months of 2002 increased 5% to $714.7 million, from $683.9 million for the year-earlier period. On a year-to-date basis, operating earnings increased $10.3 million, or 15%, to $76.9 million. The six months ended June 30, 2001, included $10.2 million of goodwill amortization expense. Other income and expenses, net, was $4.7 million of income more than the prior year, while interest expense decreased $1.5 million, or 6%. For the six-month period ended June 30, 2002, net earnings were $42.8 million, or $0.88 per diluted share; net earnings for the comparable prior-year period were $34.3 million, or $0.72 per diluted share.
Net sales for the Aggregates division increased 3% to $405.1 million for the second quarter, compared with the year-earlier period. Aggregates pricing at heritage locations increased approximately 2%. Heritage aggregates shipments increased 1% with strong performance in the southwest and midwest regions of the United States. Inclusive of volume from acquisitions, which was partially offset by divestitures, total aggregate shipments were up 1%.
Gross profit as a percentage of net sales for the Aggregates division was 26.7% as compared to 22.8% in the prior year second quarter. Gross profit increased across the aggregates, asphalt and ready mixed concrete lines of business. Among other things, the increase resulted from the strong operational performance experienced at the acquired Meridian locations, the Texas markets, and the Midwest. Additional factors included lower fuel costs and the nonamortization of goodwill. Goodwill amortization was $6.0 million in the second quarter 2001. Furthermore, the Corporation has begun to recognize improved operational efficiencies and lower production costs from recent plant modernization projects and process improvement programs at certain of its locations. The gross margin percentage for the second quarter 2001 was negatively affected by flooding in the Houston, Texas and Columbus, Ohio areas and a work stoppage in the Indianapolis, Indiana area. Gross profit percentage for the Aggregates division for the six months ended June 30, 2002 was 19.1% as compared to 18.0% for the comparable prior-year period.
Page 13 of 29
The following tables present volume and pricing data and shipments data for heritage operations and acquisitions:
Selling, general and administrative expenses increased almost 6% at the Aggregates division. These expenses represented 6.8% of net sales in the second quarter of 2002 as compared to 6.6% in the prior year quarter. For the six months ended June 30, selling, general and administrative expenses represented 8.1% and 7.5% of net sales in 2002 and 2001, respectively.
The Aggregates division’s earnings from operations were $80.5 million in the second quarter of 2002 as compared to $63.5 million in the second quarter of 2001. On a year-to-date basis, the division’s earnings from operations were $74.0 million in 2002 and $65.9 million in 2001.
The Aggregates division’s business is significantly affected 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 indicative of expected performance for the year.
Page 14 of 29
Magnesia Specialties’ second quarter 2002 sales of $19.7 million declined 25% from the prior-year’s net sales of $26.3 million, principally as a result of the May 2001 sale of the refractories business. Earnings from operations for the second quarter were $1.4 million for 2002 as compared to $1.0 million in 2001. For the first six months of 2002, net sales were $38.4 million and earnings from operations were $2.9 million. Net sales were $57.3 million and earnings from operations were $0.8 million for the first six months of 2001.
The following tables present net sales, gross profit, selling, general and administrative expenses, and earnings from operations data for the Corporation and each of its divisions for the three months and six months ended June 30, 2002 and 2001. 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.
Page 15 of 29
Page 16 of 29
Other income and expenses, net, for the quarter ended June 30, was $13.7 million in income in 2002 compared with $7.9 million in income in 2001. On a year-to-date basis, other income and expenses, net, was $13.9 million in income in 2002 and $9.2 million in income in 2001. In addition to other offsetting amounts, other income and expenses, net, is comprised generally of interest income, gains and losses associated with the disposition of certain assets, gains and losses related to certain amounts receivable, costs associated with the commercialization of certain new technologies and net equity earnings from nonconsolidated investments.
Other income and expenses, net, for the quarter ended June 30, 2002 included $20.3 million of gains on divestitures of quarries in the Columbus, Ohio, area and the Fredericksburg and Culpeper, Virginia, areas. Other income and expenses, net, also included $6.6 million of expenses in the quarter ended June 30, 2002 related to legal settlements and to reserve an investment related to certain new technologies. Other income and expenses, net, for the quarter ended June 30, 2001 included an $8.9 million gain on the sale of the refractories business of Magnesia Specialties.
Interest expense was $11.2 million in the second quarter 2002, compared to $13.3 million in the second quarter of 2001. For the six months ended June 30, interest expense was $22.3 million in 2002 as compared to $23.8 million in 2001.
Page 17 of 29
Management’s outlook for the remainder of the year is cautious due primarily to continued current economic weakness and declining construction demand. The 2002 outlook includes flat to 3% volume growth, inclusive of acquisitions and the effect of divestitures. Average sales prices are expected to increase 2% to 2.5% at heritage locations. Net earnings for 2002 are expected to range from $2.35 to $2.60 per diluted share, inclusive of other income and the effect of divested operations on operating earnings and the effective tax rate for the year. It is also inclusive of the elimination of goodwill amortization and its impact on the effective tax rate. Assuming the prior-year’s level of goodwill amortization and the current estimated 2002 effective tax rate, the benefit from the nonamortization provisions of FAS 142 is estimated at $0.28 per diluted share. This amount has been revised from previous estimates to include the impact of goodwill amortization which is included in inventory at less than previously estimated. The estimate of full year 2002 earnings per diluted share excludes the anticipated impairment charge for goodwill related to the road paving business, which is estimated to be up to $15 million on a pretax basis. Third quarter 2002 earnings are expected to approximate earnings reported in the third quarter of 2001.
The Corporation outlined the risks associated with its aggregates operations in its Annual Report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission on March 27, 2002. 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 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. If shipment volumes are negatively affected, operating results may be adversely affected due to the significant portion of production expenses that are fixed costs. Other factors that may affect management’s outlook are discussed on page 22 of this report.
Page 18 of 29
LIQUIDITY AND CAPITAL RESOURCES Net cash flow provided by operating activities during the six months ended June 30 was $47.7 million in 2002 compared with $44.3 million in the comparable period of 2001. The cash flow for both 2002 and 2001 was principally from earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. Depreciation, depletion and amortization was as follows (amounts in millions):
The seasonal nature of the construction aggregates business impacts quarterly net cash provided by operating activities when compared with the year. Full year 2001 net cash provided by operating activities was $252.9 million, compared with $44.3 million provided by operations in the six months ended June 30, 2001.
Six-month capital expenditures, exclusive of acquisitions, were $67.9 million in 2002 and $102.1 million in 2001. Capital expenditures are expected to be approximately $125 million for 2002, exclusive of acquisitions. Comparable full-year capital expenditures were $194.4 million in 2001.
In 2002 and 2001, the Corporation entered into new equipment operating leases with aggregate future commitments of $31.2 and $30.0 million, respectively. The Corporation intends to continue entering into operating leases, primarily for mobile equipment, in its ordinary course of business. The Corporation also enters into equipment rentals on a regular basis to meet shorter term, nonrecurring and intermittent needs.
Page 19 of 29
The Corporation is a minority member of certain limited liability corporations (“LLCs”) whereby the majority members are paid a preferred return from the profits of the underlying businesses. For one of these LLCs, the Corporation is required to purchase another minority member’s interests. Additionally, the Corporation has commitments for lease obligations related to an acquisition. The commitments related to the LLC, and acquisition related lease and certain contingent obligations total approximately $28 million.
As discussed in the “Results of Operations” section contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on pages 12 to 18, during the quarter ended June 30, 2002, the Corporation received proceeds related to certain divestitures. Such proceeds, partially offset by amounts being held in escrow for like-kind exchanges, are reflected in other investing activities in the statement of cash flows.
In August 2002, the Corporation amended its Five-Year Credit Agreement by increasing the credit facility from $225 million to $275 million. This agreement expires in August 2006. Additionally, the Corporation reduced its commercial paper program facility from $450 million to $275 million. Furthermore, the Corporation did not renew the 364-day $225 million revolving credit agreement that expired in August 2002.
In May 2002, the Corporation entered into interest rate swap agreements related to $100 million of the Notes due in 2008. The Corporation will receive a fixed interest rate and pay a variable rate based on LIBOR. The swap agreements terminate concurrently with the maturity of the Notes. The swap agreements are designed to effectively convert the interest rate expense on $100 million of the Notes from a 5.875% fixed annual rate to a floating annual rate equal to six-month LIBOR plus an average of 0.235%.
The Corporation continues to rely upon internally generated funds and access to capital markets, including its revolving credit agreement 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.
Page 20 of 29
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 2002.
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 and “P-2” by Moody’s. In July 2001, Standard and 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 credit ratios 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.
Page 21 of 29
ACCOUNTING CHANGES The accounting changes that currently impact the Corporation are included in Notes 6 and 7 to the Consolidated Financial Statements.
OTHER MATTERS Investors are cautioned that all statements in this Quarterly Report on Form 10-Q that relate to the future, particularly those statements made in the “outlook” section of this report on page 18, involve risks and uncertainties, and are based on assumptions that the Corporation believes in good faith are reasonable but which may be materially different from actual results. Factors that the Corporation currently believes could cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, national and regional economic conditions in the markets the Company serves; the timing or extent of any recovery of the economy; the level and timing of federal and state transportation funding; levels of construction spending in the markets the Company serves; unfavorable weather conditions; fuel costs; transportation costs; competition from new or existing competitors; ability to recognize quantifiable savings from internal expansion programs; ability to successfully integrate acquisitions quickly and in a cost effective manner; ability to recognize expected profits from acquisitions; changes in capital availability or costs; and the timing and occurrence of events that may be subject to circumstances beyond the Company’s control. 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. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. 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.
INVESTOR ACCESS TO COMPANY FILINGS Shareholders may obtain, without charge, a copy of Martin Marietta Materials’ Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2001, by writing to:
Page 22 of 29
Additionally, Martin Marietta Materials’ Annual Report, press releases and filings with the Securities and Exchange Commission, including Forms 10-K, 10-Q, 8-K and 11-K, can generally be accessed via the Corporation’s Web site. Filings with the Securities and Exchange Commission accessed via the Web site are available through a link with the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. Accordingly, access to such filings is available upon EDGAR placing the related document in its database. Investor relations contact information is as follows:
Page 23 of 29
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation is exposed to fluctuations in interest rates on borrowings under its various long-term debt instruments. Because substantially all of the debt was at fixed rates, a decline in interest rates would result in an increase in the fair market value of the liability. In May 2002, the Corporation entered into interest rate swap agreements (the “Swaps”) for interest related to $100 million of the $200 million Notes due in 2008 to increase the percentage of its long-term debt that bears interest at a variable rate. The Swaps are fair value hedges designed to hedge against changes in the fair value of the Notes due to changes in LIBOR, the designated benchmark interest rate. The terms of the Swaps include the Corporation receiving a fixed annual interest rate of 5.875% and paying a variable annual interest rate based on six-month LIBOR plus an average of 0.235%.
The Corporation is required to record the fair value of the Swaps and the change in the fair value of the related Notes in its consolidated balance sheet. In accordance with Statement of Financial Accounting Standards No. 133Accounting for Derivative Instruments and Hedging Activities, no gain or loss is recorded for the changes in fair values. At June 30, 2002, the fair market value of the debt covered by the Swaps is $102,073,000 as compared to a book value of $99,638,000.
As a result of the Swaps, the Corporation has increased interest rate risk associated with changes in the LIBOR rate. The effect of a hypothetical decline in interest rates of 1% would increase the fair market value of the debt covered by the Swaps by approximately $6 million.
Page 24 of 29
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, 2001.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on May 23, 2002, the shareholders of Martin Marietta Materials, Inc.:
Page 25 of 29
PART II — OTHER INFORMATION(Continued)
Item 5. OTHER INFORMATION
On May 6, 2002, the Corporation announced that its management will make a presentation to analysts and portfolio managers in New York City on May 7, 2002.
On May 21, 2002, the Corporation announced the acquisition of a quarry in Uvalde, Texas. The quarry produces limestone asphalt with mineral reserves in excess of 50 million tons. The Corporation also announced the acquisition of a granite quarry near Haw River, North Carolina and the disposition of two quarries located near Fredericksburg and Culpeper, Virginia. The terms of the transactions were not disclosed.
On May 22, 2002, the Corporation’s subsidiary, Martin Marietta Composites, Inc., and the National Composite Center of Dayton, Ohio, announced the installation of the first of six fiber-reinforced polymer composite bridge decks to be installed in Ohio in 2002. The bridge deck was installed on Fairgrounds Road in Greene County, and has three spans totaling 7,074 square feet.
On May 23, 2002, 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 30, 2002, to shareholders of record at the close of business on June 1, 2002.
On June 17, 2002, the Corporation announced the purchase of four quarry operations in central Alabama from Oldcastle Materials. The quarries produce approximately five million tons of limestone per year and have mineral reserves in excess of 100 million tons. The Corporation also announced the sale of six quarries located in the Columbus, Ohio area, to an affiliate of Oldcastle Materials. The terms of the transactions were not disclosed.
On June 21, 2002, the Corporation announced its expectation of meeting the consensus earnings estimate for the second quarter ended June 30, 2002.
On July 25, 2002, the Corporation reported its financial results for the second quarter and six months ended June 30, 2002.
Page 26 of 29
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
None.
Page 27 of 29
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.
Page 28 of 29
EXHIBIT INDEX
Page 29 of 29