SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.
Registrant’s telephone number, including area code 919-781-4550
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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
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 SUBSIDIARIESFORM 10-QFor the Quarter Ended March 31, 2004
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
See accompanying notes to consolidated financial statements.
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MARTINS MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
OVERVIEW Martin Marietta Materials, Inc. (the “Corporation”), operates in two principal business segments: aggregates products and specialty products. The Corporation’s net sales and earnings are predominately derived from its aggregates segment, which processes and sells granite, limestone, and other aggregates products from a network of 351 quarries, distribution facilities and plants in 28 states in the southeastern, southwestern, midwestern and central regions of the United States and in the Bahamas 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 specialty products segment produces magnesia-based chemicals products used in industrial, agricultural and environmental applications; dolomitic lime sold primarily to customers in the steel industry and structural composite products used in a wide variety of industries.
CRITICAL ACCOUNTING POLICIES The Corporation outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 15, 2004.
RESULTS OF OPERATIONS Consolidated net sales for the quarter were $307.8 million compared to 2003 first quarter net sales of $273.8 million. Consolidated loss from operations for the quarter was $0.5 million as compared to $8.8 million in the first quarter 2003. Interest expense increased 2% to $10.3 million for the first quarter 2004. Consolidated loss from continuing operations before the cumulative effect of a change in accounting principle for the quarter was $6.6 million, or $0.14 per diluted share, in 2004 compared to $12.0 million, or $0.25 per diluted share, in the first quarter 2003.
The Corporation had an after-tax gain on discontinued operations of $0.1 million in the first quarter of 2004 compared to an after-tax loss of $2.1 million in the first quarter of 2003.
During the first quarter 2003, the Corporation recorded a $6.9 million, or $0.14 per diluted share, net charge as the cumulative effect of an accounting change related to the adoption of Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. The consolidated net loss for the first quarter was $6.5 million, or $0.14 per diluted share, in 2004 as compared to $20.9 million, or $0.43 per diluted share, in 2003.
Except as indicated, the following comparative analysis in the Results of Operations section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on results from continuing operations.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSFirst Quarter Ended March 31, 2004 and 2003(Continued)
The following tables present net sales, gross profit, selling, general and administrative expenses, other operating (income) and expenses, net, and earnings (loss) from operations data for the Corporation and each of its segments for the three months ended March 31, 2004 and 2003. 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.
Earnings (loss) from operations include research and development expense. This expense for the Corporation was $0.2 million and $0.1 million for the quarters ended March 31, 2004 and 2003, respectively.
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Net sales for the Aggregates division were $281.3 million for the first quarter 2004 compared to $253.9 million for the first quarter 2003. The increase resulted from more favorable operating conditions as compared to the poor weather conditions experienced in the first quarter of 2003. Additionally, highway and residential demand increased, which resulted in strong shipments across the Southeast, particularly North Carolina, South Carolina and Georgia, and in the Midwest. Overall, heritage aggregates shipments increased 10.1 percent and average sales price at heritage aggregates operations increased 2.6 percent, both over the prior year quarter. In addition to increased shipments, cost of sales was positively affected by an 8 percent increase in production at heritage aggregates locations. This was partially offset by higher losses incurred in the road paving business. Gross margin for the division was 10.1 percent in 2004 compared with 7.8 percent in the year-earlier period.
The following tables present volume and pricing data and shipments data for heritage operations, acquisitions and discontinued operations:
During the quarter ended March 31, 2004, the Corporation recorded expenses of $2.3 million for a change in estimate primarily related to disputed charges in its Louisiana road paving business. These expenses increased the net loss for the quarter by $0.03 per diluted share. During the quarter ended March 31, 2003, the Corporation decreased its accrual for incurred but not reported claims related to its self-insurance health benefits provided to its employees. The change in estimate was based on the Corporation’s recent claims experience and increased net income for the quarter by $1.1 million, or $0.02 per diluted share.
During the quarter ended March 31, 2004, the Corporation incurred receivable losses of $0.7 million, which is included in other operating income and expenses, net. During the quarter ended March 31, 2003, the Corporation wrote off bad debts against its allowance for doubtful accounts and had a gain on receivables of $0.1 million.
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Selling, general and administrative expenses as a percentage of net sales for the Aggregates division decreased slightly for the quarter as compared to 2003. In addition to reduced overhead resulting from the management restructuring of the Aggregates business, pension costs decreased in 2004, principally as a result of the $32 million contribution to the pension plan made during the quarter. The Aggregates division’s loss from operations was $2.1 million in the first quarter of 2004 as compared to $7.8 million in the first quarter of 2003.
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 quarter results are not indicative of expected performance for the year.
Specialty Products’ first quarter net sales of $26.4 million increased 32.9% when compared to net sales of $19.9 million in the year-earlier period. The increase reflects strong lime sales to the steel industry and increased chemicals sales to a variety of end users. Earnings from operations for the first quarter were $1.5 million for 2004 as compared to a loss from operations of $1.0 million in 2003. Specialty Products results include a $1.7 million pretax loss in the Structural Composites business for the quarter ended March 31, 2004 as the Corporation continues to bring the new production facility on line.
Other nonoperating income and expenses, net, for the quarter ended March 31, was $0.6 million in income in 2004 compared with an expense of $0.3 million in 2003. In addition to other offsetting amounts, other nonoperating income and expenses, net, is comprised generally of interest income, net equity earnings from nonconsolidated investments and eliminations of minority interests for consolidated non-wholly owned subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES Net cash used for operating activities during the three months ended March 31, 2004 was $16.6 million compared with $19.6 million provided by operating activities in the comparable period of 2003. Operating cash flow is generally from earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. In the quarter ended March 31, 2004, the Corporation made a voluntary $32 million contribution to its pension plan, which reduced operating cash flow. Depreciation, depletion and amortization was as follows (amounts in millions):
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The seasonal nature of the construction aggregates business impacts quarterly operating cash flow when compared with the year. Full year 2003 net cash provided by operating activities was $277.2 million, compared with $19.6 million provided by operations in the first quarter of 2003.
First quarter capital expenditures, exclusive of acquisitions, were $29.8 million in 2004 and $28.0 million in 2003. Comparable full-year capital expenditures were $120.6 million in 2003.
In 2004, the Corporation continued its common stock repurchase plan and, for the quarter ended March 31, 2004, repurchased 521,600 shares at an aggregate cost of $25.0 million.
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.
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 2004.
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 for the Corporation to negative from stable while reaffirming its ratings. 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.
Contractual Obligations
In 2004, the Corporation entered into new equipment operating leases with aggregate future commitments of $6.9 million. 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.
ACCOUNTING CHANGES The accounting changes that currently impact the Corporation are included in Note 9 to the Consolidated Financial Statements.
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OUTLOOK 2004 The outlook for the Aggregates business for the remainder of 2004 is somewhat more positive than previous guidance. While uncertainty will exist until a federal highway bill is finalized and state construction spending priorities are set, management believes that the successor bill will be larger than the current program. Residential construction spending is expected to be essentially flat. Commercial construction spending, while beginning to recover in some areas in the United States, is not expected to improve significantly until later this year or, more likely, 2005. Management expects aggregates shipments volume to increase 2.5 percent to 4 percent and aggregates pricing to increase 2 percent to 3 percent. Management currently expects net earnings per diluted share for 2004 to range from $2.37 to $2.62. Second quarter 2004 earnings per diluted share are expected to range from $0.85 to $0.97. The volatility of energy prices, state construction spending priorities and the degree of commercial construction recovery are the significant factors that will affect the Corporation’s performance within the earnings range.
The Corporation outlined the risks associated with its aggregates operations in its Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 15, 2004. 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. Current levels of commercial construction activity may be more negatively affected if economic conditions deteriorate. Also, levels of residential construction spending are particularly sensitive to changes in interest rates. A significant increase in rates could affect the level of residential construction spending.
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OTHER MATTERS If you are interested in Martin Marietta Materials, Inc. stock, management recommends that, at a minimum, you read the Corporation’s current annual report and 10-K, 10-Q and 8-K reports to the SEC over the past year. The Corporation’s recent proxy statement for the annual meeting of shareholders also contains important information. These and other materials that have been filed with the SEC are accessible through the Corporation’s Web site atwww.martinmarietta.com and are also available at the SEC’s Web site atwww.sec.gov. You may also write or call the Corporation’s Corporate Secretary, who will provide copies of such reports.
Investors are cautioned that all statements in this Quarterly Report that relate to the future 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. Forward-looking statements give the investor our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate only to historical or current facts. They may use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words of similar meaning in connection with future events or future operating or financial performance. Any or all of our forward-looking statements here and in other publications may turn out to be wrong.
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, business and economic conditions and trends in the markets the Corporation serves; the level and timing of federal and state transportation funding; levels of construction spending in the markets the Corporation serves; unfavorable weather conditions; ability to recognize increased sales and quantifiable savings from internal expansion projects; ability to successfully integrate acquisitions quickly and in a cost-effective manner and achieve anticipated profitability; fuel costs; transportation costs; competition from new or existing competitors; successful development and implementation of the structural composite technological process and strategic products for specific market segments; unanticipated costs or other adverse effects associated with structural composite revenue levels, products pricing, and cost associated with manufacturing ramp-up; the financial strength of the structural composite customers and suppliers; business and economic conditions and trends in the trucking and composites industries in various geographic regions; possible disruption in commercial activities related to terrorist activity and armed conflict, such as reduced end-user purchases relative to expectations; and other risk factors listed from time to time found in the Corporation’s filings with the Securities and Exchange Commission. Other factors besides those listed here may also adversely affect the Corporation, and may be material to the Corporation. The Corporation assumes no obligation to update any such forward-looking statements.
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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, 2003, by writing to:
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:
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation’s operations are highly dependent upon the interest rate-sensitive construction and steelmaking industries. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs. Aside from these inherent risks from within its operations, the Corporation’s earnings are affected also by changes in short-term interest rates, as a result of its temporary cash investments, including money market funds and overnight investments in Eurodollars; interest rate swaps; any outstanding commercial paper obligations; and defined benefit pension plans.
Interest Rate Swaps. In August 2003, 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 1.50%.
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. 133,Accounting for Derivative Instruments and Hedging Activities, no gain or loss is recorded for the changes in the fair value of the Swaps or the debt. At March 31, 2004, the fair value of the Swaps is $3.9 million.
As a result of the Swaps, the Corporation has increased interest rate risk associated with changes in the LIBOR rate. The hypothetical change in interest rates of 1% would change annual interest expense by $1 million and also change the fair value of the debt covered by the Swaps by approximately $5 million.
Commercial Paper Obligations. The Corporation has a $275 million commercial paper program in which borrowings bear interest at a variable rate based on LIBOR. At March 31, 2004, there were no outstanding commercial paper borrowings. Due to commercial paper borrowings bearing interest at a variable rate, the Corporation has interest rate risk when such debt is outstanding.
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Pension Expense. The Corporation sponsors noncontributory defined benefit pension plans which cover substantially all employees. Therefore, the Corporation’s results of operations are affected by its pension expense. Assumptions that affect this expense include the discount rate and the expected long-term rate of return on assets. The selection of the discount rate is based on the yields on high quality, fixed income investments. The selection of the expected long-term rate of return on assets is based on general market conditions and related returns on a portfolio of investments. Therefore, the Corporation has interest rate risk associated with these factors. The impact of hypothetical changes in these assumptions on the Corporation’s annual pension expense is discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 15, 2004.
Aggregate Interest Rate Risk. The pension expense for 2004 is calculated based on assumptions selected at December 31, 2003. Therefore, interest rate risk in 2004 is limited to the potential effect related to the interest rate swaps and outstanding commercial paper. Assuming no commercial paper is outstanding, which is consistent with the March 31, 2004 balance, the aggregate effect of a hypothetical 1% increase in interest rates would increase interest expense and decrease pretax earnings by $1 million.
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Item 4. CONTROLS AND PROCEDURES
As of March 31, 2004, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2004. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to March 31, 2004.
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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, 2003.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.
CHANGES IN SECURITIES
Effective May 4, 2004, the Corporation amended (the “Amendment”) the Rights Agreement dated as of October 21, 1996 (the “Rights Agreement”) by and between the Corporation and Wachovia Bank, National Association (as successor to First Union National Bank of North Carolina), as Rights Agent, to delete the term “Continuing Director” in its entirety from the Rights Agreement and, consistent therewith, and remove from the Rights Agreement all reference to decision-making by the “Continuing Directors.” As a result of the Amendment, all decision-making is vested in the Board of Directors.
The foregoing description of Amendment No. 1 to the Rights Agreement is qualified in its entirety by reference to Amendment No. 1 to the Rights Agreement, attached hereto and filed herewith as Exhibit 10.01.
ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation’s initial stock repurchase program, which authorized the repurchase of 2.5 million shares of common stock, was announced in a press release dated May 6, 1994, and has been updated as appropriate. The program does not have an expiration date.
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PART II-OTHER INFORMATION(Continued)
Item 4. Submission of Matters to Vote of Security Holders.
No matters were submitted to a vote of security holders during the first quarter of 2004.
Item 5. Other Information.
On January 28, 2004, the Corporation announced that it will release its financial results for the fourth quarter and full year ended December 31, 2003 on February 4, 2004.
On January 30, 2004, the Corporation announced that the Board of Directors had declared a regular quarterly cash dividend of $0.18 per share of the Corporation’s common stock. The dividend, which represents a cash dividend of $0.72 per share on an annualized basis, was payable March 31, 2004, to shareholders of record at the close of business on March 1, 2004.
On February 4, 2004, the Corporation reported its financial results for the fourth quarter and full year ended December 31, 2003.
On May 4, 2004, the Corporation reported financial results for the first quarter ended March 31, 2004.
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Item 6. Exhibits and Reports on Form 8-K.
During the quarter ended March 31, 2004, the Corporation filed the following current reports on Form 8-K:
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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.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the quarter ended March 31, 2004
EXHIBIT INDEX
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