SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the quarterly period ended September 30, 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 September 30, 2004
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 ANDRESULTS OF OPERATIONSThird Quarter and Nine Months Ended September 30, 2004 and 2003
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 347 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 with potential uses 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
Quarter Ended September 30
Consolidated net sales for the quarter were $448.7 million compared with 2003 third quarter net sales of $442.8 million. Consolidated earnings from operations for the quarter were $82.1 million as compared with $74.1 million in the third quarter 2003. Interest expense decreased 1% to $10.8 million for the third quarter 2004. Other nonoperating income and expenses, net, was an expense of $0.5 million in 2004 compared with income of $1.4 million in the prior year. Consolidated after-tax earnings from continuing operations for the quarter were $53.0 million, or $1.09 per diluted share, compared with $45.6 million, or $0.93 per diluted share, in the third quarter 2003.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSThird Quarter and Nine Months Ended September 30, 2004 and 2003(Continued)
In 2004 and 2003, the Corporation divested of certain nonstrategic operations within its Aggregates operating segment. The results of all divested operations through the dates of disposal and any gain or loss on disposals are included in discontinued operations on the consolidated statements of earnings. The discontinued operations included the following net sales, pretax gain or loss on operations, pretax gain or loss on disposals and overall pretax gain or loss (in millions):
Net earnings for the quarter ended September 30 were $54.0 million, or $1.11 per diluted share, in 2004 and $45.5 million, or $0.93 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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The following tables present net sales, gross profit, selling, general and administrative expenses, other operating income and expenses, net, and earnings from operations data for the Corporation and each of its segments for the three months ended September 30, 2004 and 2003. In each case, the data is stated as a percentage of net sales, of the Corporation or the relevant segment, as the case may be.
Earnings from operations include research and development expense. This expense for the Corporation was $0.2 million for the quarters ended September 30, 2004 and 2003.
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Net sales for the Aggregates division were $420.8 million for the third quarter 2004 compared with $419.6 million for the third quarter 2003. Average sales price at heritage aggregates operations increased 3.1%, offset by a 2.4% decline in heritage aggregates shipments. Aggregates shipments in the Corporation’s southeastern and Gulf Coast markets were negatively affected by four hurricanes and adverse weather conditions. While the Bahamas facility incurred limited physical damage from two direct hits from the hurricanes, power was down for five weeks after the storms, resulting in no production and limited shipments during this time. Management expects to achieve normal operating levels at the Bahamas facility during the fourth quarter of 2004. Rising energy costs also negatively affected results by $0.08 per diluted share.
The following tables present volume and pricing data and shipments data for heritage operations, acquisitions and discontinued operations:
Selling, general and administrative expenses remained relatively stable as compared with the prior-year quarter. Increased incentive compensation costs related to profitability improvement and regulatory compliance costs were somewhat offset by a continued focus on cost reduction.
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Other operating income and expenses, net, includes accretion and depreciation expenses related to asset retirement obligations, rental and royalties income, and gains and losses related to receivables, fixed assets and other operating assets. For the quarter ended September 30, other operating income and expenses, net, for the Aggregates division was income of $2.9 million as compared with $2.1 million in 2003. The improvement is due to gains on sales of assets and changes in estimated accruals, including those related to disputed charges in the Shreveport, Louisiana road paving business.
The Aggregates division’s earnings from operations were $79.4 million in the third quarter of 2004 as compared with $75.2 million in the third quarter of 2003. Operating margin increased 100 basis points to 18.9 percent as compared with the prior-year quarter.
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, nine month results are not indicative of expected performance for the year.
Specialty Products’ third quarter net sales of $27.9 million increased 21% when compared with net sales of $23.2 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 third quarter were $2.7 million for 2004 as compared with a loss from operations of $1.0 million in 2003. Specialty Products’ results include a $2.7 million and $1.6 million loss from operations in the Structural Composites start-up business for the quarters ended September 30, 2004 and 2003, respectively, as the Corporation continues to build its capabilities in this new area.
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. For the quarter ended September 30, the Corporation recognized an expense of $0.5 million in 2004 compared with income of $1.4 million in 2003, primarily as a result of an insurance settlement in 2003.
On October 29, 2004, the Corporation divested of locations comprising approximately 70% of its sales of asphalt in the Houston, Texas area for $18 million, including cash and a note receivable. The divestiture will be included in continuing operations because of the Corporation’s continuing financial interest in the Houston asphalt market, as well as the related financing. The sale is breakeven on an after-tax basis.
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Nine Months Ended September 30
Consolidated net sales for the first nine months of 2004 were $1.169 billion compared with $1.118 billion for the year-earlier period. On a year-to-date basis, consolidated earnings from operations were $155.2 million in 2004 compared with $134.7 million in 2003. Interest expense was $31.8 million in 2004 and $31.9 million in 2003. Other nonoperating income and expenses, net, was income of $0.4 million in 2004 and $0.3 million in 2003. Consolidated earnings from continuing operations for the nine months ended September 30 were $90.5 million, or $1.86 per diluted share, in 2004 compared with $71.9 million, or $1.47 per diluted share, in 2003.
For the nine months ended September 30, the discontinued operations included the following net sales, pretax gain or loss on operations, pretax gain or loss on disposals and overall pretax gain or loss (in millions):
For the first nine months of 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 FAS 143. Consolidated net earnings for the first nine months were $92.2 million, or $1.89 per diluted share, in 2004 as compared with $64.3 million, or $1.31 per diluted share, in 2003.
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The following tables present net sales, gross profit, selling, general and administrative expenses, other operating income and expenses, net, and earnings from operations data for the Corporation and each of its segments for the nine months ended September 30, 2004 and 2003. In each case, the data is stated as a percentage of net sales, of the Corporation or the relevant segment, as the case may be.
Earnings from operations include research and development expense. This expense for the Corporation was $0.5 million and $0.4 million for the nine months ended September 30, 2004 and 2003, respectively.
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During the nine months ended September 30, 2004, the Corporation recorded expenses of $1.0 million for a change in estimate primarily related to disputed charges in its Louisiana road paving business. These expenses decreased net earnings for the nine months by $0.01 per diluted share.
The Corporation incurred $2.3 million and $0.2 million of receivable losses in the first nine months of 2004 and 2003, respectively, primarily due to the Corporation expensing bad debt write offs in 2004. In 2003, the Corporation applied the majority of bad debt write offs against the allowance for doubtful accounts.
During the nine months ended September 30, 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 earnings for the nine months by $1.1 million, or $0.02 per diluted share.
The 2004 overall effective income tax rate reflects the change in estimated 2003 tax expense upon filing the 2003 tax return and an evaluation of deferred taxes. The change in the year-to-date effective income tax rate during the third quarter of 2004, when compared with the year-to-date effective tax rate as of June 30, 2004, increased net earnings for the nine months ended September 30, 2004 by $2.7 million, or $0.06 per diluted share.
At September 30, 2004, the Corporation has recorded a valuation allowance of $4.5 million, primarily to reserve deferred tax assets related to net operating loss carryforwards for certain state income taxes.
LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities during the nine months ended September 30, 2004 was $149.2 million compared with $171.4 million 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 nine months ended September 30, 2004, the Corporation made voluntary contributions of $51 million to its pension plan, compared with $21 million in the first nine months of 2003, both of which reduced operating cash flow. Additionally, during the first three quarters of 2003, the Corporation significantly reduced inventory levels. There was no comparable reduction in 2004. These factors were partially offset by a lower increase in accounts receivable in 2004 as a result of collection efforts. 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 $171.4 million provided by operations in the first nine months of 2003.
First nine months capital expenditures, exclusive of acquisitions, were $108.7 million in 2004 and $82.4 million in 2003. Comparable full-year capital expenditures were $120.6 million in 2003.
During the nine months ended September 30, 2004, the Corporation repurchased 641,600 shares of its common stock at an aggregate cost of $30.4 million.
Based on prior performance and current expectations, the Corporation’s management believes that cash flows from internally generated funds will 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 “BBB+” 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 May 2004, Standard and Poor’s lowered its rating on the Corporation’s senior unsecured debt from “A-” to “BBB+”. At the same time, Standard and Poor’s revised its outlook for the Corporation to stable from negative. 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 $10.3 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.
TRENDS AND RISKS The Corporation outlined the trends and risks associated with its business 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.
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The Transportation Equity Act for the 21st Century (“TEA-21”), which was the federal highway bill, expired by its own terms on September 30, 2003. The general provisions of TEA-21 have been retained under continuing resolutions, which have provided federal funding for highways at an annual level of $33.6 billion during the fiscal year ended September 30, 2004 and into fiscal year 2005. Most recently, the House and Senate approved legislation to extend the federal highway program until May 31, 2005 while deliberations for a successor bill continue. The Bush Administration and both the House and Senate have all proposed six-year bills, but the overall proposed funding level varies in each of the proposals.
OUTLOOK 2004 The outlook for the Aggregates business for the remainder of 2004 is dependent on weather conditions during the fourth quarter. Additionally, the level of highway spending will continue to be uncertain until a federal highway bill is finalized and state construction spending priorities are set. Federal highway funding has been operating under a continuing resolution since the expiration of the prior bill on September 30, 2003 and has been extended through May 31, 2005. 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 2005. Management expects aggregates shipments volume and pricing to increase 2 percent to 3 percent for the year.
Management expects net earnings per diluted share for 2004 to range from $2.42 to $2.62. Included in this range is an expected loss of $8 million to $10 million in the structural composites business. Fourth quarter 2004 earnings per diluted share are expected to be in a range of $0.53 to $0.73. The uncertainty surrounding the federal highway bill reauthorization, state construction spending priorities, the degree of commercial construction recovery, weather, the sale of underperforming assets, rail and water transportation shortages, volatility of energy prices and composites performance are the significant factors that are likely to affect performance within the earnings range.
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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, the level and timing of federal and state transportation funding; levels of construction spending in the markets the Corporation serves; unfavorable weather conditions; fuel costs; transportation costs; successful development and implementation of the structural composite technological process and commercialization of strategic products for specific market segments; successful sale of underperforming assets; 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 September 30, 2004, the fair value of the Swaps is an asset of $1.6 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 $4 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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 September 30, 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. Unregistered Sales of Equity Securities and Use of Proceeds.
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.
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 2004.
Item 5. Other Information.
On July 27, 2004, the Corporation announced that it will release its financial results for the second quarter ended June 30, 2004 on August 3, 2004.
On August 3, 2004, the Corporation reported financial results for the second quarter ended June 30, 2004.
On August 18, 2004, the Corporation announced that the Board of Directors declared an increase in the regular quarterly cash dividend to $0.20 per share on the Corporation’s common stock. This dividend, which represents a cash dividend of $0.80 per share on an annualized basis, was payable September 30, 2004, to shareholders of record at the close of business on September 1, 2004.
On October 20, 2004, the Corporation announced that the Board of Directors elected Laree E. Perez to serve as a director of the Corporation.
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PART II-OTHER INFORMATION(Continued)
Item 6. 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.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the Quarter ended September 30, 2004
EXHIBIT INDEX
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