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, 2005
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.
Registrant’s telephone number, including area code 919-781-4550
Former name: None
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.
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 SUBSIDIARIES
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
See accompanying condensed notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIESFORM 10-QFor the Quarter Ended March 31, 2005
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 OPERATIONSFirst Quarter Ended March 31, 2005 and 2004
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW Martin Marietta Materials, Inc. (the “Corporation”), conducts its operations through two reportable business segments: aggregates 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 331 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, 2004, filed with the Securities and Exchange Commission on February 25, 2005.
RESULTS OF OPERATIONS Consolidated net sales for the quarter were $340.0 million compared with 2004 first quarter net sales of $297.8 million. Consolidated earnings from operations for the quarter were $18.9 million as compared with $4.3 million in the first quarter 2004. Interest expense increased 5% to $10.8 million for the first quarter 2005. Consolidated earnings from continuing operations for the quarter were $8.3 million, or $0.17 per diluted share, in 2005 compared with a loss of $3.9 million, or $0.08 per diluted share, in the first quarter 2004.
In 2005 and 2004, 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 loss on operations, pretax gain or loss on disposals, income tax benefit and net loss (dollars in thousands):
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONSFirst Quarter Ended March 31, 2005 and 2004(Continued)
Net earnings for the quarter ended March 31 were $7.1 million, or $0.15 per diluted share, in 2005 compared with a net loss of $6.5 million, or $0.14 per diluted share, in 2004.
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 March 31, 2005 and 2004. 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 $0.1 million and $0.2 million for the quarters ended March 31, 2005 and 2004, respectively.
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Net sales for the Aggregates division were $309.5 million for the first quarter 2005 compared with $271.4 million for the first quarter 2004 resulting from an increase in demand, strong pricing and cost control. Shipments and production at heritage aggregates locations increased 7.2 percent and 7.0 percent, respectively, over the prior-period quarter. Shipments were particularly strong across the Southwest and the Southeast, as highway and commercial demand increased and residential demand remained strong. Aggregates pricing increased 5.6% at heritage aggregates locations as compared with the prior-period quarter. The increases in shipments and pricing, coupled with continued cost control, resulted in a 310-basis-point improvement in gross margin in the heritage aggregates product line, in spite of increased pressures from rising diesel fuel prices, higher costs for repair and supply parts, and higher wage and benefit costs. Unit production cost of aggregates products decreased slightly compared with the prior-year period. Further, the quarter was favorably affected by the divestiture of nonstrategic operations.
The following tables present volume and pricing data and shipments data for heritage operations, acquisitions and discontinued operations:
Selling, general and administrative expenses, which were relatively flat, declined as a percentage of net sales for the quarter compared with 2004.
The Aggregates division’s earnings from operations were $16.5 million in the first quarter of 2005 as compared with $3.2 million in the first quarter of 2004. Operating margin increased 410 basis points to 5.3% as compared with the prior-year quarter.
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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 $30.5 million increased 16% when compared with net sales of $26.4 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, particularly for water treatment and acid neutralization, coupled with strong pricing improvements in both lime and chemical products. Earnings from operations for the first quarter were $2.3 million for 2005 as compared with $1.2 million in 2004. Specialty Products’ results included a $2.6 million and $1.9 million loss from operations in the Structural Composites business for the quarters ended March 31, 2005 and 2004, respectively.
In addition to other offsetting amounts, other nonoperating income and expenses, net, are comprised generally of interest income, net equity earnings from nonconsolidated investments and eliminations of minority interests for consolidated non-wholly owned subsidiaries. Other nonoperating income and expenses, net, for the quarter ended March 31, were $2.4 million in income in 2005 compared with income of $0.4 million in 2004 and resulted from higher interest income and earnings on nonconsolidated subsidiaries. Further, the elimination of minority interest for consolidated subsidiaries resulted in a $0.6 million increase in other nonoperating income.
LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities during the three months ended March 31, 2005 was $30.0 million compared with $16.6 million used for operating activities in the comparable period of 2004. Operating cash flow is generally from earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. The increase in cash provided by operating activities for the first quarter of 2005 as compared with the year-earlier period was primarily due to the Corporation making a voluntary $32 million contribution to its pension plan in the quarter ended March 31, 2004, which reduced operating cash flow. Additionally, earnings were higher for the first quarter of 2005 as compared with the year-earlier period. These factors were partially offset by a larger reduction in accounts receivable in the first quarter of 2004. 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 2004 net cash provided by operating activities was $266.8 million, compared with $16.6 million used for operations in the first quarter of 2004.
First quarter capital expenditures, exclusive of acquisitions, were $47.2 million in 2005 and $29.8 million in 2004. Comparable full-year capital expenditures were $163.4 million in 2004. The full-year capital spending projection of $195 million for 2005 is currently under review and expected to increase.
In 2005, the Corporation continued its common stock repurchase plan through open-market purchases pursuant to authority granted by its Board of Directors. For the quarter ended March 31, 2005, the Corporation repurchased 740,000 shares at an aggregate cost of $41.1 million.
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 2005.
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. 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 10 to the Consolidated Financial Statements.
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TRENDS AND RISKS The Corporation outlined the risks associated with its business in its Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Securities and Exchange Commission on February 25, 2005. Management continues to evaluate its exposure to all operating risks on an ongoing basis.
The industry and the Corporation are focusing, in the near term, on the passage of a new federal highway program. Management believes that a federal highway program funding bill will be approved at a higher level than the previous bill, which expired on September 30, 2003. Since then, the highway program has been operating under a continuing resolution that currently expires on May 31, 2005. The spending level for fiscal year 2005 of $34.6 billion under the current continuing resolution is higher than previous levels. However, the debate on funding levels, terms and duration will continue in 2005, and the level of highway spending will continue to be uncertain until a federal highway bill is finalized and state construction spending priorities are set. Management expects that a successor bill may not be passed until mid-year.
OUTLOOK 2005 The outlook for the Aggregates business for the remainder of 2005 appears to be positive. Management expects aggregates shipments volume to increase 2.5 percent to 4.5 percent and aggregates pricing to increase 3.5 percent to 4.5 percent. The Magnesia Specialties business is expected to generate between $19 million and $22 million in pretax earnings. The Structural Composites business is expected to lose between $6 million and $8 million in 2005. Presently, management believes that the Structural Composites business would require revenues of approximately $25 million to $30 million to achieve breakeven operating results.
Management currently expects net earnings per diluted share for 2005 to range from $2.90 to $3.25. Second quarter 2005 earnings per diluted share are expected to range from $0.95 to $1.10. The volatility of energy prices, control of rising costs of supply parts and wages and benefits, state construction spending priorities, the degree of commercial construction recovery, continued strength in residential spending and the weather are the significant factors that will affect the Corporation’s 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 at www.martinmarietta.com and are also available at the SEC’s Web site at www.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; wage inflation and increasing employee benefits’ impact on labor costs; continued increases in the cost of repair and supply parts; transportation costs; ability to recognize increased sales and quantifiable savings from internal expansion projects; continued strength in the steel industry markets served by the Corporation’s Magnesia Specialties business; successful development and implementation of the structural composite technological process and commercialization of strategic products for specific market segments; 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 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, 2004, by writing to:
Martin Marietta Materials, Inc.Attn: Corporate Secretary2710 Wycliff RoadRaleigh, North Carolina 27607-3033
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:
Telephone: (919) 783-4658Email: investors@martinmarietta.comWeb site address: www.martinmarietta.com
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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, 2005, the fair value of the Swaps is a liability of $1.2 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 $1.0 million and also change the fair value of the debt covered by the Swaps by approximately $4.0 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, 2005, 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 that 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, 2004, filed with the Securities and Exchange Commission on February 25, 2005.
Aggregate Interest Rate Risk. The pension expense for 2005 is calculated based on assumptions selected at December 31, 2004. Therefore, interest rate risk in 2005 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, 2005 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, 2005, 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, 2005.
On April 1, 2005, the Corporation converted certain financial accounting systems of the businesses acquired in the 1998 acquisition of Redland Stone Products Company, which are currently a part of the Southwest Division, to the Corporation’s enterprise-wide information system solution. Management believes that the conversion of these financial accounting systems should provide a more centralized system of internal control over financial reporting for these businesses. In addition, the Corporation expects further conversion of its information systems to occur during the balance of the year. There have been no other significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to March 31, 2005.
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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, 2004.
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 first quarter of 2005.
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PART II-OTHER INFORMATION(Continued)
Item 5. Other Information.
On January 27, 2005, the Corporation announced its preliminary, unaudited fourth quarter 2004 earnings forecast. The Corporation also announced that it would release fourth quarter and year ended December 31, 2004 results on February 9, 2005.
On February 3, 2005, the Corporation announced that the Board of Directors declared a regular quarterly cash dividend of $0.20 per share of the Corporation’s common stock. The dividend, which represents a cash dividend of $0.80 per share on an annualized basis, was payable March 31, 2005, to shareholders of record at the close of business on March 1, 2005.
On February 9, 2005, the Corporation reported its financial results for the fourth quarter and full year ended December 31, 2004.
On April 13, 2005, the Corporation announced that it expected first quarter earnings in a range of $0.10 to $0.15 per diluted share. The Corporation also announced that it would release its financial results for the first quarter ended March 31, 2005 on May 2, 2005.
On May 2, 2005, the Corporation reported financial results for the first quarter ended March 31, 2005.
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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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EXHIBIT INDEX
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