1
EXHIBIT 13.01
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
MARTIN MARIETTA MATERIALS, INC.
We have audited the accompanying consolidated balance sheet of Martin Marietta
Materials, Inc., and subsidiaries at December 31, 1999 and 1998,and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1999.These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Martin Marietta
Materials, Inc., and subsidiaries at December 31, 1999 and 1998,and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999,in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Raleigh, North Carolina
January 24,2000
PAGE 10 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
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STATEMENT OF FINANCIAL RESPONSIBILITY
SHAREHOLDERS
MARTIN MARIETTA MATERIALS, INC.
The management of Martin Marietta Materials, Inc., is responsible for the
consolidated financial statements and all related financial information
contained in this report. The financial statements, which include amounts based
on estimates and judgments, have been prepared in accordance with accounting
principles generally accepted in the United States applied on a consistent
basis.
The Corporation maintains a system of internal accounting controls designed and
intended to provide reasonable assurance that assets are safeguarded, that
transactions are executed and recorded in accordance with management's
authorization, and that accountability for assets is maintained. An environment
that establishes an appropriate level of control-consciousness is maintained
and monitored, and includes examinations by an internal audit staff and by the
independent auditors in connection with their annual audit.
The Corporation's management recognizes its responsibility to foster a strong
ethical climate. Management has issued written policy statements which document
the Corporation's business code of ethics. The importance of ethical behavior
is regularly communicated to all employees through the distribution of the Code
of Ethics and Standards of Conduct booklet and through ongoing education and
review programs designed to create a strong commitment to ethical business
practices.
The Audit Committee of the Board of Directors, which consists of four outside
directors, meets periodically and when appropriate, separately with the
independent auditors, management and the internal auditors to review the
activities of each.
The consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report appears on the preceding page.
/s/ Janice K. Henry
Janice K. Henry
Senior Vice President, Chief Financial Officer and Treasurer
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 11
3
CONSOLIDATED STATEMENT OF EARNINGS
for years ended December 31
(add 000, except per share) 1999 1998 1997
- --------------------------- ------------ ------------ ------------
NET SALES $ 1,258,827 $ 1,057,691 $ 900,863
Cost of sales 948,128 776,043 665,594
------------ ------------ ------------
GROSS PROFIT 310,699 281,648 235,269
Selling, general and administrative expenses 92,621 82,041 69,093
Research and development 2,789 3,053 3,406
------------ ------------ ------------
EARNINGS FROM OPERATIONS 215,289 196,554 162,770
Interest expense on debt 39,411 23,759 16,899
Other income and (expenses), net 18,435 1,347 5,341
------------ ------------ ------------
Earnings before taxes on income 194,313 174,142 151,212
Taxes on income 68,532 58,529 52,683
------------ ------------ ------------
NET EARNINGS $ 125,781 $ 115,613 $ 98,529
------------ ------------ ------------
NET EARNINGS PER COMMON SHARE
-BASIC $ 2.70 $ 2.49 $ 2.14
-DILUTED $ 2.68 $ 2.48 $ 2.13
------------ ------------ ------------
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
-BASIC 46,668 46,454 46,122
-DILUTED 46,947 46,708 46,238
------------ ------------ ------------
CASH DIVIDENDS PER COMMON SHARE $ 0.52 $ 0.50 $ 0.48
------------ ------------ ------------
PAGE 12 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
for years ended December 31
ASSETS
(add 000) 1999 1998
- --------- ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,403 $ 14,586
Accounts receivable, net 197,554 171,511
Inventories 172,865 157,104
Current deferred income tax benefits 21,899 18,978
Other current assets 7,644 7,209
------------ ------------
TOTAL CURRENT ASSETS 403,365 369,388
------------ ------------
Property, plant and equipment, net 846,993 777,528
Costs in excess of net assets acquired 375,327 348,026
Other intangibles 31,497 27,952
Other noncurrent assets 85,392 65,695
------------ ------------
TOTAL ASSETS $ 1,742,574 $ 1,588,589
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(add 000)
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 55,872 $ 57,720
Accrued salaries, benefits and payroll taxes 24,887 23,502
Accrued insurance and other taxes 26,705 25,370
Income taxes 4,293 7,201
Current maturities of long-term debt and commercial paper 39,722 15,657
Other current liabilities 31,217 22,783
------------ ------------
TOTAL CURRENT LIABILITIES 182,696 152,233
------------ ------------
Long-term debt and commercial paper 602,011 602,113
Pension, postretirement and postemployment benefits 85,839 76,209
Noncurrent deferred income taxes 81,857 75,623
Other noncurrent liabilities 16,165 14,712
------------ ------------
TOTAL LIABILITIES 968,568 920,890
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock,$0.01 par value;100,000,000 shares authorized 467 466
Additional paid-in capital 354,046 349,245
Retained earnings 419,493 317,988
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 774,006 667,699
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,742,574 $ 1,588,589
------------ ------------
The notes on pages 16 to 25 are an integral part of these financial statements.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 13
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CONSOLIDATED STATEMENT OF CASH FLOWS
for years ended December 31
(add 000) 1999 1998 1997
- --------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 125,781 $ 115,613 $ 98,529
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation, depletion and amortization 124,754 98,765 79,720
Other items, net (6,257) (4,573) (3,638)
Changes in operating assets and liabilities:
Deferred income taxes (3,266) (3,457) 7,090
Net changes in receivables, inventories and payables (31,513) (9,661) (2,865)
Other assets and liabilities, net 14,177 25,886 16,782
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 223,676 222,573 195,618
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (137,820) (123,926) (86,440)
Acquisitions, net (77,080) (347,882) (279,056)
Transactions with Lockheed Martin Corporation -- -- 23,768
Other investing activities, net 339 (34,014) 8,359
---------- ---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (214,561) (505,822) (333,369)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (618) (1,704) (226,367)
Increase in long-term debt 280 198,994 349,947
Commercial paper, net 15,000 105,000 60,000
Debt issue costs -- (1,745) (938)
Dividends paid (24,276) (23,233) (22,134)
Issuances of common stock 2,022 1,862 164
Repurchases of common stock (12,706) -- --
---------- ---------- ----------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (20,298) 279,174 160,672
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (11,183) (4,075) 22,921
CASH AND CASH EQUIVALENTS (BOOK OVERDRAFT), BEGINNING OF YEAR 14,586 18,661 (4,260)
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,403 $ 14,586 $ 18,661
---------- ---------- ----------
PAGE 14 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
for years ended December 31
Total
Common Additional Retained Shareholders'
(add 000) Stock Paid-In Capital Earnings Equity
- --------- ------ --------------- -------- -------------
Balance at December 31, 1996 $ 461 $ 331,303 $ 149,213 $ 480,977
Net earnings - - 98,529 98,529
Dividends declared ($0.48 a share) - - (22,134) (22,134)
Net stock transactions 1 4,463 - 4,464
------- ---------- ---------- ----------
Balance at December 31, 1997 462 335,766 225,608 561,836
Net earnings - - 115,613 115,613
Dividends declared ($0.50 a share) - - (23,233) (23,233)
Net stock transactions 4 13,479 - 13,483
------- ---------- ---------- ----------
Balance at December 31, 1998 466 349,245 317,988 667,699
NET EARNINGS - - 125,781 125,781
DIVIDENDS DECLARED ($0.52 A SHARE) - - (24,276) (24,276)
NET STOCK TRANSACTIONS 4 17,504 - 17,508
REPURCHASES OF COMMON STOCK (3) (12,703) - (12,706)
------- ---------- ---------- ----------
BALANCE AT DECEMBER 31, 1999 $ 467 $ 354,046 $ 419,493 $ 774,006
------- ---------- ---------- ----------
The notes on pages 16 to 25 are an integral part of these financial statements.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 15
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NOTE A: ACCOUNTING POLICIES
ORGANIZATION. Martin Marietta Materials, Inc. ("Martin Marietta Materials" or
the "Corporation") is engaged principally in the construction aggregates
business. Aggregates products are used primarily for construction of highways
and other infrastructure projects in the United States and in the domestic
commercial and residential construction industries. In addition, the
Corporation produces magnesia-based chemicals, refractories and dolomitic lime
products used in a wide variety of industrial, environmental and agricultural
applications with a majority of its products used by customers in the
worldwide steel industry.
BASIS OF CONSOLIDATION AND USE OF ESTIMATES. The consolidated financial
statements include the accounts of the Corporation and its wholly owned and
majority-owned subsidiaries. Partially owned affiliates are accounted for at
cost or as equity investments depending on the level of ownership interest or
the Corporation's ability to exercise control over the affiliates' operations.
In particular, the Corporation's 14% investment in Meridian Aggregates Company
("Meridian") is recorded at cost. The Corporation may be required to purchase
some or all of the other investors' interests in Meridian. The other
investors, by the terms of the original investment agreement, have an option,
exercisable at the end of each year beginning December 31, 2000, to require
the Corporation to purchase their interests at a predetermined formula price.
The Corporation also has an option to purchase Meridian at a predetermined
formula price beginning September 30, 2003.
All significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of the Corporation's financial statements in
conformity with generally accepted accounting principles requires management
to make certain estimates and assumptions. Such judgments affect the reported
amounts in the consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
REVENUE RECOGNITION. Substantially all revenues are recognized, net of
discounts, if any, when finished products are shipped to unaffiliated
customers or services have been rendered, with appropriate provision for
uncollectible amounts. Revenues generally represent sales of materials to
customers, excluding freight and delivery charges.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents are net of outstanding
checks that are funded daily as presented for payment. Cash equivalents are
comprised generally of highly liquid instruments with original maturities of
three months or less from the date of purchase. The Corporation's cash and
cash equivalents were invested with its former parent, Lockheed Martin
Corporation, through January 31, 1997. At that time, all funds held by
Lockheed Martin were transferred to the Corporation and invested under its own
cash management arrangements with third party commercial banks.
INVENTORIES VALUATION. Inventories are stated at the lower of cost or market.
Costs are determined principally by the first-in, first-out ("FIFO") method.
PROPERTIES AND DEPRECIATION. Property, plant and equipment are stated at cost.
Depreciation is computed over estimated service lives principally by the
straight-line method. The estimated service life for buildings ranges from 10
to 20 years and from 4 to 20 years for machinery and equipment. Depletion of
mineral deposits is calculated over estimated recoverable quantities
principally by the units-of-production method. Depreciation and depletion
expense was $103,928,000, $86,602,000 and $71,756,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
INTANGIBLE ASSETS. Costs in excess of net assets acquired ("goodwill")
represent the excess purchase price paid for acquired businesses over the
estimated fair value of identifiable assets and liabilities. Goodwill is
amortized ratably over appropriate periods ranging from 10 to 30 years. At
December 31, 1999 and 1998, the amounts for accumulated amortization of costs
in excess of net assets acquired were approximately $36,104,000 and
$21,685,000, respectively. Other intangibles represent amounts assigned
principally to noncompete agreements and are amortized ratably over periods
based on related contractual terms, generally 2 to 20 years. At December 31,
1999 and 1998, the amounts for accumulated amortization of other intangibles
were approximately $22,250,000 and $20,826,000, respectively. Amortization
expense for intangibles was $20,290,000, $12,163,000 and $7,964,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The carrying value of goodwill and other intangibles is reviewed if the facts
and circumstances indicate potential impairment. If this review indicates that
the carrying value of goodwill and
PAGE 16 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
8
other intangibles is not recoverable, as determined based on estimated cash
flows of the business acquired over the remaining amortization period,
goodwill and other intangibles are reduced by the estimated shortfall of
discounted cash flows.
STOCK-BASED COMPENSATION. In 1996, the Corporation adopted the Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("FAS 123"). In accordance with FAS 123, the Corporation has elected to follow
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for certain of its employee
stock-based compensation plans.
ENVIRONMENTAL MATTERS. The Corporation records an accrual for environmental
remediation liabilities in the period in which it is probable that a liability
has been incurred and the appropriate amount can be estimated reasonably. Such
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures for environmental remediation obligations are
generally not discounted to their present value.
Certain normal reclamation and other environmental-related costs are treated
as normal ongoing operating expenses and expensed generally in the period in
which they are incurred.
INCOME TAXES. Deferred income tax assets and liabilities on the consolidated
balance sheet reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
RELATED PARTY TRANSACTIONS. The Corporation entered into certain agreements
with Meridian. These agreements require the Corporation to provide certain
advisory and consulting services at agreed-upon rates. In 1999, the
Corporation provided funds to finance certain Meridian expansion projects at
market rates of interest. Further, the Corporation is negotiating a multi-year
supply agreement whereby Meridian will provide aggregates to certain
operations in 2000 and beyond. The Corporation recorded an investment in
Meridian, including receivables and a convertible note, of $53,511,000 and
$42,267,000 at December 31, 1999 and 1998, respectively, and Meridian-related
revenue of $3,395,000 during 1999.
RESEARCH AND DEVELOPMENT AND SIMILAR COSTS. Research and development and
similar costs are charged to operations as incurred. Pre-operating costs and
start-up costs for new facilities and products are generally charged to
operations as incurred.
SEGMENT INFORMATION. Information concerning business segment data is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 34 through 36.
EARNINGS PER COMMON SHARE. Basic earnings per common share are based on the
weighted-average number of common shares outstanding during the year. Diluted
earnings per common share were computed assuming that the weighted-average
number of common shares was increased by the conversion of fixed awards
(employee stock options and incentive stock awards) and nonvested stock awards
to be issued to employees and non-employee members of the Corporation's Board
of Directors under certain stock-based compensation arrangements. The diluted
per-share computations reflect a change in the number of common shares
outstanding (the "denominator") to include the number of additional shares
that would have been outstanding if the potentially dilutive common shares had
been issued. In each year presented, the income available to common
shareholders (the "numerator") is the same for both basic and dilutive
per-share computations. The following table sets forth a reconciliation of the
denominators for the basic and diluted earnings per share computations for
each of the years ended December 31:
1999 1998 1997
---------- ---------- ----------
BASIC EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares 46,667,600 46,453,900 46,121,800
---------- ---------- ----------
EFFECT OF DILUTIVE SECURITIES:
Employee fixed awards 238,500 234,800 113,300
Employee and Director
nonvested stock 40,900 18,900 2,700
---------- ---------- ----------
DILUTED EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares and
assumed conversions 46,947,000 46,707,600 46,237,800
---------- ---------- ----------
ACCOUNTING CHANGES. In June 1998, the Financial Accounting Standards Board
("FASB") issued the Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities ("FAS 133"),
which was required to be adopted in years beginning after June 15, 1999. The
FASB amended FAS 133 to defer the effective date of adoption until all fiscal
quarters of all fiscal years beginning after June 15, 2000. Statement of
Financial Accounting Standards
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 17
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No. 137, Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, was issued in June
1999. Because of the Corporation's minimal use of derivatives, if any,
management does not anticipate that the adoption of FAS 133 will have a
significant impact on net earnings or the financial position of the
Corporation.
NOTE B: BUSINESS COMBINATIONS
As of December 4, 1998, the Corporation purchased all of the outstanding common
stock of Redland Stone Products Company ("Redland Stone") from an affiliate of
Lafarge SA. The operating results of the acquired business have been included
with those of the Corporation since that date.
The purchase price consisted of approximately $272 million in cash plus normal
balance sheet liabilities, subject to certain post-closing adjustments relating
to working capital, and approximately $8 million estimated for certain other
assumed liabilities and transaction costs. The acquisition has been accounted
for under the purchase method of accounting wherein the Corporation recognized
approximately $166 million in costs in excess of net assets acquired after
recording other purchase adjustments necessary to allocate the purchase price
to the fair value of assets acquired and liabilities assumed. Goodwill is being
amortized over a 30-year period. The preliminary purchase price allocation was
adjusted in 1999 within the applicable period provided by Accounting Principles
Bulletin No. 16, Business Combinations. The post-closing adjustments related to
working capital and other fair-value adjustments were finalized without a
significant impact on the preliminary purchase price allocation.
For comparative purposes, the following unaudited pro forma summary financial
information presents the historical results of operations of the Corporation
and the Redland Stone business for the year ended December 31, 1998. The
financial information reflects pro forma adjustments as if the acquisition had
been consummated as of the beginning of the period presented. The pro forma
financial information is based upon certain estimates and assumptions that
management of the Corporation believes are reasonable in the circumstances.
The unaudited pro forma information presented below is not necessarily
indicative of what results of operations actually would have been if the
acquisition had occurred on the date indicated. Moreover, they are not
necessarily indicative of future results.
PRO FORMA INFORMATION (Unaudited)
year ended December 31
(add 000, except per share) 1998
- --------------------------- -------------
Net sales $ 1,185,278
Net earnings $ 113,113
Earnings per common share:
Basic $ 2.44
Diluted $ 2.42
=============
Information concerning other business combinations completed during 1999 is
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 26.
NOTE C: ACCOUNTS RECEIVABLE
December 31
(add 000) 1999 1998
- --------- --------- ---------
Customer receivables $ 193,380 $ 172,372
Other current receivables 8,881 3,569
--------- ---------
202,261 175,941
Less allowances (4,707) (4,430)
--------- ---------
Total $ 197,554 $ 171,511
========= =========
NOTE D: INVENTORIES
December 31
(add 000) 1999 1998
- --------- --------- ---------
Finished products $ 143,776 $ 127,904
Products in process and
raw materials 9,972 12,342
Supplies and expendable parts 25,862 25,307
--------- ---------
179,610 165,553
Less allowances (6,745) (8,449)
--------- ---------
Total $ 172,865 $ 157,104
========= =========
NOTE E: PROPERTY, PLANT AND EQUIPMENT, NET
December 31
(add 000) 1999 1998
- --------- ---------- ----------
Land and improvements $ 182,670 $ 164,362
Mineral deposits 156,870 150,684
Buildings 69,273 63,205
Machinery and equipment 1,170,592 1,072,258
Construction in progress 73,803 52,003
---------- ----------
1,653,208 1,502,512
Less allowances for depreciation
and depletion (806,215) (724,984)
---------- ----------
Total $ 846,993 $ 777,528
========== ==========
PAGE 18 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
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NOTE F: LONG-TERM DEBT
December 31
(add 000) 1999 1998
- --------- --------- ---------
5.875% Notes, due 2008 $ 199,059 $ 198,980
6.9% Notes, due 2007 124,956 124,952
7% Debentures, due 2025 124,215 124,204
Commercial Paper, interest rates
ranging from 5.50% to 7.14% 180,000 165,000
Acquisition notes, interest rates
ranging from 5.50% to 10.00% 12,395 3,299
Other notes 1,108 1,335
--------- ---------
Total 641,733 617,770
Less current maturities (39,722) (15,657)
--------- ---------
Long-term debt $ 602,011 $ 602,113
--------- ---------
The 5.875% Notes were offered and sold by the Corporation, through a private
placement, in December 1998, at 99.5% of their principal amount of
$200,000,000. The Corporation exchanged the Notes for publicly registered
notes with substantially identical terms. The effective interest rate on these
securities is 6.03%. The Notes are not redeemable prior to their maturity on
December 1, 2008.
During August 1997, the Corporation offered and sold the 6.9% Notes at 99.7%
of their principal amount of $125,000,000. The entire amount of these long-term
fixed rate debt securities was registered under the Corporation's shelf
registration statement on file with the Securities and Exchange Commission.
The effective interest rate on these securities is 6.91%. The Notes are not
redeemable prior to their maturity on August 15, 2007.
The 7% Debentures were sold at 99.3% of their principal amount of $125,000,000
in December 1995. The entire amount of these long-term fixed rate debt
securities was registered under the Corporation's shelf registration statement
on file with the Securities and Exchange Commission. The effective interest
rate is 7.05%,and the Debentures are not redeemable prior to their maturity
date of December 1, 2025.
These Notes and Debentures are carried net of original issue discount, which
is being amortized by the effective interest method over the life of the
issue.
The Corporation entered into revolving credit agreements, syndicated with a
group of domestic and foreign commercial banks, which provide for borrowings
of up to $150,000,000 for general corporate purposes through January 2002 and
$300,000,000 for general corporate purposes through August 2000 (collectively
the "Agreements"). Borrowings under these Agreements are unsecured and bear
interest, at the Corporation's option, at rates based upon: (i) the Eurodollar
rate (as defined on the basis of a LIBOR plus basis points related to a
pricing grid); (ii) a bank base rate (as defined on the basis of a published
prime rate or the Federal Funds Rate plus 1/2 of 1%); or (iii) a competitively
determined rate (as defined on the basis of a bidding process). These
Agreements contain restrictive covenants relating to leverage, requirements
for limitations on encumbrances, and provisions that relate to certain changes
in control. The Corporation is required to pay an annual loan commitment fee
to the bank group.
No borrowings were outstanding under the revolving credit agreements at
December 31, 1999. However,the Agreements support a commercial paper program
of $450,000,000,of which borrowings of $180,000,000 and $165,000,000 were
outstanding at December 31, 1999 and 1998, respectively. Of these amounts,
$150,000,000 at December 31, 1999 and 1998, was classified as long-term debt
on the Corporation's consolidated balance sheet based on management's ability
and intention to maintain this debt outstanding for at least one year. The
remaining $30,000,000 at December 31, 1999, and $15,000,000 at December 31,
1998, was classified as a current liability.
Excluding commercial paper, the Corporation's long-term debt maturities for
the five years following December 31, 1999,are:
(add 000)
- --------
2000 $ 9,722
2001 1,060
2002 893
2003 277
2004 213
Thereafter 449,568
---------
Total $ 461,733
---------
Total interest paid was $37,108,000, $23,677,000 and $14,487,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.
Amounts reflected in acquisitions, net, in the consolidated statement of cash
flows include assumed or incurred indebtedness of $9,208,000, $3,373,000 and
$1,364,000 for the years ended December 31, 1999, 1998 and 1997,respectively.
In addition, the amount reflected in acquisitions, net, for 1999, 1998 and
1997 excludes the effect of the issuance of approximately 311,100,280,100 and
123,500 shares, respectively, of the Corporation's common stock.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 19
11
NOTE G: FINANCIAL INSTRUMENTS
In addition to its long-term debt arrangements, the Corporation's financial
instruments also include temporary cash investments, customer accounts and
notes receivable, and commercial paper borrowings. Temporary investments are
placed with creditworthy financial institutions, primarily in Euro-time
deposits. The Corporation's cash equivalents principally have maturities of
less than three months. Due to the short maturity of these investments, they
are carried on the consolidated balance sheet at cost, which approximates
market value. Customer receivables are due from a large number of customers
who are dispersed across wide geographic and economic regions. At December 31,
1999 and 1998, the Corporation had no significant concentrations of credit
risk.
The estimated fair values of customer receivables and commercial paper
borrowings approximate their carrying amounts. The estimated fair values of
the Corporation's long-term debt instruments (excluding commercial paper
borrowings) at December 31, 1999,was approximately $420,768,000 compared with
a carrying amount of $461,733,000 on the consolidated balance sheet. The fair
values of long-term debt were estimated based on quoted market prices for
those instruments publicly traded. For privately placed debt, the fair values
were estimated based on the quoted market prices for similar issues, or on
current rates offered to the Corporation for debt of the same remaining
maturities.
NOTE H: INCOME TAXES
The components of the Corporation's tax expense (benefit) on income are as
follow:
years ended December 31
(add 000) 1999 1998 1997
- --------- -------- -------- -------
Federal income taxes:
Current $ 61,349 $ 52,663 $40,916
Deferred (4,081) (4,486) 2,566
-------- -------- -------
Total federal income taxes 57,268 48,177 43,482
-------- -------- -------
State income taxes:
Current 12,128 11,360 9,032
Deferred (864) (1,008) 169
-------- -------- -------
Total state income taxes 11,264 10,352 9,201
-------- -------- -------
Total provision $ 68,532 $ 58,529 $52,683
-------- -------- -------
The Corporation's effective income tax rate varied from the statutory United
States' income tax rate because of the following permanent tax differences:
years ended December 31, 1999 1998 1997
---- ---- ----
Statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction)
resulting from:
Effect of statutory depletion (6.4) (6.6) (5.8)
State income taxes 3.8 3.9 4.0
Other items 2.9 1.3 1.6
---- ---- ----
Effective tax rate 35.3% 33.6% 34.8%
---- ---- ----
The principal components of the Corporation's deferred tax assets and
liabilities at December 31 are as follows:
Deferred Assets (Liabilities)
(add 000) 1999 1998
- --------- -------- ---------
Property, plant and equipment $ (85,609) $ (77,954)
Employee benefits 21,395 15,159
Financial reserves 7,549 7,436
Other items, net (3,293) (1,286)
-------- ---------
Total $ (59,958) $ (56,645)
-------- ---------
Deferred income taxes on the consolidated balance sheet reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. The Corporation does not believe a valuation allowance is
required at December 31, 1999 or 1998.
The Corporation's total income tax payments were $71,644,000, $59,466,000 and
$54,181,000, respectively, during the years ended December 31, 1999, 1998 and
1997.
NOTE I: RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
DEFINED BENEFIT PLANS. The Corporation sponsors a number of noncontributory
defined benefit retirement plans, covering substantially all employees. The
assets of the Corporation's retirement plans are held in the Corporation's
Master Retirement Trust and are invested principally in commingled funds. The
underlying investments are invested in listed stocks and bonds and cash
equivalents. Defined benefit plans for salaried employees provide benefits
based on each employee's years of service and average compensation for a
specified period of time before retirement. Defined retirement plans for hourly
employees generally provide benefits of stated amounts for specified periods of
service.
PAGE 20 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
12
The Corporation's defined benefit pension plans comply with two principal
standards: the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), which, in conjunction with the Internal Revenue Code, determines
legal minimum and maximum deductible funding requirements, and Statement of
Financial Accounting Standards No. 87, Employers Accounting for Pensions ("FAS
87") and Statement of Financial Accounting Standards No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits, which establish
rules for financial accounting and reporting. When any funded plan exceeds the
full-funding limits of ERISA, no contribution is made to that plan. FAS 87
specifies that certain key actuarial assumptions be adjusted annually to reflect
current, rather than long-term, trends in the economy.
It is the Corporation's funding policy to stabilize annual contributions with
assumptions selected on the basis of expected long-term trends. The net
periodic pension benefit cost of defined benefit plans included the following
components:
years ended December 31
(add 000) 1999 1998 1997
- --------- -------- -------- -------
Components of net periodic
benefit cost:
Service cost $ 7,578 $ 5,965 $ 5,039
Interest cost 10,071 9,231 8,245
Expected return on assets (12,946) (11,454) (9,598)
Amortization of:
Prior service cost 531 512 537
Actuarial gain (485) (464) (648)
Transition asset (357) (331) (360)
-------- -------- -------
Net periodic benefit cost $ 4,392 $ 3,459 $ 3,215
-------- -------- -------
Weighted-average assumptions used as of December 31 are as follows:
1999 1998 1997
---- ---- ----
Discount rates 8.00% 6.75% 7.25%
Rate of increase in future
compensation levels 5.00% 5.00% 5.50%
Expected long-term rate
of return on assets 9.00% 9.00% 9.00%
The following table sets forth the defined benefit plans' change in benefit
obligations, change in plan assets, funded status and amounts recognized in the
respective consolidated balance sheet as of:
years ended December 31
(add 000) 1999 1998
- --------- --------- ---------
Change in benefit obligations:
Net obligation at beginning of year $ 144,109 $ 125,973
Service cost 7,578 5,965
Interest cost 10,071 9,231
Actuarial (gain)/loss (26,718) 4,473
Acquisitions/divestitures 1,216 4,600
Gross benefits paid (5,587) (6,133)
--------- ---------
Net benefit obligation at
end of year $ 130,669 $ 144,109
--------- ---------
years ended December 31
(add 000) 1999 1998
- --------- --------- ---------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 147,187 $ 130,345
Actual return on plan assets, net 27,291 20,180
Acquisitions -- 2,600
Employer contributions 52 195
Gross benefits paid (5,587) (6,133)
--------- ---------
Fair value of plan assets
at end of year $ 168,943 $ 147,187
--------- ---------
December 31
(add 000) 1999 1998
- --------- --------- ---------
Funded status of the plan
at end of year $ 38,274 $ 3,078
Unrecognized net actuarial gain (63,003) (21,998)
Unrecognized prior service cost 4,130 4,661
Unrecognized net transition asset (748) (1,105)
--------- ---------
Accrued benefit cost $ (21,347) $ (15,364)
--------- ---------
December 31
(add 000) 1999 1998
- --------- --------- ---------
Amounts recognized in the
consolidated balance sheet
consist of:
Prepaid benefit cost $ 118 $ 101
Accrued benefit cost (21,465) (15,465)
--------- ---------
Net amount recognized
at end of year $ (21,347) $ (15,364)
--------- ---------
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $3,900,000, $2,478,000 and $0, respectively, as of December
31, 1999,and $3,124,000, $1,375,000 and $0, respectively,as of December 31,
1998.
POSTRETIREMENT BENEFITS. The Corporation provides other
postretirement benefits including medical benefits for retirees
and their spouses (and Medicare Part B reimbursement for
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 21
13
certain retirees) and retiree life insurance. The net periodic postretirement
benefit cost of postretirement plans included the following components:
years ended December 31
(add 000) 1999 1998 1997
- --------- -------- -------- -------
Components of net periodic
benefit cost:
Service cost $ 2,738 $ 1,732 $ 1,360
Interest cost 3,782 4,034 3,539
Expected return on assets (35) (121) (246)
Amortization of:
Prior service cost (35) 25 36
Actuarial gain (419) (85) (372)
-------- -------- -------
Net periodic benefit cost $ 6,031 $ 5,585 $ 4,317
-------- -------- -------
The postretirement health care plans' change in benefit obligation, change in
plan assets, funded status and amounts recognized in the Corporation's
consolidated balance sheet are as follows:
years ended December 31
(add 000) 1999 1998
- --------- --------- ---------
Change in benefit obligations:
Net benefit obligation at
beginning of year $ 62,381 $ 52,158
Service cost 2,738 1,732
Interest cost 3,782 4,034
Participants' contribution 31 164
Plan amendments (6,410) --
Actuarial (gain)/loss (13,208) 6,713
Gross benefits paid (2,879) (2,420)
--------- ---------
Net benefit obligation
at end of year $ 46,435 $ 62,381
--------- ---------
years ended December 31
(add 000) 1999 1998
- --------- --------- ---------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 578 $ 2,926
Actual return on plan assets, net 15 (92)
Participants' contributions 31 164
Gross benefits paid (624) (2,420)
--------- ---------
Fair value of plan assets
at end of year $ 0 $ 578
--------- ---------
December 31
(add 000) 1999 1998
- --------- --------- ---------
Funded status of the plan
at end of year $ (46,435) $ (61,803)
Unrecognized net actuarial
(gain)/loss (10,469) 2,270
Unrecognized prior service cost (5,918) 456
--------- ---------
Accrued benefit cost $ (62,822) $ (59,077)
--------- ---------
December 31
(add 000) 1999 1998
- --------- --------- ---------
Amounts recognized in the
consolidated balance sheet
consist of:
Accrued benefit cost $ (62,822) $ (59,077)
--------- ---------
Net amount recognized
at end of year $ (62,822) $ (59,077)
--------- ---------
Weighted-average assumptions used as of December 31 are as follows:
1999 1998 1997
---- ---- ----
Discount rate 8.00% 6.75% 7.25%
Expected long-term rate
of return on assets 9.00% 9.00% 9.00%
The assumed trend rate for health care inflation used in measuring the net
periodic benefit cost and benefit obligation is 8% for 1999, declining to 4.5%
in 2004 and remaining at that level thereafter. The assumed health care trend
rate has a significant impact on the amounts reported. A one-percentage point
change in the assumed health care trend rate would have the following effects
at December 31, 1999:
One Percentage Point
(add 000) Increase (Decrease)
- --------- -------- ----------
Total service and interest cost
components $ 506 $ (416)
Postretirement benefit obligation $ 4,811 $ (4,041)
In November 1999, the Corporation amended its postretirement medical benefits
to, among other things, realign the maximum annual medical benefits available
to retirees, modify the retiree premium schedules and limit future retiree
participation.
DEFINED CONTRIBUTION PLANS. The Corporation maintains two defined contribution
plans, which cover substantially all employees. These plans, intended to be
qualified under Section 401(a) of the Internal Revenue Code, are retirement
savings and investment plans for the Corporation's salaried and hourly
employees. The employees of Redland Stone participate in a separate defined
contribution plan established prior to the Corporation's acquisition. The
Corporation will continue to support the existing plan in the near term. Under
certain provisions of these 401(k) plans, the Corporation, at established
rates, matches employees' eligible contributions. The Corporation's matching
obligations were $3,144,000 in 1999, $2,381,000 in 1998 and $1,418,000 in
1997.
PAGE 22 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
14
Postemployment Benefits. The Corporation provides certain benefits to former or
inactive employees after employment but before retirement, such as workers'
compensation and disability benefits. The Corporation has accrued
postemployment benefits of $1,734,000 at each of December 31, 1999 and 1998.
NOTE J: STOCK OPTIONS AND AWARD PLANS
In 1994, the shareholders of the Corporation approved an Amended Omnibus
Securities Award Plan (an "Amended Omnibus Plan") that provided authorization
for the Corporation to repurchase 2,000,000 shares of the Corporation's Common
Stock for issuance under the Amended Omnibus Plan. On May 8, 1998, the
repurchase authorization was decreased to approximately 1,007,000 shares, which
represented the aggregate number of shares that were subject to grants made
through May 8, 1998. The shareholders approved, on May 8, 1998, the Martin
Marietta Materials, Inc. Stock-Based Award Plan (the "Plan"), as amended from
time to time (collectively the "Plans", along with the "Amended Omnibus
Plan"). In connection with the Plan, the Corporation was authorized to
repurchase up to 5,000,000 shares of the Corporation's Common Stock for
issuance under the Plan.
Under the Plans, the Corporation grants options to employees to purchase its
common stock at a price equal to the market value at the date of grant. These
options become exercisable in three equal annual installments beginning one
year after date of grant and expire ten years from such date. The Plans allow
the Corporation to provide for financing of purchases, subject to certain
conditions, by interest-bearing notes payable to the Corporation. However, the
Corporation has provided no such financing.
Additionally, an incentive stock plan has been adopted under the Plans whereby
certain participants elect to use up to 50% of their annual incentive
compensation to acquire shares of the Corporation's common stock at a 20%
discount to the market value on the date of the incentive compensation award.
Certain executive officers are required to participate in the incentive stock
plan at certain minimum levels. Stock unit awards, representing 32,648 shares
for 1999, 22,905 shares for 1998 and 28,029 shares for 1997 of the
Corporation's common stock, were awarded under the incentive stock plan. Such
awards are granted in the subsequent year. Under the awards outstanding,
participants earn the right to acquire their respective shares at the
discounted value generally at the end of a three-year period of additional
employment from the date of award. All rights of ownership of the common stock
convey to the participants upon the issuance of their respective shares at the
end of the ownership-vesting period.
The Plan provides that each non-employee director receives 1,500 non-qualified
stock options annually. The Corporation grants the non-employee directors
options to purchase its common stock at a price equal to the market value at
the date of grant. These options become exercisable in one year from the grant
date assuming completion of the service year by the non-employee director and
expire ten years from such date.
A summary of the Corporation's stock-based plans' activity and related
information follows:
Number of Shares
------------------------------
Available Awards Weighted-Avg.
for Grant Outstanding Exercise Price
--------- ----------- --------------
December 31, 1996 1,317,141 682,859 $ 21.96
Granted (315,327) 315,327 $ 34.10
Exercised -- (10,030) $ 21.33
Terminated 2,334 (2,334) $ 25.57
--------- --------- --------
December 31, 1997 1,004,148 985,822 $ 25.84
Additions 5,000,000 -- --
Authorization
decrease (993,000) -- --
Granted (360,779) 360,779 $ 46.31
Exercised -- (165,612) $ 21.09
Terminated 7,166 (7,166) $ 30.17
--------- --------- --------
December 31, 1998 4,657,535 1,173,823 $ 32.78
GRANTED (433,155) 433,155 $ 48.20
EXERCISED -- (124,938) $ 22.53
TERMINATED 7,912 (7,912) $ 37.56
--------- --------- --------
DECEMBER 31, 1999 4,232,292 1,474,128 $ 38.15
========= ========= ========
Approximately 712,000,519,000 and 411,000 outstanding awards were exercisable
at December 31, 1999, 1998 and 1997, respectively. Exercise prices for awards
outstanding as of December 31, 1999, ranged from $20.00 to $63.44. The
weighted-average remaining contractual life of those awards is 7.7 years. The
weighted-average exercise price of outstanding exercisable awards at December
31, 1999, is $29.85.
In 1996,the Corporation adopted the Shareholder Value Achievement Plan to award
shares of the Corporation's common stock to key senior employees based on
certain common stock performance criteria over a long-term period. Under the
terms of this plan, 250,000 shares of common stock are reserved for grant.
Stock units potentially representing 16,791 and 24,324 shares of the
Corporation's com-
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 23
15
mon stock were granted under this plan in 1999 and 1998, respectively. The
Corporation issued 10,872 net shares of common stock to key senior employees in
January 2000 representing stock unit awards granted for 1997.
Also, the Corporation adopted the Amended and Restated Common Stock Purchase
Plan for Directors, which provides non-employee directors the election to
receive all or a portion of their total fees in the form of the Corporation's
common stock. Under the terms of this plan, 50,000 shares of common stock are
reserved for issuance. Currently, directors are required to defer at least 30%
of the retainer portion of their fees in the form of common stock. Directors
elected to defer portions of their fees representing 3,551 and 6,328 shares of
the Corporation's common stock under this plan during 1999 and
1998, respectively.
Pro forma information regarding net income and earnings per share is required
by FAS 123, which also requires that the information be determined as if the
Corporation had accounted for its employee stock options and other stock-based
awards and grants subsequent to December 31, 1994, under the fair value method
prescribed by FAS 123. The fair value for these stock-based plans was estimated
as of the date of grant using a Black-Scholes valuation model with the
following weighted-average assumptions as of December 31:
1999 1998 1997
-------- ------- --------
Risk-free interest rate 6.20% 5.40% 6.40%
Dividend yield 1.40% 1.80% 1.70%
Volatility factor 27.70% 17.90% 20.40%
Expected life 7 years 7 years 7 years
The Black-Scholes valuation model was developed for use in estimating the fair
value of traded awards which have no vesting restrictions and are fully
transferable. In addition, valuation models require the input of highly
subjective assumptions, including the expected stock price volatility factor.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based plans.
For purposes of pro forma disclosure, the estimated fair value of the
stock-based plans is amortized hypothetically over the vesting period of the
related grant or award. The Corporation's pro forma information for the years
ended December 31 is as follows:
(add 000, except per share) 1999 1998 1997
- -------------------------------- -----------------------------------
Basic earnings per common share:
Net earnings $122,791 $113,658 $97,557
Earnings per share $ 2.63 $ 2.45 $ 2.12
Diluted earnings per
common share:
Net earnings $122,791 $113,343 $97,072
Earnings per share $ 2.62 $ 2.43 $ 2.10
NOTE K: LEASES
Total rent expense for all operating leases was $26,761,000, $23,460,000 and
$19,700,000 for the years ended December 31, 1999,1998 and 1997, respectively.
The Corporation's operating leases generally contain renewal and/or purchase
options with varying terms. Total mineral royalties for all leased properties
were $23,482,000, $19,988,000 and $17,750,000 for the years ended December 31,
1999,1998 and 1997, respectively. Future minimum rental and royalty commitments
for all non-cancelable operating leases and royalty agreements as of December
31, 1999, are as follows:
(add 000)
- -----------------------
2000 $ 8,915
2001 6,767
2002 5,252
2003 4,113
2004 3,353
Thereafter 41,575
------------
Total $ 69,975
------------
NOTE L: SHAREHOLDERS' EQUITY
The authorized capital structure of Martin Marietta Materials, Inc., includes
10,000,000 shares of preferred stock with par value of $0.01 a share, none of
which is issued currently; however, 100,000 shares of Class A Preferred Stock
have been reserved in connection with the Corporation's Shareholders' Rights
Plan. In addition, the capital structure includes 100,000,000 shares of common
stock, with a par value of $0.01 a share. As of December 31, 1999 and
1998, there were approximately 46,715,000 and 46,621,000 shares, respectively,
of the Corporation's common stock issued and outstanding. Approximately
8,307,000 common shares have been reserved for issuance under benefit and
stock-based incentive plans.
PAGE 24 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
16
In 1999, the Corporation repurchased 322,300 shares of its common stock at
public market prices at various purchase dates. The repurchase of shares was
authorized under the Corporation's stock-based award plans' authorizations (see
Note J). There were no shares repurchased in 1998 or 1997. Further, during
1999, the Corporation issued 311,100 restricted shares of common stock as part
of an acquisition (see Management's Discussion and Analysis of Financial
Condition and Results of Operations, page 37).
Under the North Carolina Business Corporation Act, shares of common stock
reacquired by a corporation constitute unissued shares. For financial reporting
purposes, reacquired shares are recorded as reductions to issued common stock
and to additional paid-in capital.
NOTE M: COMMITMENTS AND CONTINGENCIES
The Corporation is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of those actions at this time, in the opinion of
management and counsel, it is unlikely that the outcome of such litigation and
other proceedings, including those pertaining to environmental matters (see
Note A and Management's Discussion and Analysis of Financial Condition and
Results of Operations, page 39), will have a material adverse effect on the
results of the Corporation's operations or on its financial position.
ENVIRONMENTAL MATTERS. The Corporation's operations are subject to and affected
by federal, state and local laws and regulations relating to the environment,
health and safety and other regulatory matters. Certain of the Corporation's
operations may, from time to time, involve the use of substances that are
classified as toxic or hazardous within the meaning of these laws and
regulations. Environmental operating permits are, or may be, required for
certain of the Corporation's operations and such permits are subject to
modification, renewal and revocation. The Corporation regularly monitors and
reviews its operations, procedures and policies for compliance with these laws
and regulations. Despite these compliance efforts, risk of environmental
liability is inherent in the operation of the Corporation's businesses, as it
is with other companies engaged in similar businesses, and there can be no
assurance that environmental liabilities will not have a material adverse
effect on the Corporation in the future.
The Corporation currently has no material provisions for estimated costs in
connection with expected remediation costs or other environmental-related
expenditures because it is impossible to quantify the impact of all actions
regarding environmental matters, particularly the extent and cost of future
remediation and other compliance efforts. However, in the opinion of
management, it is unlikely that any additional liability the Corporation may
incur for known environmental issues or compliance with present
environmental-protection laws would have a material adverse effect on the
Corporation's consolidated financial position or on its results of operations
(see Note A and Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 39).
LETTERS OF CREDIT. The Corporation has entered into a standby letter of credit
agreement relating to workers' compensation self-insurance requirements. At
December 31, 1999, the Corporation had a contingent liability on this
outstanding letter of credit of approximately $6,700,000.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 25
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Martin Marietta Materials, Inc. ("Martin Marietta Materials" or the
"Corporation"), is the nation's second largest producer of construction
aggregates and a leading producer of magnesia-based chemicals, refractories and
dolomitic lime products, used in a wide variety of industries. The discussion
and analysis that follows reflects management's assessment of the financial
condition and results of operations of Martin Marietta Materials and should be
read in conjunction with the audited consolidated financial statements on pages
12 through 25.
BUSINESS COMBINATIONS
In 1999, the Corporation completed ten transactions, excluding its new
technology investment in Industrial Microwave Systems, for a combined $77.1
million in cash, stock and certain other consideration, that strategically
expanded its aggregates, asphalt and ready mixed concrete businesses in Texas,
Tennessee, Louisiana, Arkansas, West Virginia, Mississippi and Alabama. Of the
ten transactions, two are particularly noteworthy. In Texas, the Corporation
began serving the Dallas/Fort Worth area through the purchase of Marock, Inc.
The Marock acquisition included a limestone quarry and a sand and gravel
operation with annual production capacity of 4.5 million tons. The purchase
also included three asphalt plants with annual capacity of 700,000 tons. The
Corporation also acquired L.J. Earnest, Inc., with operations in Shreveport,
Louisiana, and Texarkana, Arkansas. L.J. Earnest operates a major aggregates
distribution yard, to which the Corporation was supplying aggregates via rail
from Arkansas; three asphalt plants with annual capacity in excess of 800,000
tons; and two ready mixed concrete plants. L.J. Earnest is also a major
road-paving contractor in Louisiana and Arkansas. Vertical integration -- that
is, owning and operating facilities that use materials from the company's
quarries -- is more common in the industry as the Corporation continues its
expansion west of the Mississippi River. While management has no current plan
to become a significant participant in the road-paving industry, the
Corporation will continue to look selectively at acquisitions, like L.J.
Earnest, that are complementary to the aggregates business.
The ten acquisitions in 1999 were accounted for under the purchase method of
accounting, and the operating results of the businesses acquired were included
with those of the Corporation from the acquisition dates forward. The Liquidity
and Cash Flow discussion, which follows, outlines the impact of these
acquisitions on financing and investing activities. During 1999,the Corporation
finalized the purchase price allocation related to its acquisition of Redland
Stone Products Company ("Redland Stone"). The Redland Stone acquisition,
completed on December 4, 1998, for $272 million in cash plus normal balance
sheet liabilities, subject to certain post-closing adjustments in working
capital, and $8 million estimated for certain other assumed liabilities and
transaction costs, has been included in operating results since the acquisition
date. The post-closing adjustments related to working capital and other
fair-value adjustments were finalized without a significant impact on the
preliminary purchase price allocation.
Costs in excess of net assets acquired ("goodwill") represent the excess of
the purchase price paid for acquired businesses over the estimated fair value
of identifiable assets and liabilities. The carrying value of goodwill is
reviewed if the facts and circumstances indicate potential impairment. If this
review indicates that the carrying value of goodwill will not be recoverable,
as determined based on estimated discounted cash flows of the business acquired
over the remaining amortization period, goodwill is reduced by the estimated
shortfall of cash flows. Goodwill is as follows at December 31:
Costs in Excess of % of Total % of Shareholders'
Net Assets Acquired Assets Equity
------------------- ---------- ------------------
(in millions)
1999 $375.3 21.5% 48.5%
1998 $348.0 21.9% 52.1%
RESULTS OF OPERATIONS
The Corporation's Aggregates division's business is characterized by a high
level of dependence on construction-sector spending; and the Magnesia
Specialties product lines, particularly refractories and dolomitic lime
products, are used principally within the steel industry. Therefore, the
Corporation's operating results are highly dependent upon activity within the
construction and steel-related marketplaces, both of which are subject to
interest rate fluctuations and economic cycles within the public and private
business sectors. Factors such as sea-
PAGE 26 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
18
sonal and other weather-related conditions also affect the Corporation's
business production schedules and levels of profitability. Accordingly, the
financial results for a particular year, or year-to-year comparisons of
reported results, may not be indicative of future operating results. Further,
the Corporation's sales and earnings are predominantly derived from its
Aggregates division. The following comparative analysis and discussion should
be read in that context.
The Corporation's 1999 net earnings of $125.8 million, or $2.68 per diluted
share, represent an increase of 9% over 1998 net earnings of $115.6 million, or
$2.48 per diluted share. The 1998 net earnings were 17% higher than 1997 net
earnings of $98.5 million, or $2.13 per diluted share. The Corporation's
consolidated net sales of $1.259 billion in 1999 represent an increase of
$201.1 million, or 19%,over 1998 net sales of $1.058 billion. The 1997
consolidated net sales were $900.9 million. Consolidated earnings from
operations were $215.3 million in 1999 and $196.6 million in 1998, reflecting
an increase of $18.7 million, or 10%, in 1999 and $33.8 million, or 21%,in
1998, both over the prior year. The Corporation's 1997 operating earnings were
$162.8 million.
In 1999, the Corporation's results reflected the impact of weather-related
events, changing agricultural and commercial construction demand, positive
performance from the recently acquired Redland Stone and nonrecurring other
income. Hurricane Floyd, and two other hurricanes that occurred in the third
and fourth quarters, most significantly affected the Corporation's operations
in its largest production state, North Carolina. Historic levels of flooding in
North Carolina left seven quarries temporarily inoperable after the hurricanes.
However, by the end of the year, all quarries had resumed normal operations.
During this period, Hurricane Floyd continued to impact the level of sales in
North Carolina, as well as increase production and transportation costs.
Certain storm-related property damage and business interruption costs may be
recovered under the Corporation's insurance program. Certain of these amounts
were recorded as receivables at year end. Further, five weeks of unusually wet
weather in the Midwest and Southeast during the second quarter of 1999 also
contributed to relatively flat year-over-year volume at heritage operations and
rising production costs.
The agricultural economy in the Midwest began to decline during the year and
significantly affected performance during the third quarter, as farm commodity
prices reached record low levels. Sales of agricultural-use lime and base road
stone declined in Iowa, the Corporation's fourth largest production state.
However, United States' federal government agricultural subsidies late in the
year partially offset the decline in these product areas. Weaker-than-expected
demand in commercial construction in the central region of the United States
had further impact on the Corporation's performance during 1999.
Acquisitions, particularly Redland Stone, somewhat mitigated the impact of
weather-related events and changing agricultural market and commercial
construction demand. The Texas Department of Transportation was one of the
country's leaders in utilizing federal-aid highway funds under the
Transportation Equity Act for the 21st Century ("TEA-21"),with a backlog of
engineered and approved projects awaiting funding. Favorable market conditions
were experienced for all product lines as dry weather conditions in 1999
provided Redland Stone with the opportunity to work through a backlog of
projects created from significant flooding in late 1998.
The Corporation's operating performance was negatively affected by declining
sales and earnings in its Magnesia Specialties division. The division's sales
and earnings continued to reflect the weak economic performance of the steel
industry. Operating results were further reduced as management slowed
production rates to better match production to declining sales volume.
The Corporation's operating margin of 17.1% in 1999 declined from 18.6% in
1998, primarily as a result of hurricane- and other weather-related costs and
lower volumes at heritage aggregates operations (which exclude acquisitions
that have not been included in prior-year operations for a full year). Lower
margin asphalt, ready mixed and paving operations associated with certain
acquisitions, along with Magnesia Specialties' declining results, also
contributed to the operating margin reduction.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 27
19
Other income and expenses, net, for the year ended December 31, 1999, was $18.4
million in income, compared to income of $1.3 million and $5.3 million in 1998
and 1997, respectively. 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 accounts receivable, income from nonoperating services, costs
associated with the commercialization of certain new technologies, and net
equity earnings from nonconsolidated investments. In 1999, other income and
expenses, net, includes nonrecurring settlements from antitrust claims and a
higher-than-normal level of planned property sales, both principally relating
to the Aggregates division. Further, beginning in the third quarter of
1999, income from certain nonoperating services was recorded as operating
income, as the activities associated with these services became a recurring
feature of business operations. The prospective classification between
operating and nonoperating income did not materially affect operating earnings.
[GRAPH]
1999 Aggregates Division Markets
48% Infrastructure
17% Residential
28% Commercial
7% Chemical, Railroad Ballast & Other
Interest expense for the year ended December 31, 1999,was $39.4 million. This
represents an increase of $15.7 million, or 66%,in 1999 over 1998. Interest
expense was $23.8 million in 1998,an increase of $6.9 million, or 41%, over
1997 interest expense of $16.9 million. The increased interest expense in 1999
results primarily from the full-year impact of borrowings to finance the
acquisition of Redland Stone. The interest expense increase from 1998,as
compared to 1997, resulted primarily from additional borrowings to finance the
acquisition of Redland Stone, coupled with the full-year impact of borrowings
to finance the acquisition of American Aggregates Corporation ("American
Aggregates"), which was consummated in May 1997.
The Corporation's effective income tax rate for 1999 was 35.3%,compared with
33.6% in 1998 and 34.8% in 1997. The variance in the effective income tax rates
for these years, when compared to the federal corporate tax rate of 35%,is due
to the effect of several factors. In this regard, the Corporation's effective
tax rates for these years reflect the impact of differences in financial and
tax accounting arising from the net permanent benefit associated with the
depletion allowances for mineral reserves, nondeductible amortization of
certain good-will balances, foreign operating earnings, and earnings from
nonconsolidated investments. As expected, the 1999 effective tax rate increased
as a result of the Redland Stone acquisition, principally from the amortization
of nondeductible goodwill.
The Corporation's debt-to-capitalization ratio decreased from 48% at December
31, 1998,to 45% at December 31, 1999, with total debt, including commercial
paper obligations, increasing from $617.8 million to $641.7 million, and
shareholders' equity increasing from $667.7 million to $774.0 million. During
1999,the Corporation paid common stock dividends of $24.3 million, or $0.52 per
common share. Additional information regarding the Corporation's debt and
capital structure is contained in Note F to the audited financial statements on
page 19 and under "Liquidity and Cash Flows" and "Capital Structure and
Resources" on pages 36 through 39.
BUSINESS ENVIRONMENT
The Corporation's principal lines of business include Martin Marietta
Aggregates, which primarily serves commercial customers in the construction
aggregates-related markets, and Martin Marietta Magnesia Specialties, which
manufactures and markets magnesia-based products and dolomitic lime,
principally for use in the steel industry. These businesses are strongly
affected by activity within the construction and steel-related marketplaces,
respectively, both of which represent industries that are cyclical in nature.
The Aggregates division markets its products primarily to the construction
industry, with approximately half of its aggregates
PAGE 28 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
20
shipments made to contractors in connection with highway and other public
infrastructure projects and the balance of its shipments made primarily to
contractors in connection with commercial and residential construction
projects. Accordingly, the Corporation's profitability is sensitive to
national, as well as regional and local, economic conditions, and particularly
to cyclical swings in construction spending. The cyclical swings in
construction spending are affected by fluctuations in interest rates, changes
in the levels of infrastructure funding by the public sector and demographic
and population shifts. Further, the Corporation's asphalt, ready mixed and road
paving operations generally follow trends in the construction industry. Due to
the high level of fixed costs associated with aggregates production, the
Corporation's operating leverage can be substantial.
[GRAPH]
(1) Aggregates Division Capacity
(in millions of tons)
1995 117.3
1996 120.0
1997 165.8
1998 222.6
1999 233.7
Note: 1999 and 1998 include 25 million tons from the Meridian investment.
(2) United States Aggregates Consumption
(in millions of tons)
Crushed Stone Sand & Gravel Total
------------- ------------- -----
1995 1,389 1,003 2,392
1996 1,437 1,008 2,445
1997 1,565 1,046 2,611
1998 1,664 1,190 2,854
1999 (est.) 1,700 1,211 2,911
While construction spending in the public and private market sectors is
affected by changes in economic cycles, there has been a tendency for the level
of spending for infrastructure projects in the public-sector portion of this
market to be more stable than spending for projects in the private sector.
Governmental appropriations and expenditures are less interest-rate sensitive
than private-sector spending, and generally improved levels of funding have
enabled highway and other infrastructure projects to register improvement over
the past few years. The Corporation believes publicworks projects consumed more
than 50% of the total annual aggregates consumption in the United States during
1999. This has consistently been the trend in construction spending for each
year since 1990. Additionally, since public sector-related shipments account
for almost 50% of the Corporation's 1999 aggregates shipments, the Aggregates
division also enjoys the benefit of the high level of public-works construction
projects. Accordingly, the Corporation's management believes the Corporation's
exposure to fluctuations in commercial and residential, or private sector,
construction spending is lessened somewhat by the division's broad mix of
public sector-related shipments.
Public-sector construction projects are funded through a combination of
federal, state, and local sources, with TEA-21 providing the principal source
of federal funding. Congress passed TEA-21 legislation on June 9, 1998. TEA-21
provides federal transportation funding authorization of $218 billion ($168
billion for highway construction and $50 billion for other programs) over a
six-year period ending in 2003. TEA-21 increases funding by approximately 40%
over the prior federal funding level and increases funding for highway
construction alone by an average of 44%.
In a change from previous legislation, TEA-21 provides a minimum funding
guarantee firewall for the Highway Account of the Highway Trust Fund and
minimum percentage of funding guarantees for each state. TEA-21 requires that
100% of the federal gasoline tax revenues collected be directed into the
Highway Trust Fund as a minimum funding guarantee. However, Congress must
annually appropriate highway funding levels and could choose to fund at a level
below the minimum funding guarantee. Further, TEA-21 includes a revised highway
funding distribution formula that guarantees that each state will receive a
minimum percentage of highway funding, equal to 90.5% of the state's share of
total gasoline tax contributions. Many states in the South are expected to
experience an increase in funding in excess of the 44%
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 29
21
national average as a result of the revised highway funding distribution
formula. Highway construction spending is expected to increase further as state
departments of transportation match, as required, the federal funds received
under TEA-21.
The federal transportation appropriation bill for fiscal 2000 fully funded the
guaranteed highway funding level authorized under TEA-21 of $26.7 billion.
Further, the fiscal 2000 transportation appropriations bill includes an
additional $1.5 billion for guaranteed highway funding. The additional $1.5
billion of guaranteed funding results from the adjustment of TEA-21 Federal-Aid
Highways authorizations as gasoline tax receipt projections were amended to
reflect actual receipts.
However, to balance the federal budget, federal funding for fiscal 2000
appropriations is subject to a 0.38% across-the-board spending reduction
provision for all federal agencies. The spending reduction provides the Clinton
Administration with the flexibility to determine which programs within each
federal agency will be reduced but would prevent any program from being reduced
by more than 15%. TEA-21 transportation appropriations will be reduced by
$105.2 million for fiscal 2000. Further, the 2001 Transportation Budget
released by the Clinton Administration proposes to reallocate a portion of the
additional $3.0 billion of guaranteed highway funding between TEA-21 and
non-TEA-21 transportation programs. These and other potential proposals may
impact the additional funding available for the Highway Fund. There is no
assurance that Congress will continue to follow the TEA-21 legislated minimum
funding guarantee firewall. Management currently believes that reductions in
TEA-21 funding, if any, will not have a significant impact on the Corporation.
The Corporation's six largest production states are expected to experience an
approximately 55% increase in six-year weighted average annual public-works
construction funding under TEA-21 (see graph) as compared to the prior bill. As
expected, TEA-21 did not significantly impact operations in 1999. However,
management expects that the ultimate level of spending for publicworks
construction projects will continue to increase in 2000 as a result of TEA-21.
In the Corporation's survey of transportation departments across its production
states, management reaffirmed its TEA-21 expectations. Those expectations
include that most states are utilizing federal TEA-21 funding obligations, have
the ability to raise the needed matching funds and are experiencing an increase
in highway projects. However, the highway projects are more complex in nature
and require more extensive feasibility, engineering and environmental studies
before letting contracts and beginning construction. Many transportation
departments, based on the survey, are increasing the utilization of consultants
to handle engineering and environmental work for these additional projects.
Therefore, as expected, there is a lag between the appropriation of highway
funds and the actual commencement of construction. Annual highway funds under
all TEA-21 programs are available for obligation within a four-year period,
including the year of appropriation. Once obligated, TEA-21 funds are available
until expended. The Corporation's capital expansion program is focused on
taking advantage of the TEA-21 growth through investment in both permanent and
portable quarrying operations. However, there is no guarantee that the
Corporation will fully benefit from the expected increase in public-works
construction projects.
[GRAPH]
TEA-21 Funding Increases
Six largest Aggregates division production states
NC 55%
TX 61%
OH 37%
IA 43%
GA 70%
IN 52%
Wtd. Avg. 55%
Because of the Aggregates division's operations in the southeastern,
southwestern, midwestern and central regions of the nation, the division's --
and, consequently, the Corporation's -- operating performance and financial
results depend on the strength of these specific regional economies. In recent
years, the economic growth in these regions of the United States, particularly
in the Southeast and Southwest, has been generally strong. However, if federal
appropriation levels are reduced, if a reduction occurs in state and local
spending, or if the specific regional economies decline, similar to the impact
experienced in the Midwest as a result of a declining agricultural economy, the
Aggregates division could be adversely affected.
PAGE 30 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
22
The general economy, spurred by rising business productivity, strong consumer
spending, improving foreign economies and negligible inflation, outside of
certain sectors, has exceeded the previously-set record expansion of 106 months,
which occurred during the 1960's. Further, the Federal Reserve, as a result of
controlled inflation, continues to have the flexibility to adjust monetary
policy and sustain the economic growth curve. Therefore, generally, economists
expect the U.S. economy to continue to grow in 2000 at, or slightly lower than,
the level in 1999. Management believes that the construction industry will
continue to benefit from enhanced public-works construction funding. Management
also expects growth in commercial construction, albeit slower growth than in
1999. However, within the construction industry, the anticipated increases in
public-works and commercial construction could be offset by potential decreases,
triggered by anticipated higher interest rates, in the residential construction
markets. However, as discussed previously, public-works construction spending is
principally driven by the level of gasoline tax revenues and the appropriation
guidelines under TEA-21. As such, the volatility of public-works construction
spending to interest-rate changes is somewhat mitigated.
Currently, management believes the construction industry's overall consumption
levels and the Corporation's heritage production and shipments will grow by 2%
to 4% in 2000. However, there is no assurance that these levels will be achieved
or will continue. Over the next five years, management expects that the
Aggregates division's business and financial results will continue to grow, as a
result of increased infrastructure construction spending generated by
TEA-21,coupled with moderate growth in residential and commercial construction.
Further, the Aggregates division will generally follow national, regional and
local general economic, construction and industry trends.
The aggregates industry expansion and growth is also subject to increasing
challenges from environmental and political advocates who want to control the
pace of future development and preserve open space. Rail and other
transportation alternatives are being supported by these groups as solutions to
mitigate traffic congestion and overcrowding.
The Clean Air Act, originally passed in 1963 and periodically updated by
amendments, is the United States' national air pollution control program that
granted the Environmental Protection Agency ("EPA") the authority to set limits
on the level of various air pollutants. Recently, environmental groups have been
successful in lawsuits against the federal and certain state departments of
transportation, asserting that highway construction should be delayed until the
municipal area is in compliance with the Clean Air Act. For example, during 1999
in the Atlanta, Georgia, metro area, 44 of 61 funded highway projects were
delayed because of nonattainment of air pollutant standards. The EPA lists ten
major metropolitan areas in the Corporation's markets, including Atlanta and
Houston/Galveston, Texas, as nonattainment areas with deadlines to reduce air
pollutants or face fines or control by the EPA. Other environmental groups have
published lists of targeted municipal areas, including areas within the
Corporation's marketplace, for environmental and suburban growth control. The
impact of these initiatives on the Corporation's growth is typically localized,
and further challenges are expected as these initiatives gain momentum.
Seasonal changes and other weather-related conditions on business production
schedules can also significantly affect the aggregates industry. 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 in the spring, summer and fall. The division's operations that are
concentrated principally in the north central region of the Midwest generally
experience more severe winter weather conditions than the division's operations
in the Southeast and Southwest.
The Corporation's management believes the overall long-term trend for the
construction aggregates industry continues to be one of consolidation. The
Corporation's Board of Directors and management continue to review and monitor
the Corporation's strategic long-term plans. These plans include assessing
business combinations and arrangements with other companies engaged in similar
businesses, building market share in the Corporation's core businesses and
pursuing new technological opportunities that are related to the Corporation's
existing markets.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 31
23
During 1999,the Corporation expanded its market opportunities by consummating
ten transactions for the acquisition of aggregates, asphalt, ready mixed
concrete or road paving operations, and either opened, or began the process of
opening, three quarry locations - known as greensiting - in the Southeast and
Midwest.
The Corporation's aggregates reserves, including its investment in Meridian
Aggregates Company ("Meridian"), exceed 50 years of production based on current
levels of activity.
Through its Magnesia Specialties division, the Corporation also manufactures and
markets magnesia-based products, including heat-resistant refractories products
for the steel industry and magnesia-based chemicals products for industrial,
agricultural and environmental uses, including wastewater treatment and acid
neutralization. Magnesia Specialties' products, particularly refractories
products and dolomitic lime, which are used within the steel industry, currently
account for approximately 68% of the division's net sales. Accordingly, the
division's profitability is dependent on the production of steel and the related
marketplace, and a significant portion of the division's product pricing
structure is affected by current business economic trends within the steel
industry. Further, due to the high level of fixed costs associated with
production, the division's operating leverage can be substantial.
In 1999, particularly in the second half of the year, the United States' steel
industry began to show signs of improvement. Foreign steel imports that flooded
the United States' markets in 1998 slowed during the year as these foreign
economies began to improve. Although the United States assisted in slowing
foreign imports by reaching agreements with select foreign countries, no broad
tariffs or duties were passed to provide long-term restriction of foreign steel
imports.
[GRAPH]
Raw Steel Production and Imports
(in millions of short tons)
North American Production U.S. Imports Total
------------------------- ------------ -----
1995 134.1 27.2 161.3
1996 136.0 32.1 168.1
1997 138.2 34.4 172.6
1998 140.9 41.5 182.4
1999 (est.) 140.7 35.7 176.4
The Magnesia Specialties division's steel-related products areas' performance
followed the steel industry's performance. Refractories and dolomitic lime
products, as expected, continued to experience declining volumes and sales
during 1999 as a result of instabilities in the steel industry. While
refractories and dolomitic lime volumes and sales improved in the second half of
1999, compared with the second half of 1998, pricing pressures continued as the
steel industry exercised its pricing power. Also, consolidation among
manufacturers of refractory brick may remove a significant periclase customer
from the market in the near term.
The division's chemicals products achieved record volume and sales in 1999 as a
result of increased sales in chemicals used as flame retardants and in
wastewater treatment. The division also added several new customers that utilize
magnesia to reduce stack pollution. Further, improving Asian economies reduced
the global pressures experienced in the chemicals products area during 1998.
However, competitive pricing pressures continued throughout 1999.
As expected, sales and earnings for the division declined in 1999; however,the
second half of 1999 began to show marked improvement compared to the previous
twelve-month period. The division's performance will continue to be directly
tied to the steel industry and, although improving, the absence of federal
restrictions on foreign steel imports continues to weaken prospects for
long-term improvements. Therefore, management expects competitive pressure
within its steel-related products areas to continue throughout 2000. Management
further expects continued growth in its chemicals products in 2000, offset
somewhat by competitive pricing pressures. While management expects sales and
earnings from operations of the Magnesia Specialties division to improve in
2000, management does not expect a full return to 1998's and previous years'
performances. The Corporation continues to explore opportunities, including
possible divestiture of all or part of the Magnesia Specialties division, with a
goal of creating additional value for the Corporation. However, there can be no
assurance that management will continue to pursue these opportunities, if any.
PAGE 32 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
24
Approximately 16% of the Magnesia Specialties division's products are sold in
foreign jurisdictions, with no single country accounting for 10% or more of the
division's sales. While the division's products are manufactured and sold
principally in the United States, the division also markets its products in the
Canadian, Mexican, European (principally England and Germany) and Pacific Rim
(primarily Korea) markets. As a result of these foreign market sales, the
division's financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in the foreign
markets in which the division distributes its products. To mitigate the
short-term effects of changes in currency exchange rates on the division's
operations, the division principally uses the U.S. dollar as the functional
currency in substantially all foreign transactions. However, adverse general
economic conditions within a foreign market where the Magnesia Specialties
division conducts business could have a negative impact on the division's
results of operations.
To mitigate its exposure to market dependence on the steel industry, the
division's management has taken steps to emphasize new product development and
concentrate on additional products for use in environmental, agricultural and
other industrial applications and transition its existing products toward higher
margin specialty applications.
The four-year union contract for the division's employees at its major operating
facility in Manistee, Michigan, was ratified in August 1999. The union contract
for the division's employees at its Woodville, Ohio, operating facility expires
in June 2000.
The Corporation continued research and development activities during 1999 in
several technological product areas. Composite materials have been used for
bridge deck installation and replacement, and research is continuing in a
variety of other construction-related uses. Management believes that additional
funds for innovative technologies in roadways, from the TEA-21 program, offer
opportunities to put new bridge decks in service and to focus more attention on
the long-life and low-maintenance costs expected from the composite materials.
The Corporation also made an investment in a start-up company in 1999,
Industrial Microwave Systems ("IMS"). IMS has proprietary technology for use in
industrial heating and drying applications, as well as food processing and
aseptic packaging. Commercial viability of these technological product areas is
not assured.
As expected, the Corporation had limited revenue in 1999 for both ECO-MIN(R)
fertilizer, a patented soil remineralization product, and SC27(TM) soil
inoculant, a microbial soil enhancer, both used to enhance plant growth, along
with a laser-measuring device for use in measuring refractory thickness in
steel production furnaces. Further, as expected, these technologies did not
generate profits in 1999. Commercialization of microwave technology, used for
cleaning ready mixed concrete equipment, has been deferred for the near future
as research and development continues. The Corporation will continue to pursue
opportunities that provide proprietary technology in high growth-rate markets
that it understands, that require limited research and development with minimal
capital investment relative to revenue and profit generation potential, and that
have the potential to provide above-average returns while minimizing risk. There
can be no assurance that these technologies can achieve profitability.
Generally, the impact of inflation on the Corporation's businesses has become
less significant with the benefit of continued lower inflation rates in recent
years. However, energy sector inflation affects the cost of transportation and
asphalt production. Wage inflation, triggered by low unemployment and the
resulting increase in labor costs, is somewhat mitigated by increases in
productivity. Generally, when the Corporation incurs higher costs to replace
productive facilities and equipment, increased capacity and productivity and
various other offsetting factors generally counterbalance increased depreciation
costs.
The Corporation's management successfully completed the conversion of its
information technology computer hardware and software and its non-information
technology equipment to enable effective functioning on and after January 1,
2000. The total costs for the year 2000 system conversion were $3.7 million,
$1.1 million in 1999 and $2.6 million in 1998, all funded from operating cash
flows. The Corporation's focus is now directed at replacing its existing systems
with an enterprise-wide information solution. In 2000,the Corporation
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 33
25
expects to complete the needs assessment and system selection. However, system
implementation will take a period of three to five years.
DISCUSSION OF BUSINESS SEGMENTS
The Corporation conducts its operations through two reportable business
segments: Aggregates and Magnesia Specialties. The Aggregates division is the
second largest producer of construction aggregates in the United States. The
Corporation's sales and earnings are predominantly derived from its aggregates
segment which processes and sells granite, sandstone, limestone, sand and gravel
and other aggregates products for use primarily by commercial customers. The
division's products are used principally in domestic construction of highways
and other infrastructure projects and for commercial and residential buildings.
The Aggregates division also includes the operations of its other construction
materials businesses. These businesses, acquired through continued selective
vertical integration by the Corporation, include primarily asphalt, ready mixed
concrete and road paving operations. The Corporation's Magnesia Specialties
division produces refractories materials and dolomitic lime used in domestic and
foreign basic steel production and chemicals products used in domestic and
foreign industrial, agricultural and environmental applications. The magnesia-
based products segment generally derives a major portion of its sales and
earnings from the products used in the steel industry.
The Corporation's evaluation of performance and allocation of resources is based
primarily on earnings from operations. Earnings from operations is total revenue
less operating expenses; selling, general and administrative expenses; and
research and development, and excludes interest expense and other income
(expense). The accounting policies of the reportable segments are the same as
those described in Note A to the audited financial statements on pages 16
through 18. Assets employed by segment include assets directly identified with
those operations. Corporate headquarters' assets consist primarily of cash and
cash equivalents, and property, plant and equipment for corporate operations.
Substantially all debt, and the related interest expense, is held at corporate
headquarters. Property additions include property, plant and equipment that has
been purchased through acquisitions in the amount of $44,747,000 in 1999,
$154,445,000 in 1998 and $174,339,000 in 1997.
The following tables display selected financial data for the Corporation's
reportable business segments for each of the three years in the period ended
December 31,1999.
SELECTED FINANCIAL DATA BY BUSINESS SEGMENT
year ended December 31
(add 000)
NET SALES
1999 1998 1997
---------- ---------- ----------
Aggregates $1,125,636 $ 920,767 $ 760,702
Magnesia Specialties 133,191 136,924 140,161
---------- ---------- ----------
Total $1,258,827 $1,057,691 $ 900,863
========== ========== ==========
GROSS PROFIT
1999 1998 1997
---------- ---------- ----------
Aggregates $ 283,998 $ 249,516 $ 202,197
Magnesia Specialties 26,701 32,132 33,072
---------- ---------- ----------
Total $ 310,699 $ 281,648 $ 235,269
========== ========== ==========
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1999 1998 1997
---------- ---------- ----------
Aggregates $ 75,568 $ 64,106 $ 52,062
Magnesia Specialties 17,053 17,935 17,031
---------- ---------- ----------
Total $ 92,621 $ 82,041 $ 69,093
========== ========== ==========
EARNINGS FROM OPERATIONS
1999 1998 1997
---------- ---------- ----------
Aggregates $ 208,011 $ 184,648 $ 148,944
Magnesia Specialties 7,278 11,906 13,826
---------- ---------- ----------
Total $ 215,289 $ 196,554 $ 162,770
========== ========== ==========
ASSETS EMPLOYED
1999 1998 1997
---------- ---------- ----------
Aggregates $1,598,948 $1,423,031 $ 959,883
Magnesia Specialties 105,362 117,549 115,682
Corporate headquarters 38,264 48,009 30,148
---------- ---------- ----------
Total $1,742,574 $1,588,589 $1,105,713
========== ========== ==========
DEPRECIATION, DEPLETION AND AMORTIZATION
1999 1998 1997
---------- ---------- ----------
Aggregates $ 114,457 $ 89,487 $ 70,552
Magnesia Specialties 8,468 8,738 8,716
Corporate headquarters 1,829 540 452
---------- ---------- ----------
Total $ 124,754 $ 98,765 $ 79,720
========== ========== ==========
PROPERTY ADDITIONS
1999 1998 1997
---------- ---------- ----------
Aggregates $ 177,318 $ 260,112 $ 248,215
Magnesia Specialties 3,942 6,874 11,072
Corporate headquarters 1,307 11,385 1,492
---------- ---------- ----------
Total $ 182,567 $ 278,371 $ 260,779
========== ========== ==========
PAGE 34 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
26
AGGREGATES. The Aggregates division's sales increased 22% to $1.126 billion for
the year ended December 31,1999, compared with the prior year's sales. This
increase in sales reflects a 15.7 million-ton increase in total aggregates tons
shipped during 1999 to 165.2 million tons. The acquisition of Redland Stone and
other acquisitions made during 1998 and 1999 accounted for all of the increase
in total tons shipped. The division's heritage operations, which exclude
acquisitions that have not been included in prior-year operations for a full
year, experienced pricing improvements during 1999 of approximately 4% in
average net selling price, while the division's overall average net selling
price increased 3.6% when compared with prior year's prices. As in 1998, the
pricing structure in acquired operations reflects lower overall net average
selling prices, principally because of differences in product groups, production
costs, demand and competitive conditions when compared with product sales from
the Corporation's heritage operations.
The division's operating earnings for the full year 1999 increased 13% to $208.0
million from the prior year's earnings from operations of $184.6 million. As
discussed previously in the Results of Operations section of this Management's
Discussion and Analysis, the division's operating earnings for the year
increased principally as a result of the acquisition of Redland Stone, which was
somewhat offset by the impact of weather-related events and weakening
agricultural and commercial construction demand.
For the year ended December 31, 1998 ,the Aggregates division had net sales of
$920.8 million, which were $160.1 million or 21% higher than the 1997 net sales
of $760.7 million. This improvement reflects a 20.4 million-ton increase in
total tons shipped during 1998 to 149.5 million-tons and reflects an increase of
approximately 3% in the division's overall average net selling price when
compared with the prior year's. Earnings from operations in the year were $184.6
million, an increase of 24% over the division's operating earnings for 1997. The
division's operating profits during the year reflected continued record volume,
price increases at heritage locations and growth from acquisitions. 1997
operating results reflect an approximately 4% increase in prices and certain
operating performance improvements both in its heritage operations, as well as
synergies achieved in the acquired businesses, which were offset somewhat by
costs associated with higher levels of greensiting activities during the year.
MAGNESIA SPECIALTIES. For the year ended December 31,1999, the Magnesia
Specialties division had sales of $133.2 million, a decrease of $3.7 million, or
3%,from 1998 sales of $136.9 million. The division's earnings from operations
for 1999 of $7.3 million were down $4.6 million, or 39%,when compared to 1998
earnings from operations of $11.9 million. As discussed earlier, during 1999 the
division continued to feel the effects of poor performance in the steel
industry. The division's steel-related products areas experienced declining
volumes and competitive pricing pressures that continued to depress 1999 sales
and earnings. In spite of global pricing pressures, the division's chemicals
products achieved record volume and net sales and achieved strong earnings in
1999. As expected, the division's operating earnings in 1999 were also
negatively affected as production rates were slowed to adjust production levels
to anticipated sales volume. Currently, although selective inventory reductions
continue, management believes it has stabilized its inventory and production
levels.
Magnesia Specialties division's 1998 net sales of $136.9 million were 2% below
the prior year's. The division's operating earnings for 1998 of $11.9 million
were 14% below the 1997 operating earnings. The division experienced softening
in its refractories and dolomitic lime products as a direct result of decreased
steel production from United States mills. While U.S. steel demand was strong,
foreign imports, principally from Japan, Korea, Russia and Brazil, supplied a
substantially increased percentage of U.S. demand. Also, worldwide competition
in the periclase and chemicals products areas intensified. As a result, sales
and operating earnings declined significantly during the year, despite favorable
operations. The division's 1998 operating earnings were also negatively affected
by the operating losses of a calcium carbonate grinding facility that was closed
at the end of the year. The Magnesia Specialties division's 1997 net sales of
$140.2 million were 7% above the prior year. Shipment levels for all of the
division's product lines
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 35
27
increased in 1997 and the division experienced some modest pricing improvements
when compared with the year-earlier period. The division's operating earnings
for 1997 of $13.8 million were 23% over the 1996 operating earnings.
LIQUIDITY AND CASH FLOWS
A primary source of the Corporation's liquidity during the past three years has
been cash generated from its operating activities. Cash provided by its
operations was $223.7 million in 1999, as compared to $222.6 million in 1998 and
$195.6 million in 1997. These cash flows were derived, substantially, from net
earnings before deduction of certain noncash charges for depreciation, depletion
and amortization of its properties and intangible assets, as well as from
changes in operating assets and liabilities.
[GRAPH]
Consolidated Operating Cash Flow
(in millions)
1995 $128.6
1996 $134.9
1997 $195.6
1998 $222.6
1999 $223.7
Working capital increases for 1999 included in the above-referenced changes in
operating assets and liabilities, were due primarily to increases in Aggregates
division inventories as a result of expected increases in demand in 2000 and an
increase in accounts receivable balances primarily associated with the increased
level of sales. The 1998 working capital increases included in changes in
operating assets and liabilities reflect an increase in the Magnesia Specialties
division's inventory as a result of strong production in 1998, coupled with
reduced demand in certain product areas, and a decrease in overall trade
accounts payable balances, partially offset by a decrease in accounts receivable
balances resulting from accelerated cash collections. The 1997 working capital
increases included in changes in operating assets and liabilities reflect
increases in accounts receivable balances resulting from increased sales volume
activity, offset by increased trade accounts payable balances and reduction of
inventory balances on hand at the end of the year. In addition to other
offsetting amounts, other assets and liabilities, net, in 1999, changed
principally due to the decline in the rate of increase in certain self-insurance
reserves, as compared to a significant increase in 1998 as a result of
higher-than-average claims.
Net cash used for investing activities was $214.6 million in 1999, a decrease of
$291.3 million from $505.8 million reported in 1998. Of that amount, the
Corporation used $77.1 million for the purchase of ten Aggregates division-
related acquisitions, compared with $347.9 million in 1998 that financed the
acquisition of Redland Stone and nine other acquisitions, and $279.1 million in
1997 that included the acquisition of American Aggregates and eight smaller
acquisitions. Other investing activities in 1999 included the Corporation's 19%
investment in Industrial Microwave Systems and loans to Meridian, among other
things, while the same activities, in 1998, principally included the
Corporation's initial investment in Meridian. Additions to property, plant and
equipment, excluding acquisitions, of $137.8 million, were 11% higher in 1999,
compared with 1998. Comparable full-year capital expenditures were $123.9
million in 1998 and $86.4 million in 1997, with this increase primarily as a
result of the impact of American Aggregates, which was acquired in May 1997, and
capacity expansion projects. The Corporation's acquisition and capital
expenditures reflect planned strategic growth and capital spending activities
that are consistent with management's strategy for investment and expansion
within the consolidating aggregates industry. For the year 1999, the
Corporation's management had anticipated a more significant increase in
property, plant and equipment additions. However, as planned growth in the
heritage operations was delayed due to weather-related conditions and softening
commercial and agricultural markets, management scaled back capacity expansion
to better match the timing of market expansion. Through January 1997, the
Corporation's cash and cash equivalents balances were invested under a cash
management agreement with its former parent, Lockheed Martin Corporation (see
Note A to the audited financial statements on pages 16 through 18). During the
year ended December 31, 1997, the Corporation reduced the balance of cash and
cash equivalents invested with Lockheed Martin Corporation by $23.8 million.
PAGE 36 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
28
Approximately $20.3 million of cash was used for financing activities during
1999,compared with $279.2 million and $160.7 million of cash provided by
financing activities in 1998 and 1997,respectively. The Corporation incurred
$14.7 million of net indebtedness in 1999,excluding $9.2 million reflected in
acquisitions, net, principally in connection with the ten acquisitions completed
during the year. The Corporation used cash of $12.7 million during 1999 to
finance the repurchase of 322,300 shares of its common stock at public market
prices at various purchase dates. The repurchase of shares was authorized under
the Corporation's 6.0 million-share authorization from the Board of Directors
for the Stock-Based Award Plan and the Amended Omnibus Securities Award Plan.
There were no shares repurchased in 1998 or 1997. Further, during 1999,the
Corporation issued stock under its stock-based award plans, as well as issuing
approximately 311,100 restricted shares of common stock, along with other
consideration to purchase L.J. Earnest, Inc. Comparable cash provided by
issuance of common stock was $1.9 million in 1998,principally for the
stock-based award plans and an acquisition; and $0.2 million in 1997. Excluding
commercial paper obligations,$9.7 million of long-term debt will mature in 2000.
In 1999,the Board of Directors approved total cash dividends on the
Corporation's common stock of $0.52 a share. Regular quarterly dividends were
authorized and paid by the Corporation at a rate of $0.13 a share.
During 1998,the Corporation incurred $302.3 million of net indebtedness,
principally in connection with the consummation of the Redland Stone
acquisition, which was financed initially through the issuance of United States'
commercial paper. A portion of the commercial paper borrowings was repaid, with
the proceeds obtained from the private placement of 5.875% Notes due December
1,2008,issued in the aggregate principal amount of $200 million. The private
placement borrowings remained outstanding at December 31,1998,and were publicly
registered in 1999. In 1997,the Corporation paid net cash consideration of $242
million for the acquisition of all of the outstanding common stock of American
Aggregates. The sources of funds for this acquisition were a combination of
borrowings under revolving credit facilities and the issuance of commercial
paper. The Corporation subsequently issued $125 million of long-term debt
securities, the net proceeds of which were used to repay amounts outstanding
under the revolving credit agreements and to reduce the amount of commercial
paper outstanding.
CAPITAL STRUCTURE AND RESOURCES
Long-term debt, including current maturities of long-term debt and commercial
paper, increased to $641.7 million at the end of 1999 from $617.8 million at the
end of 1998. Total debt represented approximately 45% of total capitalization at
December 31,1999,compared with 48% at December 31, 1998. The Corporation's debt
is in the form of publicly and privately issued long-term fixed-rate notes and
debentures and United States' commercial paper (see Note F to the audited
consolidated financial statements on page 19). Shareholders' equity grew to
$774.0 million at December 31, 1999,from $667.7 million at December 31,1998.
The Corporation has $450 million in revolving credit facilities, which are
syndicated through a group of commercial domestic and foreign banks, and a
United States commercial paper program with available funds of a comparable
amount. The credit facilities consist of a five-year, unsecured revolving credit
agreement in the amount of $150 million (the "Long-Term Credit Agreement") which
expires in January 2002 and a 364-day unsecured revolving credit agreement in
the amount of $300 million (the "Short-Term Credit Agreement"), which expires in
August 2000 (see Note F to audited consolidated financial statements on page
19).The Corporation's management believes it will be able to amend its
Short-Term Credit Agreement for an additional 364-day period beyond August 2000.
No borrowings were outstanding under either of the revolving credit agreements
at December 31,1999. However, the Long- and Short-Term Credit Agreements support
commercial paper borrowings of $180 million outstanding at December 31,1999,of
which $150 million has been classified as long-term debt on the Corporation's
consolidated balance
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 37
29
sheet, based on management's ability and intention to maintain this debt
outstanding for at least one year. The remaining outstanding commercial paper
of $30 million has been classified as current on the Corporation's consolidated
balance sheet.
As discussed earlier, 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 (see "Business Environment"
on pages 28 through 34). 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 outstanding commercial paper
obligations and temporary cash investments, including overnight investments in
Eurodollars. However, management believes that the Corporation's exposure to
short-term interest rate market risk is not material.
Long-term interest rates influence assumptions used to develop the costs for
the Corporation's employee retirement and postretirement benefit plans. The
Corporation's management anticipates a reduction in pension and postretirement
benefit expense in 2000.This reduction is a result of the increased discount
rate for the retirement and postretirement benefit plans, favorable 1999
investment returns on employee retirement plan assets and the changes to the
postretirement benefit plan. There is no assurance that retirement and
postretirement expense reductions will continue due to the underlying
volatility of interest rates and investment returns (see Note I to the audited
consolidated financial statements on pages 20 through 23).
Certain agreements expose the Corporation to foreign currency fluctuations.
However, management believes this exposure is not material to the Corporation.
The Corporation has entered into a standby letter of credit agreement relating
to workers' compensation self-insurance requirements. On December 31,1999,the
Corporation had a contingent liability on this outstanding letter of credit of
approximately $6.7 million.
The 5.875% Notes, with an effective rate of 6.03%,that were issued in December
1998 through private placement in connection with the acquisition of Redland
Stone were subsequently registered with the Securities and Exchange Commission
(the "Commission") in February 1999.The initial purchasers in the private
placement offering exchanged their outstanding notes for registered notes with
substantially identical terms.
Currently, the Board has granted management 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. However, management has not
determined the timing when, or the amount for which, it may file such shelf
registration. In January 2000,the Corporation terminated and deregistered the
unissued debt securities in its $300 million effective shelf registration on
file with the Commission that had up to $50 million of debt securities
outstanding.
Martin Marietta Materials' internal cash flows and availability of financing
resources, including its access to capital markets, both debt and equity, and
its revolving credit agreements, are expected to continue to be sufficient to
provide the capital resources necessary to support anticipated operating needs,
to cover debt service requirements, to meet capital expenditures and
discretionary investment needs and to allow for payment of dividends for the
foreseeable future. The Corporation's ability to borrow or issue securities is
dependent upon, among other things, prevailing economic, financial and market
conditions.
The Corporation may be required to purchase some or all of the other investors'
interests in Meridian in 2000. The other investors, by the terms of the
original investment agreement consummated in 1998,have an annual option to
require the Corporation to purchase their interests, at a predetermined formula
price, beginning December 31,2000. The required purchase option is accelerated
in the event of the death of an investor. The Corporation may finance the
acquisition of the remaining Meridian interests in the public or private
markets.
The Corporation's senior unsecured debt has been rated "A" by Standard & Poor's
and "A3"by Moody's. The Corporation's $450 million commercial paper program is
rated "A-1"by Standard & Poor's,"P-2"by Moody's and "F-1"by Fitch IBCA,
PAGE 38 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
30
Inc. 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.
ENVIRONMENTAL MATTERS
The Corporation's operations are subject to and affected by federal, state and
local laws, and regulations relating to the environment, health and safety and
other regulatory matters. Certain of the Corporation's operations may, from
time to time, involve the use of substances that are classified as toxic or
hazardous within the meaning of these laws and regulations. Environmental
operating permits are, or may be, required for certain of the Corporation's
operations, and such permits are subject to modification, renewal and
revocation. The Corporation regularly monitors and reviews its operations,
procedures and policies for compliance with these laws and regulations. Despite
these compliance efforts, risk of environmental liability is inherent in the
operation of the Corporation's businesses, as it is with other companies
engaged in similar businesses, and there can be no assurance that environmental
liabilities will not have a material adverse effect on the Corporation in the
future.
The Corporation records appropriate financial statement accruals for
environmental matters in the period in which liability is established and the
appropriate amount can be estimated reasonably. Among the variables that
management must assess in evaluating costs associated with environmental issues
are the evolving environmental regulatory standards. The nature of these
matters makes it difficult to estimate the amount of any costs that may be
necessary for future remedial measures. The Corporation currently has no
material provisions for estimated costs in connection with expected remediation
or other environmental-related expenditures because it is impossible to
quantify the impact of all actions regarding environmental matters,
particularly the extent and cost of future remediation and other compliance
efforts. However, in the opinion of management, it is unlikely that any
additional liability the Corporation may incur for known environmental issues
or compliance with present environmental-protection laws would have a material
adverse effect on the Corporation's consolidated financial position or on its
results of operations (see Note M to the audited consolidated financial
statements on page 25).
NEW ACCOUNTING STANDARDS
In June 1998,the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"),which is required to be adopted
in years beginning after June 15,1999.The FASB amended FAS 133 to defer the
effective date of adoption until all fiscal quarters of all fiscal years
beginning after June 15, 2000.Statement of Financial Accounting Standards
No.137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No.133,was issued in June 1999.Because
of the Corporation's minimal use of derivatives, if any, management does not
anticipate that the adoption of FAS 133 will have a significant impact on net
earnings or the financial position of the Corporation.
CAUTIONARY STATEMENTS
This Annual Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those arising out of economic, climatic, political, regulatory, competitive and
other factors. The forward-looking statements in this document are intended to
be subject to the safe harbor protection provided by Sections 27A and 21E. For
a discussion identifying some important factors that could cause actual results
to vary materially from those anticipated in the forward-looking statements,
see the Corporation's filings with the Securities and Exchange Commission
including, but not limited to, the discussion of "Competition" in the
Corporation's Annual Report on Form 10-K for the fiscal year ended December
31,1999 (Form 10-K);"Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 26 through 39 of this Annual
Report; "Note A: Accounting Policies" on pages 16 through 18 and "Note M:
Commitments and Contingencies" on page 25 of the Notes to Financial Statements
of the Audited Consolidated Financial Statements included in this Annual
Report, incorporated by reference into the Form 10-K.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 39
31
Q U A R T E R L Y P E R F O R M A N C E
unaudited
Basic Earnings Per
(add 000,except per share) Net Sales Gross Profit Net Earnings Common Share(*)
- --------------------------------------------------------------------------------------------------------------------
Quarter 1999 1998 1999 1998 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
First $ 241,061 $ 186,535 $ 39,742 $ 29,479 $ 7,940 $ 2,636 $ 0.17 $ 0.06
Second 328,865 277,737 90,227 83,235 41,273 36,356 0.88 0.78
Third 353,792 312,445 99,661 95,830 43,951 45,907 0.94 0.99
Fourth 335,109 280,974 81,069 73,104 32,617 30,714 0.70 0.66
================================================================================================================
Totals $1,258,827 $1,057,691 $ 310,699 $ 281,648 $ 125,781 $ 115,613 $ 2.70 $ 2.49
================================================================================================================
Common Dividends Paid and Stock Prices Per Common Share
-------------------------------------------------------
Market Prices
Diluted Earnings Per ------------------------------------------------------
Common Share(*) Dividends Paid High Low High Low
- -------------------------------------------------------------------------------------------------------------------------------
Quarter 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
First $ 0.17 $ 0.06 $ 0.13 $ 0.12 $ 61 $49 3/16 $ 47 3/4 $35 13/16
Second 0.88 0.78 0.13 0.12 68 1/8 54 7/8 49 5/16 42 3/16
Third 0.94 0.98 0.13 0.13 60 3/8 35 1/4 51 1/4 41 11/16
Fourth 0.70 0.66 0.13 0.13 42 5/8 35 3/8 62 3/16 38 5/8
===============================================================================================================================
Totals $ 2.68 $ 2.48 $ 0.52 $ 0.50
===============================================================================================================================
(*)The sum of per-share earnings by quarter may not equal earnings per share
for the year due to changes in average share calculations. This is in
accordance with prescribed reporting requirements.
PAGE 40 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
32
F I V E Y E A R S U M M A R Y
(add 000,except per share) 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Net sales $ 1,258,827 $ 1,057,691 $ 900,863 $ 721,947 $ 664,406
Cost of sales, other costs and expenses 1,043,538 861,137 738,093 601,271 556,841
- --------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 215,289 196,554 162,770 120,676 107,565
Interest expense on debt 39,411 23,759 16,899 10,121 9,733
Other income and (expenses), net 18,435 1,347 5,341 8,398 5,959
- --------------------------------------------------------------------------------------------------------------------
Earnings before taxes on income 194,313 174,142 151,212 118,953 103,791
Taxes on income 68,532 58,529 52,683 40,325 36,240
- --------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 125,781 $ 115,613 $ 98,529 $ 78,628 $ 67,551
====================================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 2.70 $ 2.49 $ 2.14 $ 1.71 $ 1.47
====================================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 2.68 $ 2.48 $ 2.13 $ 1.71 $ 1.47
====================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 0.52 $ 0.50 $ 0.48 $ 0.46 $ 0.44
====================================================================================================================
CONDENSED CONSOLIDATED BALANCE SHEET DATA
Current deferred income tax benefits $ 21,899 $ 18,978 $ 16,873 $ 15,547 $ 12,622
Current assets - other 381,466 350,410 305,139 255,619 301,733
Property, plant and equipment, net 846,993 777,528 591,420 408,820 392,223
Costs in excess of net assets acquired 375,327 348,026 148,481 39,952 37,245
Other intangibles 31,497 27,952 26,415 23,216 23,967
Other noncurrent assets 85,392 65,695 17,385 25,764 21,581
- --------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,742,574 $ 1,588,589 $ 1,105,713 $ 768,918 $ 789,371
====================================================================================================================
Current liabilities - other $ 142,974 $ 136,576 $ 106,804 $ 86,871 $ 69,596
Current maturities of long-term debt
and commercial paper 39,722 15,657 1,431 1,273 103,740
Long-term debt and commercial paper 602,011 602,113 310,675 125,890 124,986
Pension and postretirement benefits 85,839 76,209 63,070 52,646 47,483
Noncurrent deferred income taxes 81,857 75,623 50,008 13,592 10,606
Other noncurrent liabilities 16,165 14,712 11,889 7,669 9,415
Shareholders' equity 774,006 667,699 561,836 480,977 423,545
- --------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,742,574 $ 1,588,589 $ 1,105,713 $ 768,918 $ 789,371
====================================================================================================================
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 41