1
EXHIBIT 13.1(i)
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, 2000 and 1999, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2000. 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 mis-statement. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/S/ ERNST & YOUNG LLP
Raleigh, North Carolina
January 22, 2001,
except for Note M, as to which the date is February 23, 2001
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 Audit Committee complies with standards established by
the Securities and Exchange Commission as they relate to the composition and
practices of audit committees.
The consolidated financial statements have been audited by Ernst & Young LLP,
independent auditors, whose report appears on this page.
/S/ JANICE K. HENRY
Janice K. Henry
Senior Vice President and Chief Financial Officer
Page 8 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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CONSOLIDATED STATEMENT OF EARNINGS
for years ended December 31
(add 000, except per share) 2000 1999 1998
- ---------------------------------------------------------------------------------------------
NET SALES $1,333,000 $1,258,827 $1,057,691
Freight and delivery revenues 184,517 175,292 143,805
-----------------------------------------
Total revenues 1,517,517 1,434,119 1,201,496
- ---------------------------------------------------------------------------------------------
Cost of sales 1,029,429 948,128 776,043
Freight and delivery costs 184,517 175,292 143,805
-----------------------------------------
Total cost of revenues 1,213,946 1,123,420 919,848
- ---------------------------------------------------------------------------------------------
GROSS PROFIT 303,571 310,699 281,648
Selling, general and administrative expenses 98,768 92,621 82,041
Research and development 2,326 2,789 3,053
- ---------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 202,477 215,289 196,554
Interest expense on debt 41,895 39,411 23,759
Other income and (expenses), net 8,239 18,435 1,347
- ---------------------------------------------------------------------------------------------
Earnings before taxes on income 168,821 194,313 174,142
Taxes on income 56,794 68,532 58,529
- ---------------------------------------------------------------------------------------------
NET EARNINGS $ 112,027 $ 125,781 $ 115,613
=============================================================================================
NET EARNINGS PER COMMON SHARE
- Basic $ 2.40 $ 2.70 $ 2.49
- Diluted $ 2.39 $ 2.68 $ 2.48
=============================================================================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
- Basic 46,753 46,668 46,454
- Diluted 46,948 46,947 46,708
=============================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 0.54 $ 0.52 $ 0.50
=============================================================================================
The notes on pages 13 to 23 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 9
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CONSOLIDATED BALANCE SHEET
at December 31
ASSETS (add 000) 2000 1999
- --------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 3,403
Receivables, net 180,915 197,554
Inventories 207,534 172,865
Current deferred income tax benefits 16,750 21,899
Other current assets 19,802 7,644
- --------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 425,001 403,365
- --------------------------------------------------------------------------------------------
Property, plant and equipment, net 914,072 846,993
Goodwill, net 374,994 375,327
Other intangibles, net 34,462 31,497
Other noncurrent assets 92,910 85,392
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $1,841,439 $1,742,574
============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (add 000)
- --------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Book overdraft $ 4,778 $ --
Accounts payable 59,029 55,872
Accrued salaries, benefits and payroll taxes 27,021 24,887
Accrued insurance and other taxes 23,967 26,705
Income taxes 2,498 4,293
Current maturities of long-term debt and commercial paper 45,155 39,722
Other current liabilities 26,665 31,217
- --------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 189,113 182,696
- --------------------------------------------------------------------------------------------
Long-term debt and commercial paper 601,580 602,011
Pension, postretirement and postemployment benefits 84,950 85,839
Noncurrent deferred income taxes 86,563 81,857
Other noncurrent liabilities 15,947 16,165
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES 978,153 968,568
- --------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock, $0.01 par value; 100,000,000 shares authorized 468 467
Additional paid-in capital 356,546 354,046
Retained earnings 506,272 419,493
- --------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 863,286 774,006
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,841,439 $1,742,574
============================================================================================
The notes on pages 13 to 23 are an integral part of these financial statements.
Page 10 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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CONSOLIDATED STATEMENT OF CASH FLOWS
for years ended December 31
(add 000) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 112,027 $ 125,781 $ 115,613
Adjustments to reconcile net earnings to cash provided by operating
activities:
Depreciation, depletion and amortization 136,373 124,754 98,765
Other items, net (2,331) (6,257) (4,573)
Changes in operating assets and liabilities:
Deferred income taxes 9,457 (1,345) (3,457)
Net changes in receivables, inventories and payables (13,093) (31,513) (9,661)
Other assets and liabilities, net (29,553) 12,256 25,886
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 212,880 223,676 222,573
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (170,805) (137,820) (123,926)
Acquisitions, net (39,327) (77,080) (347,882)
Other investing activities, net 8,326 339 (34,014)
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (201,806) (214,561) (505,822)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (9,369) (618) (1,704)
Increase in long-term debt 805 280 198,994
Commercial paper and line of credit, net 12,518 15,000 105,000
Debt issue costs -- -- (1,745)
Dividends paid (25,248) (24,276) (23,233)
Issuances of common stock 2,039 2,022 1,862
Repurchases of common stock -- (12,706) --
==================================================================================================================
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (19,255) (20,298) 279,174
==================================================================================================================
NET DECREASE IN CASH AND CASH EQUIVALENTS (8,181) (11,183) (4,075)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,403 14,586 18,661
==================================================================================================================
(BOOK OVERDRAFT) CASH AND CASH EQUIVALENTS, END OF YEAR $ (4,778) $ 3,403 $ 14,586
==================================================================================================================
The notes on pages 13 to 23 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 11
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
TOTAL
COMMON ADDITIONAL RETAINED SHAREHOLDERS'
(add 000) STOCK PAID-IN CAPITAL EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------
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
Net earnings -- -- 112,027 112,027
Dividends declared ($0.54 a share) -- -- (25,248) (25,248)
Net stock transactions 1 2,500 -- 2,501
- ----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 $ 468 $ 356,546 $ 506,272 $ 863,286
====================================================================================================
The notes on pages 13 to 23 are an integral part of these financial statements.
Page 12 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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NOTES TO FINANCIAL STATEMENTS
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. The Corporation's aggregates
products are sold and shipped from a network of approximately 300 quarries and
distribution facilities to customers in 27 states, Canada and the Bahamas. North
Carolina, Texas, Ohio, Georgia and Iowa account for approximately 60% of total
net sales. 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 affiliate's operations.
In particular, the Corporation's 14% investment in Meridian Aggregates Company
("Meridian") is recorded at cost (See Note M).
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.
Certain amounts for the prior years have been reclassified to conform to the
2000 presentation. Such reclassification had no impact on previously reported
net earnings or financial position.
REVENUE RECOGNITION. Substantially all revenues are recognized when finished
products are shipped to unaffiliated customers or services have been rendered.
Total revenues generally include sales of materials to customers, net of dis-
counts, if any, and include freight and delivery charges billed to customers
(see Note A: Accounting Policies -- Accounting Changes).
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.
At December 31, 2000, the book cash balance amounted to a net overdraft of
$4,778,000 which is attributable to the float of the Corporation's outstanding
checks.
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 8 to
30 years; from 1 to 20 years for machinery and equipment; and from 5 to 15 years
for land improvements. Depletion of mineral deposits is calculated over
estimated recoverable quantities, principally by the units-of-production method.
Depreciation and depletion expense was $113,221,000, $103,928,000, and
$86,602,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
REPAIR AND MAINTENANCE COSTS. Repair and maintenance costs that do not
substantially extend the life of the Corporation's machinery and equipment are
expensed as incurred.
INTANGIBLE ASSETS. Goodwill represents 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, 2000 and 1999, the amounts for accumulated
amortization of goodwill were approximately $52,071,000 and $36,104,000,
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, 2000 and 1999, the
amounts for accumulated amortization of other intangibles were approximately
$23,075,000 and $22,250,000, respectively. Amortization expense for goodwill and
other intangibles was $22,612,000,
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 13
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$20,290,000 and $12,163,000 for the years ended December 31, 2000, 1999 and
1998, 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 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 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 which 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. The Corporation recorded an investment in Meridian, including
receivables and a convertible note, of $56,058,000 and $53,511,000 at December
31, 2000 and 1999, respectively, and Meridian-related income of $3,717,000
during 2000 and $3,395,000 during 1999. Further, Meridian provided 475,000 tons
of aggregates products to certain operations of the Corporation in 2000 at
market rates (see Note M).
RESEARCH AND DEVELOPMENT AND SIMILAR COSTS. Research and development and similar
costs are charged to operations as incurred. Preoperating costs and
noncapital-related 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 33 through 35.
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 are computed assuming that the weighted-average
number of common shares is increased by the conversion of fixed awards
(employee stock options and incentive stock awards) and nonvested stock awards
to be issued to employees and nonemployee 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 diluted 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:
(ADD 000) 2000 1999 1998
- ------------------------------------------------------------------------------
BASIC EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares 46,753 46,668 46,454
- ------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
Employee fixed awards 156 238 235
Employee and Director
nonvested stock 39 41 19
- ------------------------------------------------------------------------------
DILUTED EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares and
assumed conversions 46,948 46,947 46,708
- ------------------------------------------------------------------------------
PAGE 14 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
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ACCOUNTING CHANGES. Effective July 1, 2000, the Corporation adopted Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"), as amended by Statement of Financial
Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, and
Statement of Financial Accounting Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of FASB
Statement No. 133 ("FAS 138"). The adoption of FAS 133 and FAS 138 did not have
an impact on net earnings or the financial position of the Corporation, because
the Corporation does not currently have any hedging activities, derivative
instruments or material contracts that are subject to these accounting
standards.
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB 101"), was adopted for the quarter ended December 31, 2000. The
Corporation recognizes substantially all revenues, when finished products are
shipped to customers or services have been rendered. Therefore, the adoption of
SAB 101 did not have an effect on the Corporation's reported total revenues, net
earnings or financial position.
The Corporation adopted Emerging Issues Task Force Issue No. 00-10, Accounting
for Shipping and Handling Fees and Costs ("EITF 00-10"), beginning with the
fourth quarter 2000 reporting. EITF 00-10 requires that amounts billed to
customers related to shipping and handling be classified as revenue and that the
related costs be included in expenses. Generally, the Corporation's customers
accept the aggregates products that they purchase at the quarry location using
their own transportation. However, in certain circumstances, the Corporation
will arrange for transportation of the purchased aggregates products to the
customer for a delivered price. The customer is billed at the delivered price,
which includes the price of the aggregates products and the cost of freight and
delivery charges.
The Corporation previously offset the revenues related to freight and delivery
charges against the freight and delivery costs billed from the transportation
provider. Freight and delivery costs for the years ended December 31, 2000, 1999
and 1998, were $184.5 million, $175.3 million and $143.8 million, respectively.
The Corporation included freight and delivery charges in total revenues and the
related cost of freight and delivery in total cost of revenues beginning with
the reporting of the operating results for the quarter and year ended December
31, 2000. Gross profit did not change from amounts that would have been reported
prior to the adoption of EITF 00-10. Prior annual and quarterly periods were
reclassified upon adoption (see Note A: Accounting Policies -- Revenue
Recognition).
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities ("FAS 140"). FAS 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001, and should be applied
prospectively. Certain disclosures for securitized financial assets are required
for December 31, 2000, annual reporting. The adoption of FAS 140 is not expected
to have any impact on net earnings or the financial position of the Corporation.
No additional disclosures were required at December 31, 2000.
NOTE B: RECEIVABLES
DECEMBER 31
(ADD 000) 2000 1999
- --------------------------------------------------------------------------------
Customer receivables $ 181,326 $ 193,380
Other current receivables 4,728 8,881
- --------------------------------------------------------------------------------
186,054 202,261
Less allowances (5,139) (4,707)
- --------------------------------------------------------------------------------
Total $ 180,915 $ 197,554
================================================================================
NOTE C: INVENTORIES
DECEMBER 31
(ADD 000) 2000 1999
- --------------------------------------------------------------------------------
Finished products $ 177,066 $ 143,776
Products in process and
raw materials 9,548 9,972
Supplies and expendable parts 26,692 25,862
- --------------------------------------------------------------------------------
213,306 179,610
Less allowances (5,772) (6,745)
- --------------------------------------------------------------------------------
Total $ 207,534 $ 172,865
================================================================================
NOTE D: PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31
(ADD 000) 2000 1999
- --------------------------------------------------------------------------------
Land and improvements $ 193,205 $ 182,670
Mineral deposits 161,560 156,870
Buildings 72,687 69,273
Machinery and equipment 1,279,605 1,170,592
Construction in progress 106,544 73,803
- --------------------------------------------------------------------------------
1,813,601 1,653,208
Less allowances for
depreciation and
depletion (899,529) (806,215)
- --------------------------------------------------------------------------------
Total $ 914,072 $ 846,993
================================================================================
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES PAGE 15
9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE E: LONG-TERM DEBT
DECEMBER 31
(ADD 000) 2000 1999
- --------------------------------------------------------------------------------
5.875% Notes, due 2008 $ 199,141 $ 199,059
6.9% Notes, due 2007 124,961 124,956
7% Debentures, due 2025 124,226 124,215
Commercial Paper and Line
of Credit, interest rates
ranging from 5.50% to 7.61% 192,518 180,000
Acquisition notes, interest rates
ranging from 5.50% to 10.0% 4,930 12,395
Other notes 959 1,108
- --------------------------------------------------------------------------------
Total 646,735 641,733
Less current maturities (45,155) (39,722)
- --------------------------------------------------------------------------------
Long-term debt $ 601,580 $ 602,011
================================================================================
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
on these securities is 7.05%. The Debentures are not redeemable prior to their
maturity on 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 2001 (collectively
the "Agreements"). Borrowings under these credit 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.
No borrowings were outstanding under the revolving credit agreements at December
31, 2000. However, the Agreements support a commercial paper program of
$450,000,000 of which borrowings of $190,000,000 and $180,000,000 were
outstanding at December 31, 2000 and 1999, respectively. Of these amounts,
$150,000,000 at December 31, 2000 and 1999, 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
$40,000,000 at December 31, 2000, and $30,000,000 at December 31, 1999, were
classified as current liabilities.
At December 31, 2000, the Corporation had $2,518,000 outstanding under a
$10,000,000 line of credit. The effective interest rate was 7.32% on
outstanding line of credit balances at December 31, 2000.
Total interest paid was $42,661,000, $37,108,000 and $23,677,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
Excluding commercial paper and line of credit, the Corporation's long-term debt
maturities for the five years following December 31, 2000 are:
(ADD 000)
- --------------------------------------------------------------------------------
2001 $ 2,492
2002 840
2003 219
2004 152
2005 150
Thereafter 450,364
- --------------------------------------------------------------------------------
Total $ 454,217
================================================================================
PAGE 16 MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
10
Amounts reflected in acquisitions, net, in the consolidated statement of cash
flows include assumed or incurred indebtedness of $950,000, $9,208,000 and
$3,373,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
In addition, the amounts reflected in acquisitions, net, for 1999 and 1998
exclude the effect of the issuance of approximately 311,100 and 280,100 shares,
respectively, of the Corporation's common stock.
NOTE F: FINANCIAL INSTRUMENTS
In addition to its publicly registered long-term notes and debentures, the
Corporation's financial instruments also include temporary cash investments,
customer accounts and notes receivable, commercial paper, line of credit and
other borrowings.
Temporary investments are placed with creditworthy financial institutions,
primarily in Euro-time deposits. The Corporation's cash equivalents generally
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. However, customer
receivables are more heavily concentrated in the Corporation's five largest
states (see Note A: Accounting Policies -- Organization). At December 31, 2000
and 1999, the Corporation had no significant concentrations of credit risk. The
estimated fair values of customer receivables approximate their carrying
amounts.
The estimated fair values of the Corporation's publicly registered long-term
notes and debentures at December 31, 2000, was approximately $414,098,000
compared with a carrying amount of $448,328,000 on the consolidated balance
sheet. The fair values of this long-term debt were estimated based on quoted
market prices for those instruments publicly traded. The estimated fair value of
commercial paper, line of credit and other borrowings approximate their
carrying amounts.
NOTE G: INCOME TAXES
The components of the Corporation's tax expense (benefit)
on income are as follows:
YEARS ENDED DECEMBER 31
(ADD 000) 2000 1999 1998
- --------------------------------------------------------------------------------
Federal income taxes:
Current $44,302 $ 61,349 $ 52,663
Deferred 2,656 (4,081) (4,486)
- --------------------------------------------------------------------------------
Total federal
income taxes 46,958 57,268 48,177
- --------------------------------------------------------------------------------
State income taxes:
Current 9,409 12,128 11,360
Deferred 427 (864) (1,008)
- --------------------------------------------------------------------------------
Total state
income taxes 9,836 11,264 10,352
- --------------------------------------------------------------------------------
Total provision $56,794 $ 68,532 $ 58,529
================================================================================
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 2000 1999 1998
- --------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction)
resulting from:
Effect of statutory
depletion (7.7) (6.4) (6.6)
State income taxes 3.8 3.8 3.9
Goodwill amortization 2.7 2.1 1.0
Other items (0.2) 0.8 0.3
- --------------------------------------------------------------------------------
Effective tax rate 33.6% 35.3% 33.6%
================================================================================
The principal components of the Corporation's deferred tax assets and
liabilities at December 31 are as follows:
DEFERRED
ASSETS (LIABILITIES)
--------------------
(ADD 000) 2000 1999
- --------------------------------------------------------------------------------
Property, plant and
equipment $(116,748) $(89,898)
Goodwill and other intangibles 4,759 4,289
Employee benefits 31,233 21,395
Financial reserves 10,192 7,549
Other items, net 751 (3,293)
- --------------------------------------------------------------------------------
Total $ (69,813) $(59,958)
================================================================================
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, 2000 or 1999.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 17
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Corporation's total income tax payments were $59,915,000, $71,644,000 and
$59,466,000, respectively, during the years ended December 31, 2000, 1999 and
1998.
NOTE H: 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.
The Corporation sponsors a Supplemental Excess Retirement Plan ("SERP") that
generally provides for the payment of retirement benefits in excess of allowable
Internal Revenue Code limits. The SERP also provides for a lump sum payment of
vested benefits provided by the SERP unless the participant chooses to receive
the benefits in the same manner that benefits are paid under the Corporation's
defined benefit retirement plans.
The Corporation's defined benefit retirement 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.
The net periodic retirement benefit cost of defined benefit plans included the
following components:
YEARS ENDED DECEMBER 31
(ADD 000) 2000 1999 1998
- --------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 6,764 $ 7,578 $ 5,965
Interest cost 10,973 10,071 9,231
Expected return on assets (14,886) (12,946) (11,454)
Amortization of:
Prior service cost 571 531 512
Actuarial gain (3,005) (485) (464)
Transition asset (357) (357) (331)
- --------------------------------------------------------------------------
Net periodic benefit cost $ 60 $ 4,392 $ 3,459
==========================================================================
Weighted-average assumptions used as of December 31 are as follows:
2000 1999 1998
- ---------------------------------------------------------------------------
Discount rate 7.50% 8.00% 6.75%
Rate of increase in future
compensation levels 5.00% 5.00% 5.00%
Expected long-term rate
of return on assets 9.00% 9.00% 9.00%
- ---------------------------------------------------------------------------
The following tables set forth the defined benefit plans' change in benefit
obligation, change in plan assets, funded status and amounts recognized in the
Corporations' consolidated balance sheets as of:
YEARS ENDED DECEMBER 31
(ADD 000) 2000 1999
- ------------------------------------------------------------------
Change in benefit obligation:
Net benefit obligation at
beginning of year $ 130,669 $ 144,109
Service cost 6,764 7,578
Interest cost 10,973 10,071
Actuarial loss/(gain) 11,697 (26,718)
Plan amendments 611 --
Acquisitions/divestitures -- 1,216
Gross benefits paid (6,699) (5,587)
- ------------------------------------------------------------------
Net benefit obligation at
end of year $ 154,015 $ 130,669
==================================================================
YEARS ENDED DECEMBER 31
(ADD 000) 2000 1999
- ------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 168,943 $ 147,187
Actual return on plan assets, net (2,372) 27,291
Employer contributions 730 52
Gross benefits paid (6,699) (5,587)
- ------------------------------------------------------------------
Fair value of plan assets
at end of year $ 160,602 $ 168,943
==================================================================
Page 18 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
12
DECEMBER 31
(ADD 000) 2000 1999
- ------------------------------------------------------------------
Funded status of the plan
at end of year $ 6,587 $ 38,274
Unrecognized net
actuarial gain (31,043) (63,003)
Unrecognized prior
service cost 4,170 4,130
Unrecognized net
transition asset (391) (748)
- ------------------------------------------------------------------
Accrued benefit cost $ (20,677) $ (21,347)
==================================================================
DECEMBER 31
(ADD 000) 2000 1999
- ------------------------------------------------------------------
Amounts recognized in the
consolidated balance
sheet consist of:
Prepaid benefit cost $ 134 $ 118
Accrued benefit cost (20,811) (21,465)
- ------------------------------------------------------------------
Net amount recognized
at end of year $ (20,677) $ (21,347)
==================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for retirement plans with accumulated benefit obligations in
excess of plan assets were $5,272,000, $3,350,000 and $0, respectively, as of
December 31, 2000 and $3,900,000, $2,478,000 and $0, respectively, as of
December 31, 1999.
POSTRETIREMENT BENEFITS. The Corporation provides other postretirement benefits
including medical benefits for retirees and their spouses (and Medicare Part B
reimbursement for 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) 2000 1999 1998
- -----------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 1,144 $ 2,738 $ 1,732
Interest cost 3,886 3,782 4,034
Expected return on
assets -- (35) (121)
Amortization of:
Prior service cost (394) (35) 25
Actuarial gain (482) (419) (85)
- -----------------------------------------------------------------------
Net periodic benefit cost $ 4,154 $ 6,031 $ 5,585
=======================================================================
The postretirement health care plans' change in benefit obligation, change in
plan assets, funded status and amounts recognized in the Corporation's
consolidated balance sheets are as follows:
YEARS ENDED DECEMBER 31
(ADD 000) 2000 1999
- ----------------------------------------------------------------
Change in benefit obligation:
Net benefit obligation at
beginning of year $ 46,435 $ 62,381
Service cost 1,144 2,738
Interest cost 3,886 3,782
Participants' contribution 249 31
Plan amendments -- (6,410)
Actuarial loss/(gain) 7,315 (13,208)
Gross benefit paid (3,750) (2,879)
- ----------------------------------------------------------------
Net benefit obligation at
end of year $ 55,279 $ 46,435
================================================================
YEARS ENDED DECEMBER 31
(ADD 000) 2000 1999
- --------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 0 $ 578
Actual return on plan assets, net -- 15
Employer contributions 3,501 --
Participants' contributions 249 31
Gross benefits paid (3,750) (624)
- --------------------------------------------------------------
Fair value of plan assets
at end of year $ 0 $ 0
==============================================================
DECEMBER 31
(ADD 000) 2000 1999
- ------------------------------------------------------------------
Funded status of the plan
at end of year $ (55,279) $ (46,435)
Unrecognized net actuarial gain (2,672) (10,469)
Unrecognized prior service cost (5,524) (5,918)
- ------------------------------------------------------------------
Accrued benefit cost $ (63,475) $ (62,822)
==================================================================
DECEMBER 31
(ADD 000) 2000 1999
- ------------------------------------------------------------------
Amounts recognized in the
consolidated balance sheet
consist of:
Accrued benefit cost $ (63,475) $ (62,822)
- ------------------------------------------------------------------
Net amount recognized
at end of year $ (63,475) $ (62,822)
==================================================================
Weighted-average assumptions used as of December 31 are as follows:
2000 1999 1998
- --------------------------------------------------------------------------
Discount rate 7.50% 8.00% 6.75%
Expected long-term rate of
return on assets N/A 9.00% 9.00%
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 19
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The assumed trend rate for health care inflation used in measuring the net
periodic benefit cost and benefit obligation is 8% for 2000, declining to 4.5%
in 2005 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, 2000:
ONE PERCENTAGE POINT
-----------------------
(ADD 000) INCREASE (DECREASE)
- ---------------------------------------------------------------
Total service and
interest cost
components $ 553 $ (472)
Postretirement
benefit obligation $ 5,608 $ (4,926)
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. In addition, the employees of the former Redland Stone Products
Company ("Redland Stone") participate in a separate defined contribution plan
established prior to the Corporation's acquisition of Redland Stone. The
Corporation will continue to support this plan in the near-term. Under certain
provisions of these plans, the Corporation, at established rates, matches
employees' eligible contributions. The Corporation's matching obligations were
$3,695,000 in 2000, $3,144,000 in 1999 and $2,381,000 in 1998.
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 $1,577,000 and $1,734,000 at December 31, 2000 and 1999,
respectively.
NOTE I: STOCK OPTIONS AND AWARD PLANS
In 1994, the shareholders of the Corporation approved the Amended Omnibus
Securities Award Plan (the "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 38,222 shares
for 2000, 32,648 shares for 1999 and 22,905 shares for 1998, 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 or at retirement. 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.
Page 20 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
14
The Plans provide that each nonemployee director receives 1,500 non-qualified
stock options annually. The Corporation grants the nonemployee directors options
to purchase its common stock at a price equal to the market value at the date of
grant. These options are exercisable immediately and expire ten years from such
date.
A summary of the Corporation's stock-based plans' activity and related
information follows:
NUMBER OF SHARES
-------------------------- WEIGHTED-
AVAILABLE AWARDS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
- -------------------------------------------------------------------------------
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
Granted (507,898) 507,898 $45.50
Exercised -- (74,202) $28.04
Terminated 17,931 (17,931) $45.98
- -------------------------------------------------------------------------------
December 31, 2000 3,742,325 1,889,893 $40.44
===============================================================================
Approximately 997,000, 712,000 and 519,000 outstanding awards were exercisable
at December 31, 2000, 1999 and 1998, respectively. Exercise prices for awards
outstanding as of December 31, 2000, ranged from $20.00 to $63.44. The
weighted-average remaining contractual life of those awards is 7.4 years. The
weighted-average exercise price of outstanding exercisable awards at December
31, 2000, is $35.06.
The following table summarizes information for awards outstanding and
exercisable at December 31, 2000:
AWARDS OUTSTANDING
- ----------------------------------------------------------------------
WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF AVERAGE AVERAGE
PRICES SHARES REMAINING LIFE EXERCISE PRICE
- ----------------------------------------------------------------------
$20.00-$24.25 385,421 4.8 $22.35
$35.50-$48.75 1,480,472 8.0 $44.88
$51.50-$63.44 24,000 8.8 $57.47
AWARDS EXERCISABLE
- ----------------------------------------------------------------------
WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF AVERAGE AVERAGE
PRICES SHARES REMAINING LIFE EXERCISE PRICE
- ----------------------------------------------------------------------
$20.00-$24.25 385,421 4.8 $ 22.35
$35.50-$48.75 599,839 7.4 $ 42.67
$51.50-$63.44 12,000 8.3 $ 63.44
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 50,804, 16,791 and 24,324 shares of the
Corporation's common stock were granted under this plan in 2000, 1999 and 1998,
respectively. The Corporation issued 16,023 shares of common stock to key senior
employees in January 2001 representing net stock unit awards granted for 1998.
Also, the Corporation adopted the Amended and Restated Common Stock Purchase
Plan for Directors, which provides nonemployee 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 4,699, 3,551 and 6,328 shares of the
Corporation's common stock under this plan during 2000, 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:
2000 1999 1998
- ---------------------------------------------------------------------
Risk-free interest rate 6.10% 6.20% 5.40%
Dividend yield 1.20% 1.40% 1.80%
Volatility factor 34.10% 27.70% 17.90%
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 manage-
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 21
15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ment'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) 2000 1999 1998
- ------------------------------------------------------------------------------
Basic earnings per
common share:
Net earnings $ 108,082 $ 122,791 $ 113,658
Earnings per share $ 2.31 $ 2.63 $ 2.45
Diluted earnings per
common share:
Net earnings $ 108,082 $ 122,791 $ 113,343
Earnings per share $ 2.30 $ 2.62 $ 2.43
- ------------------------------------------------------------------------------
NOTE J: LEASES
Total rent expense for all operating leases was $31,109,000, $26,761,000 and
$23,460,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
The Corporation's operating leases generally contain renewal and/or purchase
options with varying terms. Total mineral royalties for all leased properties
were $22,460,000, $23,482,000 and $19,988,000 for the years ended December 31,
2000, 1999 and 1998, respectively. Future minimum rental and royalty commitments
for all noncancelable operating leases and royalty agreements as of December 31,
2000, are as follows:
(ADD 000)
- --------------------------------------------------
2001 $ 8,952
2002 6,989
2003 5,667
2004 4,373
2005 3,579
Thereafter 40,855
- --------------------------------------------------
Total $ 70,415
- --------------------------------------------------
NOTE K: 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, 2000 and 1999,
there were approximately 46,783,000 and 46,715,000 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.
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 I). There were no shares repurchased in 2000 or 1998. Further, during 1999
and 1998 the Corporation issued 311,100 and 280,100, respectively, restricted
shares of common stock for acquisitions.
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 L: 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 will have
a material adverse effect on the results of the Corporation's operations or on
its financial position (see Note A: Accounting Policies -- Environmental Matters
and Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 38).
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
Page 22 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
16
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: Accounting Policies --
Environmental Matters and Management's Discussion and Analysis of Financial
Condition and Results of Operations on page 38).
LETTERS OF CREDIT. The Corporation has entered into stand-by letter of credit
agreements relating to workers' compensation and auto and general liability self
insurance. At December 31, 2000, the Corporation had contingent liabilities
under these outstanding letters of credit of approximately $8.4 million.
NOTE M: PURCHASE OF MERIDIAN AND SALE OF MAGNESIA SPECIALTIES' REFRACTORIES
BUSINESS
The Corporation expects to complete the purchase of the remaining interest of
Meridian under the purchase option terms of the original October 1998,
investment agreement, early in the second quarter 2001. The estimated purchase
consideration will consist of $235 million, including the original October 1998,
investment of $42 million, the retirement of debt, the forgiveness of related
party obligations, and amounts estimated for certain other assumed liabilities
and transaction costs; plus the assumption of normal balance sheet liabilities.
The purchase consideration is subject to adjustment based on actual results and
certain other events. This acquisition will be accounted for under the purchase
method of accounting and the operating results of Meridian will be included with
those of the Corporation from the acquisition date forward.
On February 23, 2001, Martin Marietta Magnesia Specialties Inc. entered into an
agreement with a subsidiary of Minerals Technologies Inc. to sell certain assets
related to its refractories business. In addition, the Corporation's Magnesia
Specialties division will supply the subsidiary of Minerals Technologies with
certain refractories products for up to two years after the sale. The
Corporation expects to recognize a gain on the sale of assets. However, the gain
will be largely reduced by a write-down of certain retained refractories assets,
including assets at the division's Manistee, Michigan, operating facility, as
the facility is repositioned to focus on production of chemicals products. The
agreement contemplates a closing to occur in the second quarter 2001.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 23
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 reflect 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
9 through 23.
BUSINESS COMBINATIONS AND SALE OF MAGNESIA SPECIALTIES' REFRACTORIES BUSINESS
The Corporation expects to complete the purchase of the remaining interest of
Meridian Aggregates Company ("Meridian") under the purchase option terms of the
original October 1998, investment agreement early in the second quarter 2001.
The estimated purchase consideration will consist of $235 million, including the
original October 1998, investment of $42 million, the retirement of debt, the
forgiveness of related party obligations, and amounts estimated for certain
other assumed liabilities and transaction costs; plus the assumption of normal
balance sheet liabilities. The estimated purchase consideration is subject to
certain other adjustments. This acquisition will be accounted for under the
purchase method of accounting and the operating results of Meridian will be
included with those of the Corporation from the acquisition date forward.
Additional information regarding this acquisition, and the related financing, is
contained in Note M to the audited consolidated financial statements on page 23,
under "Business Environment" on pages 27 through 33 and "Liquidity and Cash
Flows" and "Capital Structure and Resources" on pages 35 through 38.
While management believes that the consolidation of the aggregates and other
construction materials industries is continuing, acquisition asking prices
during 2000 escalated, at times, to what management considered to be an
unreasonable level. Therefore, the Corporation focused more on internal growth
and capacity expansion during 2000, when compared with the acquisition activity
of recent years. In 2000, the Corporation completed five acquisitions, for a
combined $39.3 million in cash and certain other consideration. The Corporation
also entered into a long-term operating agreement with Chemical Lime Company
whereby Martin Marietta Materials will process aggregates materials and provide
certain operating services. These transactions strategically expanded the
Corporation's aggregates and other businesses in Texas, North Carolina,
Tennessee and Ohio. The acquisitions in 2000 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. In addition, the Corporation invested an additional $1.4 million in
Industrial Microwave Systems. The "Liquidity and Cash Flows" discussion, which
follows, includes the impact of these transactions on financing and investing
activities.
Aggregates Division Capacity
(in millions of tons)
1996 120.0
1997 165.8
1998 197.6
1999 208.7
2000 241.8
Note: 2000 includes 25 million tons from the Meridian acquisition.
During 2000, the Corporation finalized the purchase price allocation of the ten
transactions completed in 1999. The post-closing adjustments relating to working
capital and other fair value adjustments were finalized without a significant
impact on the preliminary purchase price allocation.
Goodwill represents 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, based on estimated cash flows of the
business acquired over the remaining amortization period, goodwill will be
reduced by the estimated shortfall of discounted cash flows. Goodwill is as
follows at December 31:
Goodwill % of Total % of Shareholders'
(in millions) Assets Equity
2000 $375.0 20.4% 43.4%
1999 $375.3 21.5% 48.5%
Page 24 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
18
On February 23, 2001, the Corporation entered into an agreement with a wholly
owned subsidiary of Minerals Technologies Inc. to sell certain assets related to
its refractories business. In an accompanying manufacturing agreement, Magnesia
Specialties agreed to supply the subsidiary of Minerals Technologies with
certain refractories products for up to two years after the sale. During 2000,
the refractories business contributed $57.3 million to net sales.
Management expects to recognize a gain on the sale, however, the gain will be
largely offset by a write-down of certain assets of the refractories business,
including assets at the Manistee, Michigan, operating facility, as the facility
is repositioned to focus on production of chemicals products. The decline in net
sales will be somewhat mitigated during the operative period of the
manufacturing agreement. Further Magnesia Specialties' earnings from operations
will decline, due to the elimination of the refractories business earnings
contribution and the division's inability to proportionately eliminate fixed
costs associated with shared production facilities and overhead costs. The
agreement contemplates a closing to occur in the second quarter 2001.
The sale of Magnesia Specialties' refractories business will lessen the Magnesia
Specialties division's dependence on the steel industry over time. In fact,
excluding the refractories business, Magnesia Specialties' sales to the steel
industry would account for 43% of the division's 2000 net sales, as compared to
68%, including refractories.
As a result of the Corporation's study of various alternatives related to
Magnesia Specialties, the Corporation has determined that the Woodville, Ohio,
operation will be transferred to the MidAmerica Division of the Aggregates
division. The Woodville, Ohio, operation produces and sells dolomitic lime to
the steel industry and produces and sells more than 1.0 million tons per year
of aggregates to construction businesses.
The Corporation continues to evaluate strategic options, including possible
divestiture of the remaining Magnesia Specialties' chemicals business, with a
goal of creating additional value for the Corporation. However, there can be
no assurance that management will pursue these opportunities, if any. Additional
information regarding this transaction is contained in Note M to the audited
consolidated financial statements on page 23 and in the "Business Environment"
discussion that follows.
RESULTS OF OPERATIONS
The Corporation's Aggregates division's business is characterized by a high
level of dependence on construction-sector spending and 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 seasonal and other weather-related conditions, also affect the
Aggregates division's 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.
As discussed in "New Accounting Standards" on pages 38 and 39, the Corporation
adopted Emerging Issues Task Force Issue No. 00-10, Accounting for Shipping and
Handling Fees and Costs, beginning with the fourth quarter 2000. As a result,
total revenues include sales of materials to customers, net of allowances,
plus freight and delivery costs billed to customers. The reconciliation of total
revenues and total cost of revenues to amounts previously reported is as
follows:
YEARS ENDED DECEMBER 31,
(IN MILLIONS) 2000 1999 1998
- -----------------------------------------------------------------------
Net sales $ 1,333.0 $ 1,258.8 $ 1,057.7
Freight and delivery
revenues 184.5 175.3 143.8
- -----------------------------------------------------------------------
Total revenues 1,517.5 1,434.1 1,201.5
Cost of sales 1,029.4 948.1 776.1
Freight and delivery costs 184.5 175.3 143.8
- -----------------------------------------------------------------------
Total cost of revenues 1,213.9 1,123.4 919.9
- -----------------------------------------------------------------------
Gross profit $ 303.6 $ 310.7 $ 281.6
=======================================================================
The comparative analysis in this Management's Discussion and Analysis of
Financial Condition and Results of Operations is based on net sales and cost of
sales, which exclude freight and delivery revenues and costs, and is consistent
with the basis by which management reviews the Corporation's operating results.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 25
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Corporation's 2000 net earnings of $112.0 million, or $2.39 per diluted
share, reflect a decrease of 11%, compared with 1999 net earnings of $125.8
million, or $2.68 per diluted share. The 1999 net earnings were 9% higher than
1998 net earnings of $115.6 million, or $2.48 per diluted share. The
Corporation's consolidated net sales of $1.333 billion in 2000 reflect an
increase of $74.2 million, or 6%, over 1999 net sales of $1.259 billion. The
1998 consolidated net sales were $1.058 billion. Consolidated earnings from
operations were $202.5 million in 2000 and $215.3 million in 1999, reflecting a
decrease of $12.8 million, or 6%, in 2000 and an increase of $18.7 million, or
10%, in 1999, both over the prior year. The Corporation's 1998 operating
earnings were $196.6 million.
In 2000, the Corporation's results reflected the impact of sharp increases in
energy-related costs, a slowdown in demand for construction-related spending and
weather-related events. The Corporation's Aggregates division's energy-related
costs include diesel fuel, liquid asphalt, natural gas and barge freight costs.
Diesel fuel is used primarily to operate mobile equipment in quarry production,
liquid asphalt and natural gas are used in the production of asphalt and the
barge freight related to waterborne transportation includes fuel escalators that
adjust barge freight rates, generally on a quarterly basis. Unanticipated
escalation in energy-related costs in the Aggregates business, based on
comparable operating levels at heritage locations, reduced the Corporation's
2000 net earnings by $24.5 million when compared to the prior year.
Historically, selling prices are increased annually and do not include
escalators for increases in specific underlying costs.
Diesel Fuel
(average price per gallon)
1996 $ 0.78
1997 $ 0.72
1998 $ 0.56
1999 $ 0.65
2000 $ 0.98
Source: National average price per gallon of diesel fuel for industrial
consumers from the February 2001, Petroleum Marketing Monthly issued by the
Energy Information Administration. The 2000 average price per gallon of diesel
fuel reflects the average of actual diesel fuel prices through November 2000.
Construction-related demand was affected by unexpected delays in the ramp-up of
the Transportation Equity Act for the 21st Century ("TEA-21") spending and the
increasingly slowing economy. The extended lag between the appropriation of
federal highway funds and actual highway construction, contributed to total
value of construction work on highways and bridges declining in 2000, when
compared to 1999. The decline in commercial and residential construction demand
experienced during 2000 was spurred, in part, by the high interest rate
environment, which caused a slowdown in the economy. This slowdown most
significantly affected the Corporation's operations in the midwestern and
central areas of the United States.
Unusual weather patterns continued to negatively affect the Corporation's
revenues and earnings. North Carolina, the Corporation's largest revenue and
production state, experienced a record snowfall in the first quarter 2000, and
prolonged wet weather continued to affect operations in the state throughout the
spring and parts of the summer and fall. Operations in Texas experienced
uncharacteristically wet weather during the last half of the year and, along
with operations in the mid-western, central and southeastern regions of the
United States, were negatively affected by an early, severe winter.
The combination of declining construction demand and adverse weather conditions
reduced the Corporation's aggregates shipments below the prior year's.
SHIPMENTS (THOUSANDS OF TONS) 2000 1999
- ---------------------------------------------------------
Heritage Aggregates Operations 156,386 162,995
Acquisitions 8,529 2,214
- ---------------------------------------------------------
Aggregates Division 164,915 165,209
=========================================================
While volume declined in 2000, average selling prices continued to increase
for both heritage aggregates operations (which exclude acquisitions that have
not been included in prior-year operations for a full year) and the Aggregates
division as a whole. Heritage aggregates operations' average selling prices
increased 3.7%, and average selling prices for the Aggregates division, which
includes all acquisitions from the date of acquisition, increased 3.6% during
2000.
The Corporation's Magnesia Specialties division contributed $8.2 million to
operating earnings, a $1.0 million increase when compared to 1999.
Higher-than-expected costs for
Page 26 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
20
natural gas, which is used to operate certain of the division's kilns,
negatively affected earnings from operations by $3.3 million in 2000, when
compared to 1999. Despite the weak economic performance of the steel industry
and higher natural gas costs, the division made a solid contribution to 2000's
operating results, primarily based upon the strength of its first-half 2000
performance.
The Corporation's operating margin of 15.2% in 2000 declined from 17.1% in 1999,
primarily as a result of energy-related costs and lower volumes at heritage
aggregates operations. Lower margin asphalt, ready mixed and paving operations
associated with certain acquisitions, also contributed to the operating margin
reduction. Improving margins at Magnesia Specialties in 2000 slightly offset the
decline.
Other income and expenses, net, for the year ended December 31, 2000, was $8.2
million in income, compared to income of $18.4 million and $1.3 million in 1999
and 1998, 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 receivables, costs associated with the commercialization of certain new
technologies and net equity earnings from non-consolidated investments. In
2000, other income includes a nonrecurring insurance settlement related to
Hurricane Floyd. Other income in 1999 included nonrecurring settlements from
antitrust claims and a higher-than-normal level of planned property sales, both
principally relating to the Aggregates division.
Interest expense for the year ended December 31, 2000, was $41.9 million. This
reflects an increase of $2.5 million, or 6%, in 2000 over 1999. Interest expense
was $39.4 million in 1999, an increase of $15.7 million, or 66%, over 1998
interest expense of $23.8 million. The increased interest expense in 2000
results primarily from the impact of increased balances of outstanding debt
throughout the year and increased interest rates on the Corporation's variable
rate commercial paper program. The interest expense increase from 1999, as
compared to 1998, resulted primarily from the full-year impact of borrowings to
finance the acquisition of Redland Stone Products Company ("Redland Stone").
The Corporation's effective income tax rate for 2000 was 33.6%, compared with
35.3% in 1999 and 33.6% in 1998. 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 effects of several factors. The Corporation's effective tax rates for
these years include state income taxes and reflect the effects 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 goodwill balances, foreign operating earnings and earnings from
nonconsolidated investments.
The Corporation's debt-to-capitalization ratio decreased from 45% at December
31, 1999, to 43% at December 31, 2000, with total debt, including commercial
paper obligations, increasing from $641.7 million to $646.7 million and
shareholders' equity increasing from $774.0 million to $863.3 million. During
2000, the Corporation paid common stock dividends of $25.2 million, or $0.54 per
common share. Additional information regarding the Corporation's debt and
capital structure is contained in Note E to the audited consolidated financial
statements on pages 16 and 17 and under "Liquidity and Cash Flows" and "Capital
Structure and Resources" on pages 35 through 38.
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 46% of its aggregates shipments made to contractors in connection
with highway and other public infrastructure projects and the balance
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 27
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
2000 Aggregate Division Markets
46% Infrastructure
30% Commercial
18% Residential
6% Chemical, Railroad Ballast & Other
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. However, in 2000, the total value of construction work on highways
and bridges was less than 1999. The Corporation believes public-works projects
consumed more than 50% of the total annual aggregates consumption in the United
States during 2000, which has consistently been the case for each year since
1990. Additionally, since public sector-related shipments account for 46% of the
Corporation's 2000 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. Further, TEA-21 includes a 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% 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 2001 fully funded the
guaranteed highway funding level authorized under TEA-21 of $27.7 billion.
Further, the fiscal 2001 transportation appropriations bill includes an
additional $3.1 billion for guaranteed highway funding under the revenue aligned
budget authority ("RABA") provisions of TEA-21. The additional $3.1 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. The fiscal 2001 federal transportation
Page 28 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
22
appropriations bill also included $1.4 billion for demonstration projects, other
specific projects and compensation for emergency repairs to highways damaged by
natural disasters. Annual highway funds, under all TEA-21 programs, are
available to be obligated by state departments of transportation during the
year of appropriation. Once obligated, TEA-21 funds are available until
expended. Unobligated highway funds are carried over into the following year.
Federal Funding for Highways (in billions)
Fiscal year 1998 $21.4
Fiscal year 1999 $26.8
Fiscal year 2000 $28.8
Fiscal year 2001 $32.2
Fiscal year 2002 $34.3
Fiscal year 2003 $28.7
Note: Fiscal year 2000, 2001 and 2002 include RABA funding of $1.5 billion, $3.1
billion and $6.0 billion, respectively. Fiscal year 2001 includes $1.4 billion
for special projects.
Source: American Road and Transportation Builders Association. This chart
depicts estimated funding under TEA-21, as originally passed in 1998, compared
to actual funding authorization through fiscal 2001. Fiscal 2002 RABA is
estimated; no RABA estimates are available for fiscal 2003.
Funding for federal transportation appropriations is subject to balanced budget
and other proposals that may affect the additional funding available for the
Highway Fund. Congress must also annually appropriate highway funding levels,
and there is no assurance that Congress will continue to follow the TEA-21
legislated minimum funding guarantee firewall or the highway funding
distribution formula.
In December 2000, the American Road and Transportation Builders Association
("ARTBA") released its 2001 highway construction forecast, including an overview
of highway construction in 2000. ARTBA's research indicated that the total value
of construction work on highways and bridges in 2000 was running behind the pace
of 1999. The research further cites a number of reasons for the decline, many of
which the Corporation has noted as contributing to the lag between the
appropriation of highway funds and the actual commencement of construction. The
reasons for the extended lag in highway construction cited in the ARTBA research
include the following: insufficient backlog of projects ready for construction
when federal highway funding unexpectedly increased; increased environmental
reviews and permitting requirements and related litigation; inadequate
staffing at some state departments of transportation, coupled with a reluctance
to outsource preliminary engineering to the private sector; a shortfall of
matching funds or a reduction of state funding for highway programs, in some
states; and a growing diversion of federal highway funds, by certain states, to
Federal Transit Administration projects under the mass transit provisions of
TEA-21.
ARTBA forecasts a 7% to 10% growth in the highway construction market in 2001,
supported by the full funding of the 2001 federal highway obligation authority
under TEA-21 and, as indicated earlier, additional funding under RABA and other
appropriations. The ARTBA research cautions that these funding increases will
not immediately translate into increased highway growth, due to the lag between
funding and construction. However, the 2001 forecast is further supported by the
fact that the pace of state obligation of federal highway funds increased 6.5%
for fiscal year 2000, when compared to 1999. ARTBA also indicates that state
spending for preliminary engineering and right-of-way acquisitions, necessary
steps before highway projects can move to construction, increased, suggesting
that states have been getting more projects ready for construction.
The Aviation Investment and Reform Act for the 21st Century ("AIR-21") provides
funding for airport improvements throughout the United States. Congress approved
$3.2 billion for the Aviation Improvement Program under AIR-21 for fiscal year
2001, which represents a 64% increase over fiscal year 2000 funding of $1.95
billion. Management does not expect that the funding increases will have an
impact on aggregates demand until 2002 or 2003, due to the lag between funding,
design and engineering, and actual construction.
The Corporation's capital expansion program is focused on taking advantage of
TEA-21; state and local spending, including a recently approved $3.1 billion
public college and university education construction bond in North Carolina;
and other infrastructure 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.
The aggregates industry expansion and growth is 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 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. The EPA lists several
major metropolitan areas in the Corporation's markets, including Atlanta,
Georgia, and Houston/Galveston and Dallas/Forth Worth, Texas, as non-attainment
areas with deadlines to
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 29
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 effect of these initiatives on the Corporation's growth is typically
localized, and further challenges are expected as these initiatives gain
momentum across the United States.
The general economy continued its record-setting pace of expansion early in
2000, with productivity growth, high levels of technology spending and
investment in technology-related stocks. Against this backdrop, the Federal
Reserve believed that consumer demand was increasing at a rate in excess of
productivity-driven gains in supply and, when coupled with a tightening labor
supply, could trigger increases in inflation that would undermine the economy's
growth. In response, the Federal Reserve Open Market Committee increased the
federal funds rate three times through the first five months of 2000, on the
heels of three prior rate hikes, beginning in June 1999. However, as the second
half of 2000 progressed, the United States' economy began to slow, as a year of
rising interest rates softened housing activity and consumer spending declined.
Further, the mid-year reduction in the value of technology-related stocks and
rising energy prices contributed to economic slowdown. As cost pressures build,
led by energy prices, consumer demand moderates and credit conditions tighten,
some economists now predict that the 2001 economy is on track for its weakest
growth rate performance since 1991. In recognition of the changing economic
climate, the Federal Reserve lowered the federal funds rate by 100 basis points
in January 2001, and many economists expect more rate reductions in the near
term. The current federal funds rate reduction is anticipated to have an impact
on the level of construction spending. 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.
The Aggregates division's operations are concentrated in the southeastern,
southwestern, midwestern and central regions of the nation, therefore, 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, economic growth in 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, the Aggregates division
could be adversely affected. The Aggregates division's top five
revenue-generating states, namely North Carolina, Texas, Ohio, Georgia and Iowa,
accounted for approximately 60% of 2000 net sales.
A growing percentage of the Corporation's aggregates shipments are being moved
by rail or water through a distribution yard network. In 1994, 93% of the
Corporation's aggregates shipments were moved by truck, while the balance was
moved by rail. In contrast, the Corporation's aggregates shipments moved 80% by
truck, 10% by rail and 10% by water in 2000. Further, the acquisition of
Meridian and its rail-based distribution network, coupled with the extensive use
of rail service in the Southwest Division, increases the Corporation's
dependence on and exposure to railroad performance, including track congestion,
crew availability and power failures, and the ability to renegotiate favorable
railroad shipping contracts.
2000 Transport Mode 1994 Transport Mode
(% of 2000 shipments (% of 1994 shipments
of 164.9 million tons) of 71.2 million tons)
80% Truck 93% Truck
10% Rail 7% Rail
10% Water
Page 30 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
24
Seasonal changes and other weather-related conditions 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 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. North
Carolina, the Corporation's largest revenue generating state at 20% of 2000 net
sales, is at risk for Atlantic Ocean hurricane activity and has experienced
hurricane-related losses in recent years.
Currently, management believes the construction industry's overall consumption
levels, and the Corporation's heritage shipments, will remain at constant levels
or increase by up to 2% in 2001. This rate of heritage growth is built on an
expected 5% to 9% growth in infrastructure-related aggregates volume, comparable
to the ARTBA forecast. However, within the construction industry, management
believes the anticipated increases in public-works construction will be offset
by decreases in the residential and commercial construction markets, as a result
of a slowing economy. The continued impact of the factors cited in the ARTBA
forecast could negatively affect anticipated infrastructure aggregates volume
growth. Due to the high level of fixed costs associated with aggregates
production, the Corporation's operating leverage can be substantial. Therefore,
a slowdown in shipments and the resultant reduction in production would impact
earnings. Currently, the Corporation's overall aggregates production and
shipments volumes are expected to grow by approximately 12% to 15%, including
heritage growth, the purchase of Meridian and several smaller acquisitions, and
capacity expansion programs that are currently in process. Coupled with
anticipated price increases of 3% to 4% in 2001, net sales are expected to
increase 15% to 19%. Based on current economic forecasts, which predict
negligible to modest growth in gross national product, and moderating energy
costs, net earnings are expected to increase at a rate of 10% to 15%, after
interest costs and goodwill amortization on new acquisitions, and excluding any
impact on operating earnings related to the sale of Magnesia Specialties'
refractories business. The Meridian acquisition is expected to be neutral to
slightly accretive to earnings, while the smaller acquisitions could have a
slightly dilutive to neutral effect on 2001 earnings. Management cannot
guarantee that the Corporation will achieve these expectations for 2001.
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 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.
During 2000, the Corporation expanded its market opportunities by consummating
five transactions for the acquisition of aggregates and other operations,
entering into a long-term aggregates operating agreement and either opened, or
began the process of opening, three new quarry locations.
The Corporation's aggregates reserves, including its Meridian acquisition,
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 used within the steel industry,
particularly refractories products and dolomitic lime, accounted for
approximately 68% of the division's net sales for 2000. 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 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.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 31
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The United States' steel demand remained strong through the first six months of
2000, although the level of foreign steel imports remained high. However, as the
steel industry moved into late summer, steel demand generally slowed, matching
the demand for durable goods in the economy, and steel inventory levels grew. As
the year progressed, the dramatic increases in energy-related costs,
particularly natural gas, coupled with a slowdown in demand and continued high
levels of steel imports, led to rapidly deteriorating performance in the steel
industry. As a result, the viability of certain steel producers is questionable
and steel producer bankruptcies have increased in recent months.
The performance of the Magnesia Specialties division's steel-related products
followed the steel industry's performance in 2000. As a result, Magnesia
Specialties' improved operating earnings during the first-six months of 2000,
compared with the prior-year period, were largely offset by performance in the
second half of the year. While, for the full year, refractories and dolomitic
lime products experienced increased volumes, refractories pricing declined.
Further consolidation among manufacturers of refractory brick removed a
significant periclase customer from the market during the year. The division's
chemicals products, excluding fuel additive shipments to utilities, had solid
sales in 2000, as a result of continued diversification in chemicals used as
flame retardants, in wastewater treatment and in reducing stack pollution.
However, competitive pricing pressures continued throughout 2000. As discussed
in "Results of Operations," higher-than-expected costs for natural gas
negatively affected earnings from operations in 2000, when compared to 1999.
Overall, sales for the division declined in 2000, while operating earnings
showed improvement, in spite of the rising cost of natural gas.
Raw Steel Production for 2000
(thousands of net tons)
January 2,189.20 July 2,175.00
February 2,270.50 August 2,089.25
March 2,293.25 September 2,080.20
April 2,335.20 October 1,996.25
May 2,331.75 November 1,924.25
June 2,237.00 December 1,756.40
Source: American Iron and Steel Institute
The division's performance will continue to be directly tied to the steel
industry, and without both short- and long-term relief in natural gas costs, and
with the absence of federal restrictions on foreign steel imports, the prospects
for long-term improvement are weak. Management is minimizing production to keep
inventory levels low until natural gas pricing returns to more economically
feasible levels. The continued pressure on natural gas prices could raise
production costs above the prevailing competitive market price for certain
products. The Magnesia Specialties division has further exposure, if the
financial condition of the steel industry continues to deteriorate. Management
expects sales and earnings from operations of the Magnesia Specialties division
to decline in 2001, dependent in part on natural gas prices and conditions in
the steel industry and resulting from the anticipated sale of the refractories
business.
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
Canada, Mexico, Europe (principally England and Germany) and the Pacific Rim
(primarily Korea). 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 foreign
transactions.
Page 32 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
26
The union contract for the division's employees at its Woodville, Ohio,
operating facility was extended in June 2000 and expires in June 2001.
The Corporation continued research and development activities during 2000 in
several technological product areas. Composite materials have been used for
bridge deck installation and replacement, and research is continuing on 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 additional investment in a start-up company in
2000, Industrial Microwave Systems ("IMS"). IMS has proprietary technology for
use in industrial heating and drying applications, as well as food processing
and aseptic packaging.
As expected, the Corporation had limited revenue in 2000 from ECO-MIN(R)
fertilizer, a patented soil remineralization product, and SC27(TM) soil
inoculant, a microbial soil enhancer, both used to enhance plant growth.
Further, as expected, these technologies did not generate profits in 2000.
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 moderate inflation rates.
However, energy-related inflation affects, among other things, the costs of
operating mobile equipment used in quarry operations, waterborne transportation
of aggregates materials, asphalt production and fuel for kiln operations. In
fact, as previously discussed, energy-related inflation had a significantly
negative affect on 2000 operations, when compared to 1999 operations. 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 capital costs to replace productive facilities and
equipment, increased capacity and productivity, and various other offsetting
factors, counterbalance increased depreciation costs.
The Corporation is replacing its existing information systems with an
enterprise-wide information solution through J.D. Edwards World Solutions
Company. The capital requirements for this project are expected to be $24
million, with $16 million expected to be expended in 2001. Management expects to
complete the system design and implementation phase of several significant
processes during 2001, including the implementation of the general ledger and
financial reporting package. However, the full system implementation will take a
period of two to three years. The Corporation believes it has deployed
sufficient manpower and capital to successfully complete the project.
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, 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 basic steel
production and chemicals products used in 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.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 33
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Corporation's evaluation of performance and allocation of resources is based
primarily on earnings from operations. Earnings from operations is total
revenues less cost of revenues; 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 consolidated financial statements on
pages 13 through 15. 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. 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 $15,325,000 in
2000, $44,747,000 in 1999 and $154,445,000 in 1998.
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, 2000.
SELECTED FINANCIAL DATA BY BUSINESS SEGMENT
years ended December 31
(in thousands)
NET SALES 2000 1999 1998
- ---------------------------------------------------------------------------
Aggregates $1,202,581 $1,125,636 $ 920,767
Magnesia Specialties 130,419 133,191 136,924
- ---------------------------------------------------------------------------
Total $1,333,000 $1,258,827 $1,057,691
===========================================================================
GROSS PROFIT
- ---------------------------------------------------------------------------
Aggregates $ 276,640 $ 283,998 $ 249,516
Magnesia Specialties 26,931 26,701 32,132
- ---------------------------------------------------------------------------
Total $ 303,571 $ 310,699 $ 281,648
===========================================================================
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
- ---------------------------------------------------------------------------
Aggregates $ 82,088 $ 75,568 $ 64,106
Magnesia Specialties 16,680 17,053 17,935
- ---------------------------------------------------------------------------
Total $ 98,768 $ 92,621 $ 82,041
===========================================================================
EARNINGS FROM
OPERATIONS
- ---------------------------------------------------------------------------
Aggregates $ 194,232 $ 208,011 $ 184,648
Magnesia Specialties 8,245 7,278 11,906
- ---------------------------------------------------------------------------
Total $ 202,477 $ 215,289 $ 196,554
===========================================================================
ASSETS EMPLOYED 2000 1999 1998
- ---------------------------------------------------------------------------
Aggregates $1,703,752 $1,598,948 $1,423,031
Magnesia Specialties 99,913 105,362 117,549
Corporate headquarters 37,774 38,264 48,009
- ---------------------------------------------------------------------------
Total $1,841,439 $1,742,574 $1,588,589
===========================================================================
DEPRECIATION, DEPLETION
AND AMORTIZATION
- ---------------------------------------------------------------------------
Aggregates $ 125,697 $ 114,457 $ 89,487
Magnesia Specialties 8,532 8,468 8,738
Corporate headquarters 2,144 1,829 540
- ---------------------------------------------------------------------------
Total $ 136,373 $ 124,754 $ 98,765
===========================================================================
PROPERTY ADDITIONS
- ---------------------------------------------------------------------------
Aggregates $ 174,797 $ 177,318 $ 260,112
Magnesia Specialties 6,817 3,942 6,874
Corporate headquarters 4,516 1,307 11,385
- ---------------------------------------------------------------------------
Total $ 186,130 $ 182,567 $ 278,371
===========================================================================
AGGREGATES. The Aggregates division's net sales increased 7% to $1.203 billion
for the year ended December 31, 2000, compared with the prior year's net sales.
This increase in net sales reflects a 0.3 million ton decrease in total
aggregates tons shipped during 2000 to 164.9 million tons, offset by increases
in volumes in asphalt and other construction-related operations and prices. The
decrease in total aggregates tons shipped during 2000 is discussed in "Results
of Operations." The division's heritage aggregates operations, which exclude
acquired operations that have not been included in prior-year operations for a
full year, experienced pricing improvements during 2000 of approximately 3.7% in
average net selling price, while the division's overall aggregates average net
selling price increased 3.6%, when compared with the prior year's prices. As in
1999, the pricing structure in acquired operations reflects lower overall
average net 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 aggregates operations.
The division's operating earnings for the full year 2000 decreased 7% to $194.2
million from the prior year's earnings from operations of $208.0 million. As
discussed previously in "Results of Operations," the division's operating
earnings for the year decreased, principally as a result of higher-than-
Page 34 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
28
expected energy-related costs, a slowdown of construction activity and
weather-related events.
For the year ended December 31, 1999, the Aggregates division had net sales of
$1.126 billion, which were $204.9 million, or 22% higher than the 1998 net sales
of $920.8 million. This improvement reflects a 15.7 million-ton increase in
total aggregates tons shipped during 1999 to 165.2 million-tons and an increase
of approximately 3.6% in the division's aggregates average net selling price,
when compared with the prior year's. Earnings from operations in the year were
$208.0 million, an increase of 13% over the division's operating earnings for
1998. The division's increased operating profits during 1999 were principally 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. Operating results in 1998 reflected record volume, 5.1%
price increases at heritage aggregates locations and growth from acquisitions.
MAGNESIA SPECIALTIES. For the year ended December 31, 2000, the Magnesia
Specialties division had net sales of $130.4 million, a decrease of $2.8
million, or 2%, from 1999 net sales of $133.2 million. The division's earnings
from operations for 2000 of $8.2 million increased $1.0 million, or 13%, when
compared to 1999 earnings from operations. As discussed earlier, the division's
improvement during 2000 was the result of stronger performance in the steel
industry in the first half of 2000. This improvement was significantly offset by
higher-than-expected natural gas prices and deteriorating performance in the
steel industry during the second half of 2000. Balanced production and shipment
levels in 2000, along with effective cost controls, also provided a favorable
year-over-year comparison between 2000 and 1999.
Magnesia Specialties division's 1999 net sales of $133.2 million were 3% below
the prior year's. The division's operating earnings for 1999 of $7.3 million
were 39% below the 1998 operating earnings. The division's results continued to
reflect the poor performance of the steel industry through decreased demand and
the resultant adjustment in the division's production levels. The Magnesia
Specialties division's 1998 net sales of $136.9 million were 2% below the prior
year's, and operating earnings for 1998 of $11.9 million were 14% below 1997
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 $212.9 million in 2000, as compared to $223.7 million in 1999 and
$222.6 million in 1998. 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. Depreciation,
depletion and amortization were as follows:
YEARS ENDED DECEMBER 31
(IN THOUSANDS) 2000 1999 1998
- ---------------------------------------------------------------------
Depreciation $108,540 $ 98,559 $ 82,268
Depletion 4,681 5,369 4,334
Amortization 23,152 20,826 12,163
-------- -------- --------
Total $136,373 $124,754 $ 98,765
======== ======== ========
CONSOLIDATED OPERATING CASH FLOW
(IN MILLIONS)
1996 $134.9
1997 $195.6
1998 $222.6
1999 $223.7
2000 $212.9
Working capital increases for 2000, included in the above-referenced cash
provided by operations, were due primarily to increases in the value of the
Aggregates division's inventories because of increases in inventory quantity,
valuation and changes in mix; offset by a reduction in receivables, primarily as
a result of reduced shipping levels in the fourth quarter. The 1999 working
capital increases were due primarily to increases in Aggregates division's
inventories, as a result of expected increases in demand in 2000, and an
increase in receivables balances, primarily associated with the increased level
of sales. The 1998 working capital increases included an increase in the
Magnesia Specialties division's inventories 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
receivables resulting from accelerated cash collections. Other assets and
liabilities, net, include changes to both current and noncurrent balance sheet
accounts. In addition to other offsetting amounts, other assets and liabilities,
net, changed in 2000, principally due to a reduction in the accrual of certain
postre-
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 35
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
tirement benefits and the payment of certain obligations accrued in the previous
year. In 1999, other assets and liabilities, net, 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 $201.8 million in 2000, a decrease of
$12.8 million from $214.6 million reported in 1999. Of that amount, the
Corporation used $39.3 million for the purchase of five Aggregates division-
related acquisitions, compared with $77.1 million in 1999 for the purchase of
ten Aggregates division-related acquisitions and $347.9 million in 1998 that
financed the acquisition of Redland Stone and nine other acquisitions. Additions
to property, plant and equipment, excluding acquisitions, of $170.8 million were
24% higher in 2000, compared with 1999. Comparable full-year capital
expenditures were $137.8 million in 1999 and $123.9 million in 1998. 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 years 1999 and 2000, the Corporation's management had planned
a more significant increase in property, plant and equipment additions. However,
as anticipated net sales growth in the heritage operations was affected by
weather-related conditions and softening construction demand, management scaled
back capacity expansion to better match the timing of market expansion. Other
investing activities included, among other items, proceeds from the sale of
surplus land and equipment; in 2000, the Corporation's additional investment in
IMS; in 1999, the Corporation's initial 19% investment in IMS and loans to
Meridian; and in 1998, the Corporation's initial investment in Meridian.
Approximately $19.3 million of cash was used for financing activities during
2000, compared with $20.3 million in 1999. In 1998, $279.2 million of cash was
provided by financing activities. The Corporation incurred $4.0 million of net
indebtedness in 2000, excluding $1.0 million reflected in acquisitions, net. Net
indebtedness of $14.7 million was incurred in 1999, excluding $9.2 million
reflected in acquisitions, net. During 1998, the Corporation incurred $302.3
million of net indebtedness, principally in connection with the consummation of
the Redland Stone acquisition. In 2000, the Board of Directors approved total
cash dividends on the Corporation's common stock of $0.54 a share. Regular
quarterly dividends were authorized and paid by the Corporation at a rate of
$0.13 a share for the first and second quarters and at a rate of $0.14 a share
for the third and fourth quarters. During 2000, the Corporation issued stock
under its stock-based award plans, providing $2.0 million in cash. Comparable
cash provided by issuance of common stock was $2.0 million and $1.9 million in
1999 and 1998, respectively. Further, during 1999 and 1998, the Corporation
issued approximately 311,100 and 280,100 restricted shares of common stock,
respectively, for acquisitions. 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 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 2000 or 1998.
The Corporation anticipates incurring additional indebtedness in connection with
the Meridian acquisition. The funds for the consummation of the Meridian
acquisition are expected to be initially provided through borrowings under the
Corporation's United States' commercial paper program. The Corporation expects
to subsequently repay a portion of its commercial paper borrowings with the
proceeds from the planned issuance of publicly registered debt.
CAPITAL STRUCTURE AND RESOURCES
Long-term debt, including current maturities of long-term debt and commercial
paper, increased to $646.7 million at the end of 2000, from $641.7 million at
the end of 1999. Total debt represented approximately 43% of total
capitalization at December 31, 2000, compared with 45% at December 31, 1999. The
Corporation's debt at December 31, 2000, was principally in the form of publicly
issued long-term, fixed-rate notes and debentures and United States' commercial
paper (see Note E to the audited consolidated financial statements on pages 16
and 17). Shareholders' equity grew to $863.3 million at December 31, 2000, from
$774.0 million at December 31, 1999.
Page 36 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
30
The Corporation has $450 million in revolving credit facilities, syndicated
through a group of commercial domestic and foreign banks, which support a United
States' commercial paper program 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 2001 (see Note E to
audited consolidated financial statements on pages 16 and 17). The Corporation
amended its revolving credit agreements, in connection with extending the term
of its Short-Term Credit Agreement, to modify certain restrictive covenants
relating to leverage. The Corporation's management believes it will be able to
extend its Short-Term Credit Agreement for an additional 364-day period beyond
August 2001 and extend its Long-Term Credit Agreement for an additional
five-year term beyond January 2002.
No borrowings were outstanding under either of the revolving credit agreements
at December 31, 2000. However, the Long- and Short-Term Credit Agreements
support commercial paper borrowings of $190 million outstanding at December 31,
2000, of which $150 million has been 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
outstanding commercial paper of $40 million has been classified as current on
the Corporation's consolidated balance sheet.
At December 31, 2000, the Corporation had $2.5 million outstanding under a $10
million, variable-rate line of credit. The effective interest rate on the
outstanding balance at December 31, 2000, was 7.32%.
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 or escalating costs (see "Business
Environment" on pages 27 through 33). Aside from these inherent risks, 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 retirement and postretirement benefit expense in 2000 was
reduced as a result of the increased discount rate for the retirement and
postretirement benefit plans, favorable 1999 investment returns on employee
retirement plan assets and certain changes to the postretirement benefit plan.
The Corporation's management anticipates an increase in retirement and
postretirement benefit expense in 2001, as a result of the decrease in the
discount rate and lower investment returns experienced in 2000, as compared to
1999. There is no assurance that retirement and postretirement benefit expense
will continue at current levels, due to the underlying volatility of interest
rates and investment returns (see Note H to the audited consolidated financial
statements on pages 18 through 20).
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 standby letter of credit agreements relating to
workers' compensation and auto and general liability self insurance. On December
31, 2000, the Corporation had contingent liabilities under these outstanding
letters of credit of approximately $8.4 million.
The 5.875% Notes, due December 1, 2008, with an effective rate of 6.03%, were
issued in December 1998, in the aggregate principal amount of $200 million,
through private placement in connection with the acquisition of Redland Stone.
The 5.875% Notes 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 of Directors 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.
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
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 37
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
provide the capital resources necessary to support anticipated operating needs,
to cover debt service requirements, to fund capital expenditures and
discretionary investments 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'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-2" by Standard & Poor's, "P-2" by Moody's and "F-2" by Fitch IBCA, Duff
& Phelps. The Corporation's senior unsecured debt was downgraded from "A" to
"A-" by Standard and Poor's and its commercial paper program was lowered from
"A-1" to "A-2" by Standard and Poor's and from "F-1" to "F-2" by Fitch, as a
result of the additional debt required to finance the acquisition of Meridian.
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 L to the audited consolidated financial statements on pages 22 and
23).
NEW ACCOUNTING STANDARDS
Effective July 1, 2000, the Corporation adopted Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("FAS 133"), as amended by Statement of Financial Accounting
Standards No. 137, Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133, and Statement of
Financial Accounting Standards No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities an Amendment of FASB Statement No.
133 ("FAS 138"). The adoption of FAS 133 and FAS 138 did not have an impact on
net earnings or the financial position of the Corporation because the
Corporation does not currently have any hedging activities, derivative
instruments or material contracts that are subject to these accounting
standards.
The Corporation adopted Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements ("SAB 101"), for the quarter ended December 31, 2000.
The Corporation recognizes substantially all revenues, net of discounts, if any,
when finished products are shipped to customers or services have been rendered.
Therefore, the adoption of SAB 101 had no effect on the Corporation's reported
total revenues, net earnings or financial position.
Page 38 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
32
The Corporation adopted Emerging Issues Task Force Issue No. 00-10, Accounting
for Shipping and Handling Fees and Costs ("EITF 00-10"), beginning with the
fourth quarter 2000 reporting. EITF 00-10 requires that amounts billed to
customers related to shipping and handling be classified as revenue and that the
related costs be included in costs. Generally, the Corporation's customers
accept the aggregates products that they purchase at the quarry location using
their own transportation. However, in certain circumstances, the Corporation
arranges for transportation of the purchased aggregates products to the customer
for a delivered price. The customer is billed at the delivered price, which
includes the price of the aggregates products and the cost of freight and
delivery charges.
Freight and delivery costs for the years ended December 31, 2000, 1999 and 1998,
were $184.5 million, $175.3 million and $143.9 million respectively. The
Corporation included freight and delivery charges in total revenues and the
related cost of freight and delivery in total cost of revenues beginning with
the reporting of the operating results for the quarter and year ended December
31, 2000. Gross profit did not change from amounts reported prior to the
adoption of EITF 00-10; however, gross profit margins have decreased, as a
result of an increase in total revenues. Prior annual and quarterly periods have
been reclassified.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities ("FAS 140"). FAS 140 is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001, and should be applied prospectively.
Certain disclosures for securitized financial assets were required for the
December 31, 2000, annual reporting. The adoption of FAS 140 did not have any
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, including inaccurate assumptions. Investors are also cautioned that it
is not possible to predict or identify all such factors. Consequently, the
reader should not consider any such list to be a complete statement of all
potential risks or uncertainties. The forward-looking statements in this
document are intended to be subject to the safe harbor protection provided by
Sections 27A and 21E. These forward-looking statements are made as of the date
hereof based on management's current expectations and the Corporation does not
undertake an obligation to update such statements, whether as a result of new
information, future events or otherwise. 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, 2000 (Form 10-K); "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 24
through 39 of this Annual Report; and "Note A: Accounting Policies" on pages 13
through 15 and "Note L: Commitments and Contingencies" on pages 22 and 23 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
33
QUARTERLY PERFORMANCE
UNAUDITED
BASIC EARNING PER
(ADD 000, EXCEPT PER SHARE) NET SALES(1) GROSS PROFIT NET EARNINGS COMMON SHARE(2)
- -----------------------------------------------------------------------------------------------------------------------------
QUARTER 2000 1999 2000 1999 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------
First $ 276,131 $ 241,061 $ 44,358 $ 39,742 $ 7,330 $ 7,940 $0.16 $0.17
Second 362,474 328,865 96,832 90,227 42,122 41,273 0.90 0.88
Third 380,305 353,792 95,426 99,661 42,051 43,951 0.90 0.94
Fourth 314,090 335,109 66,955 81,069 20,524 32,617 0.44 0.70
- -----------------------------------------------------------------------------------------------------------------------------
Totals $1,333,000 $1,258,827 $303,571 $310,699 $112,027 $125,781 $2.40 $2.70
=============================================================================================================================
PER COMMON SHARE
-------------------------------------------------------
STOCK PRICES
DILUTED EARNINGS PER -------------------------------------
COMMON SHARE(2) DIVIDENDS PAID HIGH LOW HIGH LOW
- ---------------------------------------------------------------------------------------------------------
QUARTER 2000 1999 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------
First $0.16 $0.17 $0.13 $0.13 $49.38 $35.50 $61 $49 3/16
Second 0.90 0.88 0.13 0.13 $54.25 $40.45 $68 1/8 $54 7/8
Third 0.90 0.94 0.14 0.13 $46.94 $35.24 $60 3/8 $35 1/4
Fourth 0.44 0.70 0.14 0.13 $44.10 $32.25 $42 5/8 $35 3/8
- ---------------------------------------------------------------------------------------------------------
Totals $2.39 $2.68 $0.54 $0.52
=========================================================================================================
(1) Net sales exclude freight and delivery revenues; such revenues are included
in total revenues in accordance with EITF 00-10, Accounting for Shipping
and Handling Fees and Costs on the Consolidated Statement of Earnings on
page 9.
(2) 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
34
FIVE YEAR SUMMARY
(ADD 000, EXCEPT PER SHARE) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Net sales $1,333,000 $1,258,827 $1,057,691 $ 900,863 $ 721,947
Freight and delivery revenues 184,517 175,292 143,805 128,326 102,974
--------------------------------------------------------------------------
Total revenues 1,517,517 1,434,119 1,201,496 1,029,189 824,921
- -----------------------------------------------------------------------------------------------------------------------------
Cost of sales, other costs and expenses 1,130,523 1,043,538 861,137 738,093 601,271
Freight and delivery costs 184,517 175,292 143,805 128,326 102,974
--------------------------------------------------------------------------
Cost of operations 1,315,040 1,218,830 1,004,942 866,419 704,245
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 202,477 215,289 196,554 162,770 120,676
Interest expense on debt 41,895 39,411 23,759 16,899 10,121
Other income and (expenses), net 8,239 18,435 1,347 5,341 8,398
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before taxes on income 168,821 194,313 174,142 151,212 118,953
Taxes on income 56,794 68,532 58,529 52,683 40,325
- -----------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 112,027 $ 125,781 $ 115,613 $ 98,529 $ 78,628
=============================================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 2.40 $ 2.70 $ 2.49 $ 2.14 $ 1.71
=============================================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 2.39 $ 2.68 $ 2.48 $ 2.13 $ 1.71
=============================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 0.54 $ 0.52 $ 0.50 $ 0.48 $ 0.46
=============================================================================================================================
CONDENSED CONSOLIDATED BALANCE SHEET DATA
Current deferred income tax benefits $ 16,750 $ 21,899 $ 18,978 $ 16,873 $ 15,547
Current assets - other 408,251 381,466 350,410 305,139 255,619
Property, plant and equipment, net 914,072 846,993 777,528 591,420 408,820
Goodwill, net 374,994 375,327 348,026 148,481 39,952
Other intangibles, net 34,462 31,497 27,952 26,415 23,216
Other noncurrent assets 92,910 85,392 65,695 17,385 25,764
=============================================================================================================================
TOTAL $1,841,439 $1,742,574 $1,588,589 $1,105,713 $ 768,918
=============================================================================================================================
Current liabilities - other $ 143,958 $ 142,974 $ 136,576 $ 106,804 $ 86,871
Current maturities of long-term debt
and commercial paper 45,155 39,722 15,657 1,431 1,273
Long-term debt and commercial paper 601,580 602,011 602,113 310,675 125,890
Pension and postretirement benefits 84,950 85,839 76,209 63,070 52,646
Noncurrent deferred income taxes 86,563 81,857 75,623 50,008 13,592
Other noncurrent liabilities 15,947 16,165 14,712 11,889 7,669
Shareholders' equity 863,286 774,006 667,699 561,836 480,977
=============================================================================================================================
TOTAL $1,841,439 $1,742,574 $1,588,589 $1,105,713 $ 768,918
=============================================================================================================================
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 41