EXHIBIT 13.1
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 five 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 meets 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 the following page.
/S/ Janice K. Henry
- -------------------------------------------------
Janice K. Henry
Senior Vice President and Chief Financial Officer
Page 8 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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, 2001 and 2000, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Martin Marietta
Materials, Inc., and subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
/S/ Ernst & Young LLP
Raleigh, North Carolina
January 28, 2002
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 9
CONSOLIDATED STATEMENT OF EARNINGS
for years ended December 31
(add 000, except per share) 2001 2000 1999
- --------------------------------------------------------------------------------------------------
NET SALES $1,505,691 $1,333,000 $1,258,827
Freight and delivery revenues 212,359 184,517 175,292
----------------------------------------------
Total revenues 1,718,050 1,517,517 1,434,119
- --------------------------------------------------------------------------------------------------
Cost of sales 1,201,941 1,029,429 948,128
Freight and delivery costs 212,359 184,517 175,292
----------------------------------------------
Total cost of revenues 1,414,300 1,213,946 1,123,420
- --------------------------------------------------------------------------------------------------
GROSS PROFIT 303,750 303,571 310,699
Selling, general and administrative expenses 105,949 98,768 92,621
Research and development 556 2,326 2,789
- --------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 197,245 202,477 215,289
Interest expense on debt 46,792 41,895 39,411
Other income and (expenses), net 7,986 8,239 18,435
- --------------------------------------------------------------------------------------------------
Earnings before taxes on income 158,439 168,821 194,313
Taxes on income 53,077 56,794 68,532
- --------------------------------------------------------------------------------------------------
NET EARNINGS $ 105,362 $ 112,027 $ 125,781
==================================================================================================
NET EARNINGS PER COMMON SHARE
- BASIC $ 2.20 $ 2.40 $ 2.70
- DILUTED $ 2.19 $ 2.39 $ 2.68
==================================================================================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
- BASIC 47,873 46,753 46,668
- DILUTED 48,066 46,948 46,947
==================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 0.56 $ 0.54 $ 0.52
==================================================================================================
The notes on pages 14 to 24 are an integral part of these financial statements.
Page 10 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
CONSOLIDATED BALANCE SHEET
at December 31
ASSETS (add 000) 2001 2000
- ------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,379 $ --
Accounts receivable, net 215,184 180,915
Inventories, net 231,003 207,534
Current deferred income tax benefits 19,696 16,750
Other current assets 28,970 19,802
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 496,232 425,001
- ------------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,082,189 914,072
Goodwill, net 571,186 374,994
Other intangibles, net 35,782 34,462
Other noncurrent assets 39,191 92,910
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,224,580 $1,841,439
================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (add 000)
- ------------------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Book overdraft $ -- $ 4,778
Accounts payable 79,572 59,029
Accrued salaries, benefits and payroll taxes 38,553 27,021
Accrued insurance and other taxes 32,265 23,967
Income taxes 3,091 2,498
Current maturities of long-term debt and commercial paper 4,490 45,155
Other current liabilities 34,066 26,665
- ------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 192,037 189,113
- ------------------------------------------------------------------------------------------------
Long-term debt and commercial paper 797,385 601,580
Pension, postretirement and postemployment benefits 81,650 84,950
Noncurrent deferred income taxes 102,664 86,563
Other noncurrent liabilities 28,632 15,947
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,202,368 978,153
- ------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value; 100,000,000 shares authorized 485 468
Additional paid-in capital 437,020 356,546
Retained earnings 584,707 506,272
- ------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 1,022,212 863,286
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,224,580 $1,841,439
================================================================================================
The notes on pages 14 to 24 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 11
CONSOLIDATED STATEMENT OF CASH FLOWS
for years ended December 31
(add 000) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 105,362 $ 112,027 $ 125,781
Adjustments to reconcile net earnings to cash provided by operating
activities:
Depreciation, depletion and amortization 154,635 136,373 124,754
Other items, net (12,682) (2,331) (6,257)
Changes in operating assets and liabilities:
Deferred income taxes 14,356 9,457 (1,345)
Net changes in receivables, inventories and payables (9,373) (13,093) (31,513)
Other assets and liabilities, net 645 (29,553) 12,256
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 252,943 212,880 223,676
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (194,386) (170,805) (137,820)
Acquisitions, net (221,772) (39,327) (77,080)
Other investing activities, net 45,973 8,326 339
- ----------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (370,185) (201,806) (214,561)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (2,680) (9,369) (618)
Increase in long-term debt 250,078 805 280
Commercial paper and line of credit, net (97,518) 12,518 15,000
Debt issue costs (2,175) -- --
Dividends paid (26,927) (25,248) (24,276)
Issuances of common stock 2,621 2,039 2,022
Repurchases of common stock -- -- (12,706)
- ----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 123,399 (19,255) (20,298)
======================================================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,157 (8,181) (11,183)
(BOOK OVERDRAFT) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR (4,778) 3,403 14,586
======================================================================================================================
CASH AND CASH EQUIVALENTS (BOOK OVERDRAFT), END OF YEAR $ 1,379 $ (4,778) $ 3,403
======================================================================================================================
The notes on pages 14 to 24 are an integral part of these financial statements.
Page 12 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS ' EQUITY
Total
Common Additional Retained Shareholders'
(add 000) Stock Paid-In Capital Earnings Equity
- -------------------------------------------------------------------------------------------------------------------
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
Net earnings -- -- 105,362 105,362
Dividends declared ($0.56 a share) -- -- (26,927) (26,927)
Net stock transactions 17 80,474 -- 80,491
- -------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 485 $ 437,020 $ 584,707 $ 1,022,212
===================================================================================================================
The notes on pages 14 to 24 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 13
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 343 quarries and distribution
facilities to customers in 31 states, Canada and the Caribbean. Texas, North
Carolina, Ohio, Georgia, and Iowa account for approximately 56% of total 2001
net sales. In addition, the Corporation produces magnesia-based chemicals and
dolomitic lime products used in a wide variety of industrial, agricultural and
environmental applications, primarily to customers in the worldwide steel
industry.
BASIS OF CONSOLIDATION. The consolidated financial statements include the
accounts of the Corporation and its wholly owned and majority-owned
subsidiaries, including a joint venture in Cheyenne, Wyoming, which was
purchased as part of the Meridian Aggregates Company ("Meridian") acquisition.
Partially owned affiliates are accounted for at cost or as equity investments
depending on the level of ownership interest or the Corporation's ability to
exercise control over the affiliates' operations. The Corporation is a minority
member of certain limited liability corporations whereby the majority members
are paid a preferred return from the profits of the underlying businesses.
Generally, the Corporation has an option to purchase the majority members'
interest after the lapse of a specified number of years. One such option is
exercisable beginning after December 31, 2002.
All significant intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES. The preparation of the Corporation's financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make certain estimates and assumptions. Such judgments
affect the reported amounts in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION. Substantially all revenues are recognized when finished
products are shipped to unaffiliated customers or services have been rendered.
Total revenues generally include sales of materials to customers, net of
discounts or allowances, if any, and include freight and delivery charges billed
to customers. Appropriate provision for uncollectible amounts is recognized.
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.
INVENTORIES VALUATION. Inventories are stated at the lower of cost or market.
Costs are determined by the first-in, first-out 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 4 to
38 years; from 2 to 20 years for machinery and equipment; and 3 to 15 years for
land improvements. Interest cost of $6,040,000 and $2,107,000 was capitalized
during 2001 and 2000, respectively. Depletion of mineral deposits is calculated
over estimated recoverable quantities, principally by the units-of-production
method. Depreciation and depletion expense was $125,642,000, $113,221,000, and
$103,928,000 for the years ended December 31, 2001, 2000 and 1999, 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, 2001 and 2000, the amounts for accumulated
amortization of goodwill were $77,386,000 and $52,071,000, respectively. Other
intangibles represent amounts assigned principally to noncompete agreements and
are amortized ratably over periods based on related contractual terms, generally
3 to 20 years. At December 31, 2001 and 2000, the amounts for accumulated
amortization of other intangibles were $25,629,000 and $23,075,000,
respectively. Amortization expense for intangibles was $28,393,000, $22,612,000,
and $20,290,000 for the years ended December 31, 2001, 2000 and 1999,
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,
goodwill and other intangibles are adjusted. (See: Accounting Changes for the
effect of adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.)
Page 14 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
STOCK-BASED COMPENSATION. The Corporation has adopted 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 between October 31, 1998, the original investment date, and April 3,
2001, the acquisition date, which required 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 at December 31, 2000, and
Meridian-related income of $508,000 from January 1 through April 3, 2001,
$3,717,000 during 2000 and $3,395,000 during 1999. Further, prior to the April
3, 2001 acquisition, Meridian provided 273,000 and 475,000 tons of aggregates
products to certain operations of the Corporation in 2001 and 2000,
respectively.
RESEARCH AND DEVELOPMENT AND SIMILAR COSTS. Research and development and similar
costs are charged to operations as incurred.
START-UP COSTS. Preoperating costs and noncapital-related start-up costs for new
facilities and products are generally charged to operations as incurred.
CRITICAL ACCOUNTING POLICIES. Information and further discussion of certain
accounting policies that the Corporation's management considers critical to
understanding its business are included in Management's Discussion and Analysis
of Financial Condition and Results of Operations on pages 26 and 27.
SEGMENT INFORMATION. Information concerning business segment data is included in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 36 through 38.
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 was increased by the conversion of fixed awards (employee stock
options, restricted stock 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 dilutive per-share computations. The
following table sets forth a reconciliation of the denominators for the basic
and diluted earnings per share computations for each of the years ended December
31:
(add 000) 2001 2000 1999
- ------------------------------------------------------------------------------------------
BASIC EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares 47,873 46,753 46,668
- ------------------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
Employees' fixed awards 152 156 238
Employees' and Directors'
nonvested stock 41 39 41
- ------------------------------------------------------------------------------------------
DILUTED EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares and
assumed conversions 48,066 46,948 46,947
- ------------------------------------------------------------------------------------------
ACCOUNTING CHANGES. In June 2001, the Financial Accounting Standards Board
("FASB") issued Statements of Financial Accounting Standards No. 141, Business
Combinations, which applied to business combinations for which the date of
acquisition was July 1, 2001, or later, and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"), effective January 1, 2002, (collectively the
"Statements").
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 15
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives are no longer amortized but are subject to annual impairment tests in
accordance with the Statements. The impact of the initial adoption of FAS 142
has not yet been determined; however, it may be material to the financial
position of the Corporation. Other intangible assets continue to be amortized
over their useful lives.
The Corporation applied the new rules on accounting for goodwill and other
intangible assets, beginning with four purchase business combinations completed
after June 30, 2001, and began January 1, 2002 for all purchase business
combinations. Application of the nonamortization provisions of FAS 142 will
favorably impact 2002 earnings, versus 2001 as related to such amortization. The
Corporation recognized $22,394,000 in 2001 and $16,205,000 for 2000 in goodwill
amortization. (See Management's Discussion and Analysis of Financial Condition
and Results of Operations, "Business Combinations, Divestitures and Capacity
Expansion" on pages 25 and 26, "Business Environment" on pages 30 through 36 and
Note B.)
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations ("FAS 143"). FAS 143 requires
recognition of the fair value of a liability representing an asset retirement
obligation in the period in which it is identified. The asset retirement
obligation is recorded at the acquisition date of a long-lived tangible asset if
the fair value can be reasonably estimated. A corresponding amount is
capitalized as part of the asset's carrying amount. The Corporation incurs some
reclamation liabilities as part of its aggregates mining process. However,
certain reclamation costs are currently treated as normal, ongoing operating
expenses and expensed generally in the period in which they are incurred. FAS
143 is effective the first quarter of 2003 for the Corporation. The effect of
the adoption of FAS 143 on the earnings and financial position of the
Corporation has not yet been determined but is not expected to be material.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"),
which is effective the first quarter of 2002 for the Corporation. FAS 144
supercedes Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. FAS
144 establishes criteria for the recognition and measurement of an impairment
loss for long-lived assets to be held and used and defines classification of
continuing and discontinued operations. FAS 144 also requires that assets held
for sale be measured at the lower of their carrying amount or fair value less
cost to sell. The Corporation does not expect the impact of adoption to be
material to earnings or financial position.
NOTE B: BUSINESS COMBINATIONS AND DIVESTITURES
On April 3, 2001, the Corporation completed the purchase of the remaining
interest of Meridian under the purchase option terms of the original October
1998, investment agreement. The purchase consideration consisted of
$238,000,000, including the original October 1998, investment of $42,000,000,
the retirement of debt, the forgiveness of related party obligations, and
estimated amounts for certain other assumed liabilities and transaction costs,
plus the assumption of normal balance sheet liabilities. The purchase
consideration is subject to normal post-closing adjustments and appropriate
accruals. This acquisition was accounted for under the purchase method of
accounting, and the operating results of Meridian were included with those of
the Corporation from April 3, 2001, forward. The Corporation recognized
$149,451,000 in goodwill in this acquisition. Goodwill was amortized based on a
30-year period through December 31, 2001. Effective January 1, 2002, the
goodwill related to the Meridian acquisition was no longer amortized in
accordance with FAS 142.
The Corporation, also in 2001, completed twelve smaller acquisitions in addition
to Meridian, for a combined $40,112,000 in cash and 1,684,400 shares, valued at
the time of acquisition at $77,326,000, of the Corporation's common stock, plus
the assumption of certain liabilities. These transactions strategically expanded
the Corporation's aggregates, asphalt and ready mixed businesses throughout the
system. These acquisitions 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, with most
acquisitions occurring in the first half of 2001. The Corporation recognized
$58,054,000 in goodwill related to eight acquisitions completed prior to June
30, 2001, which was amortized based on a 10-to-20 year period through December
31, 2001. Four of the 2001 acquisitions were completed after June 30, 2001.
Goodwill of $11,246,000 recognized for these four acquisitions was not
amortized, in accordance with the provisions of FAS 142.
Page 16 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Management expects that the preliminary purchase price allocations will be
adjusted during the one-year allocation period for these acquisitions.
On May 1, 2001, the Corporation completed the sale of certain of its assets
related to the Magnesia Specialties refractories business to a subsidiary of
Minerals Technologies Inc. ("Minteq") for $34,000,000. The Corporation retained
certain current assets, including accounts receivable, and certain liabilities
of the refractories business. The Corporation recognized a gain of $8,936,000 on
the sale of assets after the write-down of certain retained refractories assets,
including assets at the Magnesia Specialties division's Manistee, Michigan,
operating facility, as the facility was repositioned to focus on production of
chemicals products. Magnesia Specialties supplied Minteq with certain
refractories products during 2001 under a supply agreement. While the supply
agreement continues through 2002, the Corporation does not anticipate
refractories sales in 2002 under this agreement to exceed $5,000,000. The
refractories business contributed $26,774,000 in 2001 and $57,333,000 in 2000 to
Magnesia Specialties' net sales.
NOTE C: ACCOUNTS RECEIVABLE, NET
December 31
(add 000) 2001 2000
- ---------------------------------------------------------------------------------
Customer receivables $ 215,846 $181,326
Other current receivables 6,705 4,728
- ---------------------------------------------------------------------------------
222,551 186,054
Less allowances (7,367) (5,139)
- ---------------------------------------------------------------------------------
Total $ 215,184 $180,915
=================================================================================
NOTE D: INVENTORIES, NET
December 31
(add 000) 2001 2000
- ---------------------------------------------------------------------------------
Finished products $ 207,696 $177,066
Products in process and
raw materials 5,659 9,548
Supplies and expendable parts 23,668 26,692
- ---------------------------------------------------------------------------------
237,023 213,306
Less allowances (6,020) (5,772)
- ---------------------------------------------------------------------------------
Total $ 231,003 $207,534
=================================================================================
NOTE E: PROPERTY, PLANT AND EQUIPMENT, NET
December 31
(add 000) 2001 2000
- -----------------------------------------------------------------------------------
Land and improvements $ 226,943 $ 193,205
Mineral deposits 192,858 161,560
Buildings 75,212 72,687
Machinery and equipment 1,402,965 1,279,605
Construction in progress 176,444 106,544
- -----------------------------------------------------------------------------------
2,074,422 1,813,601
Less allowances for
depreciation and
depletion (992,233) (899,529)
- -----------------------------------------------------------------------------------
Total $1,082,189 $ 914,072
===================================================================================
NOTE F: LONG-TERM DEBT
December 31
(add 000) 2001 2000
- ---------------------------------------------------------------------------------
6.875% Notes, due 2011 $ 249,728 $ --
5.875% Notes, due 2008 199,229 199,141
6.9% Notes, due 2007 124,965 124,961
7% Debentures, due 2025 124,238 124,226
Commercial Paper and Line
of Credit, interest rates
ranging from 2.20% to 7.61% 95,000 192,518
Acquisition notes, interest rates
ranging from 5.60% to 9.00% 7,080 4,930
Other notes 1,635 959
- ---------------------------------------------------------------------------------
Total 801,875 646,735
Less current maturities (4,490) (45,155)
- ---------------------------------------------------------------------------------
Long-term debt $ 797,385 $601,580
=================================================================================
The 6.875% Notes were offered and sold by the Corporation, through a private
offering, in March 2001, at 99.85% of their principal amount of $250,000,000. In
July 2001, the Corporation exchanged $249,650,000 of the Notes for publicly
registered notes with substantially the same terms. The effective interest rate
on these securities is 6.98%. The Notes are not redeemable prior to their
maturity on April 1, 2011.
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 a shelf registration statement.
The effective interest rate on these securities is 7.00%. 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 a shelf registration statement. The effective
interest rate on these securities is 7.12%. 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
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 17
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
$225,000,000 for general corporate purposes through August 2002 and $225,000,000
for general corporate purposes through August 2006 (collectively, the
"Agreements"). Borrowings under these credit agreements are unsecured and bear
interest, at the Corporation's option, at rates based upon: (i) the Euro-Dollar
rate (as defined on the basis of a LIBOR) plus basis points related to a pricing
grid; (ii) a bank base rate (as defined on the basis of a published prime rate
or the Federal Funds Rate plus 1/2 of 1%); or (iii) a competitively determined
rate (as defined on the basis of a bidding process). These Agreements contain
restrictive covenants relating to leverage, requirements for limitations on
encumbrances and provisions that relate to certain changes in control. The
Corporation pays an annual loan commitment fee to the bank group.
No borrowings were outstanding under the revolving credit agreements at December
31, 2001. However, the Agreements support a commercial paper program of
$450,000,000 of which borrowings of $95,000,000 and $190,000,000 were
outstanding at December 31, 2001 and 2000, respectively. Of these amounts,
$95,000,000 and $150,000,000 at December 31, 2001 and 2000, respectively, were
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, was
classified as a current liability.
Excluding commercial paper, the Corporation's long-term debt maturities for the
five years following December 31, 2001, are:
(add 000)
- -------------------------
2002 $ 4,490
2003 1,647
2004 273
2005 123
2006 300
Thereafter 700,042
- -------------------------
Total $706,875
=========================
Total interest paid was $47,478,000, $42,661,000 and $37,108,000 for the years
ended December 31, 2001, 2000 and 1999, respectively.
Amounts reflected in acquisitions, net, in the consolidated statement of cash
flows include assumed or incurred indebtedness of $5,140,000, $950,000 and
$9,208,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
In addition, for 2001 and 1999, the amounts reflected in acquisitions, net,
exclude the effect of the issuance of 1,684,400 and 311,100 shares,
respectively, of the Corporation's common stock.
NOTE G: 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 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, 2001 and 2000, 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, 2001, was approximately $698,275,000
compared with a carrying amount of $698,160,000 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 and other borrowings approximates their carrying amount.
NOTE H: INCOME TAXES
The components of the Corporation's tax expense (benefit) on income are as
follow:
years ended December 31
(add 000) 2001 2000 1999
- -------------------------------------------------------------------------------
Federal income taxes:
Current $36,793 $44,302 $ 61,349
Deferred 7,366 2,656 (4,081)
- -------------------------------------------------------------------------------
Total federal
income taxes 44,159 46,958 57,268
- -------------------------------------------------------------------------------
State income taxes:
Current 7,109 9,409 12,128
Deferred 1,809 427 (864)
- -------------------------------------------------------------------------------
Total state
income taxes 8,918 9,836 11,264
- -------------------------------------------------------------------------------
Total provision $53,077 $56,794 $68,532
===============================================================================
The Corporation's effective income tax rate varied from the statutory United
States income tax rate because of the following permanent tax differences:
Page 18 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
years ended December 31 2001 2000 1999
- -------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction)
resulting from:
Effect of statutory
depletion (7.4) (7.7) (6.4)
State income taxes 3.7 3.8 3.8
Goodwill amortization 3.2 2.7 2.1
Partnership interest (2.6) -- --
Other items 1.6 (0.2) 0.8
- -------------------------------------------------------------------------------
Effective tax rate 33.5% 33.6% 35.3%
===============================================================================
The effective tax rate in 2001 included the recognition of a one-time, tax
benefit. The tax benefit related to a wholly owned partnership which elected to
be treated as a corporation for federal income tax purposes subsequent to the
2001 purchase of the remaining partnership interest by the Corporation. As a
result of this election, the Corporation looks to the inside tax basis to
calculate its deferred taxes under Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes.
The principal components of the Corporation's deferred tax assets and
liabilities at December 31 are as follow:
DEFERRED
ASSETS (LIABILITIES)
----------------------------
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Property, plant and
equipment $(133,850) $(116,748)
Goodwill and other intangibles 4,200 4,759
Employee benefits 32,339 31,233
Financial reserves 6,461 10,192
Other items, net 7,882 751
- ----------------------------------------------------------------------------------
Total $ (82,968) $ (69,813)
==================================================================================
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, 2001 or 2000.
The Corporation's total income tax payments were $42,126,000, $59,915,000 and
$71,644,000, respectively, during the years ended December 31, 2001, 2000 and
1999.
NOTE I: RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
DEFINED BENEFIT PLANS. The Corporation sponsors a number of noncontributory
defined benefit retirement plans, covering substantially all employees. The
assets of the Corporation's retirement plans are held in the Corporation's
Master Retirement Trust and are invested principally in commingled funds. The
underlying investments are invested in listed stocks and bonds and cash
equivalents. Defined benefit plans for salaried employees provide benefits based
on each employee's years of service and average compensation for a specified
period of time before retirement. Defined retirement plans for hourly employees
generally provide benefits of stated amounts for specified periods of service.
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 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 pension plans comply with two principal
standards: the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), which, in conjunction with the Internal Revenue Code, determines
legal minimum and maximum deductible funding requirements, and Statement of
Financial Accounting Standards No. 87, Employers Accounting for Pensions ("FAS
87") and Statement of Financial Accounting Standards No.132, Employers
Disclosures About Pensions and Other Postretirement Benefits, which establish
rules for financial accounting and reporting. When any funded plan exceeds the
full-funding limits of ERISA, no contribution is made to that plan. FAS 87
specifies that certain key actuarial assumptions be adjusted annually to reflect
current, rather than long-term, trends in the economy.
The net periodic retirement benefit cost of defined benefit plans included the
following components:
years ended December 31
(add 000) 2001 2000 1999
- ------------------------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 8,284 $ 6,764 $ 7,578
Interest cost 11,950 10,973 10,071
Expected return on assets (14,114) (14,886) (12,946)
Amortization of:
Prior service cost 617 571 531
Actuarial gain (1,006) (3,005) (485)
Transition asset (357) (357) (357)
- ------------------------------------------------------------------------------------------
Net periodic benefit cost 5,374 60 4,392
Curtailment gain (1,472) -- --
- ------------------------------------------------------------------------------------------
Total net periodic benefit cost $ 3,902 $ 60 $ 4,392
==========================================================================================
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 19
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Weighted-average assumptions used as of December 31 are as follow:
2001 2000
- --------------------------------------------------------
Discount rate 7.25% 7.50%
Rate of increase in future
compensation levels 5.00% 5.00%
Expected long-term rate
of return on assets 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
Corporation's consolidated balance sheets as of:
years ended December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Change in benefit obligation:
Net benefit obligation at
beginning of year $ 154,015 $ 130,669
Service cost 8,284 6,764
Interest cost 11,950 10,973
Actuarial loss 9,714 11,697
Plan amendments 850 611
Curtailment (1,600) --
Gross benefits paid (8,586) (6,699)
- ----------------------------------------------------------------------------------
Net benefit obligation at
end of year $174,627 $ 154,015
==================================================================================
years ended December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 160,602 $ 168,943
Actual return on plan assets, net (5,184) (2,372)
Employer contributions 262 730
Gross benefits paid (8,586) (6,699)
- ----------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 147,094 $ 160,602
==================================================================================
December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Funded status of the plan
at end of year $ (27,533) $ 6,587
Unrecognized net
actuarial gain (1,025) (31,043)
Unrecognized prior
service cost 4,275 4,170
Unrecognized net
transition asset (33) (391)
- ----------------------------------------------------------------------------------
Accrued benefit cost $ (24,316) $ (20,677)
==================================================================================
December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Amounts recognized in the
consolidated balance
sheet consist of:
Prepaid benefit cost $ 157 $ 134
Accrued benefit cost (24,473) (20,811)
- ----------------------------------------------------------------------------------
Net amount recognized
at end of year $ (24,316) $ (20,677)
==================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $21,477,000, $19,145,000 and $13,015,000, respectively, at
December 31, 2001, and $5,272,000, $3,350,000 and $0, respectively, as of
December 31, 2000.
The Corporation realized a $1,600,000 reduction in the year-ended December 31,
2001, net benefit obligation, as a result of the elimination of future service
related to the refractories employees of Magnesia Specialties. After immediate
recognition of unrecognized prior service costs related to these employees, a
curtailment gain of $1,472,000 reduced 2001 net periodic benefit cost. However,
the curtailment gain was recorded through other income and expenses, net, as a
part of the gain on the sale of the refractories business (see Note B).
POSTRETIREMENT BENEFITS. The Corporation provides other postretirement benefits
for certain employees 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) 2001 2000 1999
- --------------------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 791 $ 1,144 $ 2,738
Interest cost 4,203 3,886 3,782
Expected return on
assets -- -- (35)
Amortization of:
Prior service cost (483) (394) (35)
Actuarial gain (112) (482) (419)
- --------------------------------------------------------------------------------------
Net periodic benefit cost 4,399 4,154 6,031
Curtailment charge 115 -- --
Settlement gain (471) -- --
- --------------------------------------------------------------------------------------
Total net periodic benefit cost $ 4,043 $ 4,154 $ 6,031
======================================================================================
Page 20 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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 follow:
years ended December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Change in benefit obligation:
Net benefit obligation at
beginning of year $ 55,279 $ 46,435
Service cost 791 1,144
Interest cost 4,203 3,886
Participants' contribution 300 249
Plan amendments (2,156) --
Settlement (386) --
Actuarial loss 4,023 7,315
Gross benefits paid (3,405) (3,750)
- ----------------------------------------------------------------------------------
Net benefit obligation at
end of year $ 58,649 $ 55,279
==================================================================================
years ended December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 0 $ 0
Employer contributions 3,105 3,501
Participants' contributions 300 249
Gross benefits paid (3,405) (3,750)
- ----------------------------------------------------------------------------------
Fair value of plan assets
at end of year $ 0 $ 0
==================================================================================
December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Funded status of the plan
at end of year $ (58,649) $ (55,279)
Unrecognized net actuarial loss (gain) 1,550 (2,672)
Unrecognized prior service cost (7,314) (5,524)
- ----------------------------------------------------------------------------------
Accrued benefit cost $ (64,413) $ (63,475)
==================================================================================
December 31
(add 000) 2001 2000
- ----------------------------------------------------------------------------------
Amounts recognized in the
consolidated balance sheet
consist of:
Accrued benefit cost $ (64,413) $ (63,475)
- ----------------------------------------------------------------------------------
Net amount recognized
at end of year $ (64,413) $ (63,475)
==================================================================================
The weighted-average discount rate assumption was 7.25% and 7.50% at December
31, 2001 and 2000, respectively.
The assumed trend rate for health care inflation used in measuring the net
periodic benefit cost and benefit obligation is 8% for 2001, declining to 4.5%
in 2006 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, 2001:
ONE PERCENTAGE POINT
----------------------------
(add 000) INCREASE (DECREASE)
- ----------------------------------------------------------------------------------
Total service and
interest cost
components $ 487 $ (404)
Postretirement
benefit obligation $ 5,383 $ (4,523)
In June 2001, the Corporation amended its postretirement medical benefits for
certain employees to realign the maximum annual medical benefits available to
retirees and further limit additional benefits. The amendment reduced the net
postretirement benefit obligation by $2,156,000.
The Corporation realized a $386,000 reduction in the year-ended December 31,
2001, net benefit obligation, as a result of the irrevocable settlement of
future benefits related to the refractories employees of Magnesia Specialties.
After immediate recognition of unrecognized actuarial gains related to these
employees, a settlement gain of $471,000 reduced 2001 net periodic benefit cost.
In addition, a curtailment charge of $115,000 resulted from the immediate
recognition of prior service costs related to these employees. The settlement
gain and curtailment charge were recorded through other income and expenses,
net, as a part of the gain on the sale of the refractories business (see Note
B).
DEFINED CONTRIBUTION PLANS. The Corporation maintains two defined contribution
plans, which cover substantially all employees. These plans, intended to be
qualified under Section 401(a) of the Internal Revenue Code, are retirement
savings and investment plans for the Corporation's salaried and hourly
employees. The employees of the former Redland Stone Products Company
participate in a separate defined contribution plan which was established prior
to the Corporation's acquisition of Redland Stone. The Corporation will continue
to support the existing 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 $4,846,000 in 2001,
$3,695,000 in 2000, and $3,144,000 in 1999.
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 at each of December 31, 2001 and 2000.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 21
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE J: STOCK OPTIONS AND AWARD PLANS
The shareholders approved, on May 8, 1998, the Martin Marietta Materials, Inc.
Stock-Based Award Plan (the "Plan"), as amended from time to time (along with
the Amended Omnibus Securities Award Plan, originally approved in 1994, the
"Plans"). In connection with the Plans, the Corporation is authorized to
repurchase up to 6,000,000 shares of the Corporation's common stock for issuance
under the Plans.
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 the 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 38,452 shares
for 2001, 38,222 shares for 2000 and 32,648 shares for 1999, of the
Corporation's common stock, were awarded under the incentive stock plan. Such
awards are granted in the subsequent year. 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.
In 2001, the Corporation granted restricted stock awards under the Plans to a
group of executive officers and key personnel. This plan replaces the
Shareholder Value Achievement Plan which was terminated for awards effective
January 1, 2001. The restricted stock awards which, in most cases, are based on
certain common stock performance criteria over a specified period of time,
promote long-term growth and performance and generally vest if the executive is
continuously employed on December 1 in the year that is immediately preceding
three or five years from the date of grant. At that date, shares of the
Corporation's common stock are issued to the participants. In 2001, 58,104
restricted stock awards were granted.
The Plans provide that each nonemployee director receives 2,000 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 vest immediately upon grant and expire ten years from such
date.
The following table includes summary information for the Plans and includes
awards under the option plan for employees, incentive stock plan for certain
participants, restricted stock awards for executive officers and key personnel
and nonemployee director awards.
NUMBER OF SHARES
------------------------------ WEIGHTED-
AVAILABLE AWARDS AVERAGE
FOR GRANT OUTSTANDING EXERCISE PRICE
- -----------------------------------------------------------------------------------------
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
GRANTED (624,326) 624,326 $38.81
EXERCISED -- (89,107) $29.54
TERMINATED 10,289 (10,289) $44.35
- -----------------------------------------------------------------------------------------
DECEMBER 31, 2001 3,128,288 2,414,823 $40.41
=========================================================================================
Approximately 1,347,000, 997,000 and 712,000 outstanding awards were exercisable
at December 31, 2001, 2000 and 1999, respectively. Exercise prices for awards
outstanding as of December 31, 2001, ranged from $0.00 to $63.44. The
weighted-average remaining contractual life of those awards is 7.1 years. The
weighted-average exercise price of outstanding exercisable awards at December
31, 2001, is $39.29.
The following table summarizes information for awards outstanding and
exercisable at December 31, 2001.
AWARDS OUTSTANDING
- -------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF AVERAGE AVERAGE
PRICES SHARES REMAINING LIFE EXERCISE PRICE
- -------------------------------------------------------------------------------
$0.00 58,104 2.9 $00.00
$20.00-$24.25 329,919 3.7 $22.24
$32.37-$48.75 2,002,800 7.8 $44.37
$51.50-$63.44 24,000 7.8 $57.47
AWARDS EXERCISABLE
- -------------------------------------------------------------------------------
WEIGHTED- WEIGHTED-
RANGE OF NUMBER OF AVERAGE AVERAGE
PRICES SHARES REMAINING LIFE EXERCISE PRICE
- -------------------------------------------------------------------------------
$20.00-$24.25 329,919 3.7 $22.24
$32.37-$48.75 992,706 7.0 $44.51
$51.50-$63.44 24,000 7.8 $57.47
22 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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 and 16,791 shares of the Corporation's
common stock were granted under this plan in 2000 and 1999, respectively. Due to
the December 2001, price of the Corporation's common stock relative to the
performance criteria, the Corporation issued no shares of common stock to key
senior employees in January 2002 representing stock unit awards granted in 1999.
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 50% of their
retainer in the form of the Corporation's common stock at a 20% discount to
market value. Directors elected to defer portions of their fees representing
9,731, 4,699 and 3,551 shares of the Corporation's common stock under this plan
during 2001, 2000 and 1999, 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:
2001 2000 1999
- ---------------------------------------------------------------------------
Risk-free interest rate 4.90% 6.10% 6.20%
Dividend yield 1.20% 1.20% 1.40%
Volatility factor 34.40% 34.10% 27.70%
Expected life 7 YEARS 7 years 7 years
Based on these assumptions, the weighted-average fair value of each option award
granted was $17.45, $19.44 and $17.86 for 2001, 2000 and 1999, respectively.
The Black-Scholes valuation model was developed for use in estimating the fair
value of traded awards which have no vesting restrictions and are fully
transferable. In addition, valuation models require the input of highly
subjective assumptions, including the expected stock price volatility factor.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based plans.
For purposes of pro forma disclosure, the estimated fair value of the
stock-based plans is amortized hypothetically over the vesting period of the
related grant or award. The Corporation's pro forma information for the years
ended December 31 is as follows:
(add 000, except per share) 2001 2000 1999
- ------------------------------------------------------------------------
Basic earnings per
common share:
Net earnings $99,077 $108,082 $122,791
Earnings per share $ 2.07 $ 2.31 $ 2.63
Diluted earnings per
common share:
Net earnings $99,077 $108,082 $122,791
Earnings per share $ 2.06 $ 2.30 $ 2.62
========================================================================
NOTE K: LEASES
Total lease expense was $43,803,000, $31,109,000 and $26,761,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. The Corporation's
operating leases generally contain renewal and/or purchase options with varying
terms. Total mineral royalties for all leased properties were $29,087,000,
$22,460,000 and $23,482,000 for the years ended December 31, 2001, 2000 and
1999, respectively. Future minimum rental and royalty commitments for all
noncancelable agreements as of December 31, 2001, are as follow:
(add 000)
- --------------------------
2002 $ 16,436
2003 14,387
2004 11,965
2005 10,444
2006 8,384
Thereafter 48,364
- --------------------------
Total $109,980
==========================
NOTE L: SHAREHOLDERS' EQUITY
The authorized capital structure of Martin Marietta Materials, Inc., includes
10,000,000 shares of preferred stock with par value of $0.01 a share, none of
which is issued currently; however, 100,000 shares of Class A Preferred Stock
have been reserved in connection with the Corporation's Shareholders Rights
Plan. In addition, the capital structure includes 100,000,000 shares of common
stock, with a par value of $0.01 a share. As of December 31, 2001 and 2000,
there were
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 23
NOTES TO FINANCIAL STATEMENTS
approximately 48,549,000 and 46,783,000 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 J). There were no shares repurchased in 2001 or 2000. 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.
Further, during 2001 and 1999 the Corporation issued 1,684,400 and 311,100,
respectively, shares of common stock for acquisitions.
NOTE M: COMMITMENTS AND CONTINGENCIES
The Corporation is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of those actions at this time, in the opinion of
management and counsel, it is unlikely that the outcome of such litigation and
other proceedings, including those pertaining to environmental matters (see Note
A and Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 41), will have a material adverse effect on the results of
the Corporation's operations or on its financial position.
ENVIRONMENTAL MATTERS. The Corporation's operations are subject to and affected
by federal, state and local laws and regulations relating to the environment,
health and safety and other regulatory matters. Certain of the Corporation's
operations may, from time to time, involve the use of substances that are
classified as toxic or hazardous within the meaning of these laws and
regulations. Environmental operating permits are, or may be, required for
certain of the Corporation's operations, and such permits are subject to
modification, renewal and revocation. The Corporation regularly monitors and
reviews its operations, procedures and policies for compliance with these laws
and regulations. Despite these compliance efforts, risk of environmental
liability is inherent in the operation of the Corporation's businesses, as it is
with other companies engaged in similar businesses, and there can be no
assurance that environmental liabilities will not have a material adverse effect
on the Corporation in the future.
The Corporation currently has no material provisions for estimated costs in
connection with expected remediation costs or other environmental-related
expenditures because it is impossible to quantify the impact of all actions
regarding environmental matters, particularly the extent and cost of future
remediation and other compliance efforts. However, in the opinion of management,
it is unlikely that any additional liability the Corporation may incur for known
environmental issues or compliance with present environmental protection laws
would have a material adverse effect on the Corporation's consolidated financial
position or on its results of operations (see Note A and Management's Discussion
and Analysis of Financial Condition and Results of Operations on page 41).
LETTERS OF CREDIT. The Corporation has entered into standby letter of credit
agreements relating to workers' compensation and auto and general liability
self-insurance. At December 31, 2001, the Corporation had contingent liabilities
under these outstanding letters of credit of approximately $13,836,000.
PERFORMANCE BONDS. In the normal course of business, the Corporation is
currently contingently liable for performance under $84,943,000 in performance
bonds required by certain states and municipalities, and their related agencies.
The bonds are principally for certain construction contracts, reclamation
obligations and mining permits. The Corporation has indemnified the underwriting
insurance company against any exposure under the performance bonds. In the
Corporation's past experience, no material claims have been made against these
financial instruments.
Two of these bonds totaling $35,545,000, or 42% of all outstanding performance
bonds, relate to specific performance for road construction projects currently
underway.
Page 24 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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 used in a wide
variety of industries. The discussion and analysis that follows reflects
management's assessment of the financial condition and results of operations of
Martin Marietta Materials and should be read in conjunction with the audited
consolidated financial statements on pages 10 through 24.
BUSINESS COMBINATIONS, DIVESTITURES AND CAPACITY EXPANSION
As of April 3, 2001, the Corporation completed the purchase of the remaining
interest of Meridian Aggregates Company ("Meridian") under the purchase option
terms of the original October 1998, investment agreement. The purchase
consideration consisted of $238 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 normal post-closing adjustments and
appropriate accruals. This acquisition was accounted for under the purchase
method of accounting, and the operating results of Meridian were included with
those of the Corporation from April 3, 2001, forward. The Corporation recognized
$149 million in goodwill in this acquisition. Goodwill was amortized based on a
30-year period through December 31, 2001. Effective January 1, 2002, the
goodwill related to the Meridian acquisition was no longer amortized in
accordance with Financial Accounting Standards Board Statement No. 142, Goodwill
and Other Intangible Assets ("FAS 142"). Management expects that the preliminary
purchase price allocation will be adjusted during the one-year allocation
period.
AGGREGATES CAPACITY
(IN MILLIONS OF DOLLARS)
1997 165.8
1998 197.6
1999 208.7
2000 216.8
2001 269.2
After focusing more on initiating internal growth and capacity expansion
projects during 2000, the Corporation, in 2001, completed twelve acquisitions in
addition to Meridian, for a combined $40.1 million in cash and 1,684,400 shares,
valued at the time of the acquisitions at $77.3 million, of the Corporation's
common stock, plus the assumption of certain liabilities. These transactions
strategically expanded the Corporation's aggregates, asphalt, and ready mixed
businesses throughout the system. Expansion, through contiguous acquisitions,
occurred in the Southwest Division - Texas and Oklahoma; the MidAmerica Division
- - Indiana and Ohio; the Midwest Division - Missouri, Kansas and Nebraska; the
Central Division - Arkansas and Mississippi; the newly acquired Meridian
Division - Nevada and California; and the Southeast Division - Tennessee. These
acquisitions were accounted for under the purchase method of accounting, and the
operating results of the businesses acquired were included with those of the
Corporation from the acquisition dates forward. The Corporation recognized $58.1
million in goodwill related to eight acquisitions completed prior to June 30,
2001, which was amortized based on a 10-or-20 year period through December 31,
2001. Four of the 2001 acquisitions were completed after June 30, 2001. Goodwill
of $11.2 million recognized for these four acquisitions was not amortized, in
accordance with the provisions of FAS 142. If the goodwill related to these four
acquisitions had been amortized, pretax earnings would have been reduced by
$225,000 in amortization expense. Additional information regarding all thirteen
acquisitions, and the related financing, is contained in Note A and Note B to
the audited consolidated financial statements on pages 14 through 17 and under
"Business Environment" on pages 30 through 36 and "Liquidity and Cash Flows" and
"Capital Structure and Resources" on pages 38 through 41.
During 2001, the Corporation finalized the purchase price allocations of the
five transactions completed in 2000. The post-closing adjustments relating to
working capital and other fair value adjustments were finalized without a
significant impact on the preliminary purchase price allocations.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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, goodwill will be reduced. Goodwill is as
follows at December 31:
Goodwill % of Total % of Shareholders'
(in millions) Assets Equity
- -------------------------------------------------------------------------------
2001 $ 571.2 25.7% 55.9%
2000 $ 375.0 20.4% 43.4%
As of May 1, 2001, the Corporation completed the sale of certain of its assets
related to the Magnesia Specialties refractories business to a subsidiary of
Minerals Technologies Inc. ("Minteq") for $34 million. The Corporation retained
certain current assets, including accounts receivable, and certain liabilities
of the refractories business. The reduction in working capital related to this
business yielded an additional $13 million in cash during the year. The
Corporation recognized a gain of $8.9 million on the sale of these assets after
the write-down of certain retained refractories assets, including assets at the
Magnesia Specialties division's Manistee, Michigan, operating facility, as the
facility was repositioned to focus on production of chemicals products. Magnesia
Specialties supplied Minteq with certain refractories products during 2001 under
a supply agreement. While the supply agreement continues through 2002, the
Corporation does not anticipate refractories sales under the agreement to exceed
$5.0 million in 2002. The refractories business contributed $26.8 million in
2001 and $57.3 million in 2000 to Magnesia Specialties net sales. Additional
information regarding this transaction, is contained in Note B to the audited
consolidated financial statements on pages 16 and 17 and in the "Business
Environment" discussion on pages 30 through 36.
The Corporation also transferred the operating responsibility for its Woodville,
Ohio, dolomitic lime facility to the MidAmerica Division of the Aggregates
segment. However, the dolomitic lime operations will continue to be reported
within the magnesia-based products segment.
Management believes that under Magnesia Specialties' current operating
structure, which carries a lower invested asset base, the dolomitic lime and
magnesia chemicals businesses provide an opportunity to generate attractive
earnings and cash flows in 2002 and beyond.
In addition to completing thirteen acquisitions, the Corporation continued to
focus on internal expansion during 2001. Several projects were completed during
the year, including the largest single plant modernization project in the
Corporation's history at the Bahama Rock quarry, making 2001 a record internal
expansion year. New plant construction and revitalization projects in Texas,
North Carolina, Arkansas, West Virginia, as well as the Bahamas, increased
annual aggregates production capacity by more than 12 million tons.
CRITICAL ACCOUNTING POLICIES
The Corporation has identified the accounting policies below as critical to its
business operations and the understanding of its results of operations. The
impact and any associated risks related to these policies on the Corporation's
business operations is discussed throughout this Management's Discussion and
Analysis of Financial Condition and Results of Operations, where such policies
affect reported or expected financial results. The preparation of the
Corporation's financial statements in conformity with accounting principles
generally accepted in the United States requires management to make certain
estimates and assumptions. Such judgments affect the reported amounts in the
audited consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Note A to the audited consolidated financial
statements on pages 14 through 16 provides detail on the application of these
and other accounting policies. As such, these critical accounting policies and
Note A to the audited consolidated financial statements should be read in
conjunction with this Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Business Combinations - Purchase Price Allocation. The Corporation has accounted
for all of its acquisitions under the purchase method of accounting. The
Corporation allocates purchase price to tangible assets based on appraisals to
determine estimated fair value. Typically, assumed liabilities in the
Corporation's business combinations are of a working capital
Page 26 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
nature and are generally recorded at fair value. The purchase price allocation
is typically finalized within a one-year allocation period as estimated values
are adjusted to reflect final valuation results. In the recent past, adjustments
from preliminary to final purchase price allocations have not been material to
the Corporation's financial position or results of operations.
The excess of the purchase price over the value of the tangible net assets
acquired is generally allocated to other identifiable intangible assets, namely
noncompete, consulting, supply, materials handling and name agreements, or to
goodwill. The other identifiable intangible assets are amortized over
contractually-specified periods. Goodwill was amortized over a 10-to-30 year
period on a straight-line basis prior to adoption of the nonamortization
provision of FAS 142.
Intangible Assets. The carrying value of intangible assets, including goodwill,
is reviewed if the facts and circumstances indicate potential, other than
temporary, impairment. Such facts and circumstances include, among other things,
a significant decrease in the market value of the underlying asset, a
significant adverse change in the business climate, or a history of operating or
cash flow losses combined with a forecast of continuing losses. The Corporation
has not recognized significant impairment losses in the past.
Retirement and Postretirement Benefits. The selection of retirement and
postretirement benefits as a critical accounting policy results from the direct
influence of long-term interest rates and investment returns, and the volatility
that changes in these factors can have on the related retirement and
postretirement expense recorded in the consolidated statement of earnings. Note
I in the audited consolidated financial statements on pages 19 through 21 and
the "Capital Structure and Resources" discussion which follows on pages 39
through 41 discuss the sensitivity and volatility of these factors.
Net Sales
(in millions)
MAGNESIA
AGGREGATES SPECIALTIES TOTAL
---------- ----------- -----
1997 $ 761 $ 140 $ 901
1998 $ 921 $ 137 $ 1,058
1999 $ 1,126 $ 133 $ 1,259
2000 $ 1,203 $ 130 $ 1,333
2001 $ 1,406 $ 100 $ 1,506
RESULTS OF OPERATIONS
The Corporation's Aggregates division's business is characterized by a high
level of dependence on construction-sector spending, and the Magnesia
Specialties' product lines, particularly dolomitic lime products, are used
principally within the steel industry. Therefore, the Corporation's
businesses are 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. The Corporation's
Aggregates division generated over 93% of net sales and over 98% of the
operating earnings during 2001. The following comparative analysis and
discussion should be read in that context. 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 billed to customers, and is consistent with the
basis by which management reviews the Corporation's operating results.
The Corporation's consolidated net sales of $1.506 billion in 2001 represent an
increase of $172.7 million, or 13%, over 2000 net sales of $1.333 billion. The
1999 consolidated net sales were $1.259 billion. Consolidated earnings from
operations were $197.2 million in 2001 and $202.5 million in 2000, reflecting a
decrease of $5.3 million, or 3%, in 2001 and a decrease of $12.8 million, or 6%,
in 2000, both as compared to the prior year. The Corporation's 1999 operating
earnings were $215.3 million. The Corporation's 2001 net earnings of $105.4
million, or $2.19 per diluted share, decreased 6% compared with 2000 net
earnings of $112.0 million, or $2.39 per diluted share. The 2000 net earnings
were 11% lower than 1999 net earnings of $125.8 million, or $2.68 per diluted
share.
In 2001, aggregates shipments increased 16% to 191.7 million tons, due primarily
to the acquisition of Meridian and 17 other businesses completed in 2000 and
2001. Heritage aggregates shipments (which exclude acquisitions that have not
been included in prior-year operations for a full year) increased 1% in 2001,
compared to the prior year.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Shipments (thousands of tons) 2001 2000
- -----------------------------------------------------------------------
Heritage Aggregates Operations 164,497 162,921
Acquisitions (2000 and 2001) 27,229 1,994
-------- --------
Aggregates Division 191,726 164,915
======== ========
While United States' public-works construction spending put in place in 2001
exceeded 2000 spending by $5.7 billion, or 11%, leading to increased aggregates
demand, expected declines in commercial construction and residential
construction, as measured by start-up of new housing developments, materialized
and largely offset public-works construction demand growth. The decline in
commercial construction, and the related aggregates demand, resulted from
reduced economic activity, workforce reductions and increased vacancy rates for
commercial building space. The declines were greater in the southeastern region
of the United States.
Average selling prices continued to increase for heritage aggregates operations
with a 2.6% increase in 2001. Pricing increases for heritage aggregates
operations are lower than the 3.7% average pricing increase in 2000 as a result
of 2001's recessionary economic environment and changes in mix. The Aggregates
division's average selling price, which includes all acquisitions from the date
of acquisition, increased 1.0% during 2001. 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.
Compared with prior year, full-year 2001 earnings were negatively affected by
higher health and welfare costs, which are expected to further increase in 2002,
and inventory control measures that better matched production with forecasted
volumes in response to a slowing economy. However, operating results
demonstrated improvement in second-half 2001 when compared to second-half 2000.
First-half 2001 earnings were negatively affected by certain weather-related
events, plant project delays, high energy costs, a slowdown in the steel
industry, as well as a weaker economy. Tropical Storm Allison significantly
affected the Houston, Texas, area during May 2001, and deferred major highway
work at the Texas Department of Transportation. Heavy rainfall from the storm
also reduced sales and production across the Southeast. Unexpected delays in
certain previously mentioned internal expansion projects also contributed to
lower than anticipated results. Most notably, expansion at the Bahama Rock
quarry was delayed from its planned mid-year completion to a late 2001
completion. Further, energy-related costs, including diesel fuel, liquid
asphalt, natural gas and barge freight costs, were higher during the first
half of 2001, when compared to the first six months of 2000.
Second-half 2001 operating earnings were up 18% over the comparable period in
the prior year, based on stronger volume, favorable fourth-quarter weather as
compared to the 2000 fourth quarter, moderating energy costs, and despite
unusual expenses associated with consolidation, shutdown, relocation and
start-up of certain facilities.
The Corporation consolidated or shut down 11 aggregates operations during the
year. The operations were principally located in historically profitable rural
markets that are now declining and can no longer generate expected financial
returns. The consolidation of these operations with other existing operations
allows the Corporation to maintain most of the aggregates tonnage in a more cost
efficient and profitable manner. Further, the Corporation will maintain control
of the available reserves in these consolidated locations to provide future
flexibility. The relocation and start-up of certain facilities negatively
affected operating earnings during 2001. For example, at the Corporation's
largest quarry, Beckmann, in San Antonio, Texas, the main crushing plant and the
primary haul road were relocated in 2001 to provide access to high quality,
mineable reserves. Also, at the Bahama Rock quarry, two crushing plants were
operational during most of the year, as the previously mentioned expansion
project was completed. While some of these costs were unusual and nonrecurring,
normal start-up costs and continued relocation costs, most notably at the Bahama
Rock quarry and Beckmann, will continue to affect 2002 operating results. The
costs associated with these consolidations, shutdowns, start-ups and relocation
were included in 2001's cost of sales.
The Corporation, as part of its ongoing strategy, will continue to review its
portfolio of assets for opportunities to consolidate, close or sell certain
nonstrategic, underperforming assets with a goal of redeploying capital to
enhance financial returns. However, there are no assurances that these financial
returns will be enhanced.
Page 28 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
The Corporation's Magnesia Specialties' division contributed $3.2 million to
2001 operating earnings, a $5.0 million decrease when compared to the prior
year's. The expected decline in operating earnings resulted principally from
higher energy-related costs for natural gas, underabsorption of fixed costs as
the division repositioned its Manistee, Michigan, operating facility to focus on
the production of chemicals products and an overall market decline.
The Corporation's operating margin of 13.1% in 2001 declined from 15.2% in 2000,
primarily as a result of previously mentioned cost factors, lower margins from
Meridian and other recently acquired operations and embedded freight. Discussion
regarding the impact of recently acquired operations and embedded freight is
included in the "Business Environment" discussion beginning on page 30.
Other income and expenses, net, for the year-ended December 31, 2001, was $8.0
million in income, compared to income of $8.2 million and $18.4 million in 2000
and 1999, 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 amounts receivable, costs associated with the commercialization of
certain new technologies and net equity earnings from nonconsolidated
investments. In 2001, other income includes an $8.9 million nonrecurring gain on
the sale of certain Magnesia Specialties refractories-related assets. In
addition the Corporation also divested of the Dallas/Fort Worth asphalt
business, acquired in 1999 with the acquisition of Marock, Inc. The divestiture
of this asphalt business enables the Corporation to focus on supplying
aggregates to the Dallas/Fort Worth area. In 2000, other income included 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, 2001, was $46.8 million. This
represents an increase of $4.9 million, or 12%, over 2000. Interest expense was
$41.9 million in 2000, an increase of $2.5 million, or 6%, over 1999 interest
expense of $39.4 million. The 2001 increase in interest expense relates
primarily to the acquisition of Meridian. The increase in interest expense was
somewhat mitigated by declining interest rates on the Corporation's variable
rate commercial paper program and an increased level of capitalized interest.
The increased interest expense in 2000 compared with 1999, results primarily
from the impact of higher balances of outstanding debt throughout the year and
increased interest rates on the Corporation's variable rate commercial paper
program.
The Corporation's effective income tax rate for 2001 was 33.5%, compared with
33.6% in 2000 and 35.3% in 1999. The variance in the effective income tax rates
for these years, when compared to the federal corporate tax rate of 35%, is due
to several factors. The Corporation's effective tax rate for these years
includes state taxes and the 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
effective tax rate in 2001 included the recognition of a one-time, deferred tax
benefit. The deferred tax benefit related to a wholly owned partnership which
elected to be treated as a corporation for federal income tax purposes
subsequent to the 2001 purchase of the remaining partnership interest by the
Corporation. As a result of this election, the Corporation looks to the inside
tax basis to calculate its deferred taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Additional
information regarding the Corporation's income taxes is contained in Note H to
the audited consolidated financial statements on pages 18 and 19.
The Corporation's debt-to-capitalization ratio was 44% at December 31, 2001, as
compared to 43% at December 31, 2000. Total debt, including commercial paper
obligations, increased from $646.7 million to $801.9 million, and share-
holders' equity increased from $863.3 million to $1.022 billion. During 2001,
the Corporation paid common stock dividends of $26.9 million, or $0.56 per
common share. Net debt peaked at $916 million during the year as a result of the
Meridian acquisition, yielding a debt-to-capitalization ratio of 51%. Additional
information regarding the Corporation's debt and capital structure is contained
in Note F to the audited consolidated financial statements on pages 17 and 18
and under "Liquidity and Cash Flows" and "Capital Structure and Resources" on
pages 38 through 41.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 chemicals products for wideranging
environmental and industrial applications 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 44% of its aggregates shipments made to contractors in connection
with highway and other public infrastructure projects and with the balance of
its shipments made primarily to contractors in connection with commercial and
residential construction projects. Accordingly, the Corporation's profitability
is sensitive to national, as well as regional and local, economic conditions and
particularly to cyclical swings in construction spending. The cyclical swings in
construction spending are affected by fluctuations in interest rates, changes in
the levels of infrastructure funding by the public sector and demographic and
population shifts. Due to the high level of fixed costs associated with
aggregates production, the Corporation's operating leverage can be substantial.
AGGREGATES DIVISION MARKETS
44% Infrastructure
30% Commercial
17% Residential
9% Chemical, Railroad Ballast & Other
The Corporation's asphalt, ready mixed and road paving operations generally
follow these construction industry trends. These vertically integrated
operations accounted for about 14% of 2001 Aggregates division net sales, with
no single operation contributing more than 10%. As the Corporation continues its
expansion strategy westward, where vertically integrated operations, including
asphalt, ready mixed, road paving and trucking businesses, are the norm, profit
margins are generally adversely affected. Gross margin percentages for these
businesses typically range from 5% to 15%, with the highest margin contribution
from asphalt operations and with trucking operations generating the lowest
margins. The Corporation became more vertically integrated with the acquisition
of the Redland Stone Products Company in December 1998.
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. In 2001, the total value of the United States construction put in
place on highways, streets and bridges was $5.2 billion, or 11%, more than in
2000, according to the U.S. Census Bureau. The Corporation believes public-works
projects consumed more than 50% of the total annual aggregates produced in the
United States during 2001, which has consistently been the case for each year
since 1990. Additionally, since public sector-related shipments account for
approximately 44% of the Corporation's 2001 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 The Transportation Equity Act for the 21st Century
("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 bil-
Page 30 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
lion 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%, both based on the original TEA-21 bill.
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 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. Annual highway funds under
all TEA-21 programs are designated by state departments of transportation during
the year of appropriation. Once designated, TEA-21 funds are available until
expended. Undesignated highway funds are carried over into the following year.
Designated funds are generally spent over a period of years following
designation.
FEDERAL FUNDING FOR HIGHWAYS
(IN BILLIONS)
FISCAL YEAR 1999 $21.4
FISCAL YEAR 1999 $26.8
FISCAL YEAR 2000 $28.8
FISCAL YEAR 2001 $32.2
FISCAL YEAR 2002 $31.8
FISCAL YEAR 2003 $23.2
NOTE: FISCAL YEAR 2000, 2001 AND 2002 INCLUDE RABA FUNDING OF $1.5 BILLION, $3.1
BILLION AND $4.5 BILLION, RESPECTIVELY. FISCAL YEAR 2003 INCLUDES A NEGATIVE
RABA ADJUSTMENT OF $5.0 BILLION. 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 AUTHORIZATIONS THROUGH FISCAL 2002. FISCAL 2003 NEGATIVE RABA
ADJUSTMENT IS PROPOSED IN THE BUSH ADMINISTRATION TRANSPORTATION BUDGET.
The federal transportation appropriation bill for fiscal 2002 fully funded the
guaranteed highway funding level authorized under TEA-21 of $27.3 billion.
Further, the fiscal 2002 transportation appropriations bill includes an
additional $4.5 billion for guaranteed highway funding under the revenue aligned
budget authority ("RABA") provisions of TEA-21, providing a record $31.8 billion
in guaranteed highway funding. The additional $4.5 billion of guaranteed funding
results from the adjustment of TEA-21 Federal-Aid Highways authorizations as
gasoline tax receipt projections were amended to reflect actual receipts.
The outlook for TEA-21 appropriations for fiscal 2003 under President Bush's
proposed federal transportation budget indicates an $8.6 billion reduction in
federal transportation authorization to $23.2 billion when compared to the
fiscal 2002 authorization of $31.8 billion. The RABA provisions of TEA-21 have
aligned fiscal 2003 authorization to projected shortfalls in fiscal 2001 highway
account revenues coupled with reduced fiscal 2003 revenue forecasts. The
shortfall in fiscal 2001 highway account revenues results from higher energy
prices, which have curbed demand thereby reducing gas excise tax collection.
Further, the fiscal 2003 revenue forecast reflects a continued recessionary
economy.
While it is possible that there will be a reduction in fiscal 2003 highway
funding, management believes it is unlikely that Congress will accept the
proposed budget without some increase from currently proposed levels in highway
funding to lessen the sharp decline between fiscal 2002 and 2003, and to bridge
to the anticipated level of the next highway funding bill. TEA-21 expires in
October 2003. Many arguments are being proposed to support an adjustment to the
impact of the RABA provisions on the fiscal 2003 transportation spending
authorizations. One such argument supports spending part of the unobligated $19
billion surplus currently in the Highway Trust Fund to cover projected RABA
shortfalls; while another supports maintaining fiscal 2003 spending as a source
of economic stimulus since highway construction creates jobs throughout all
socioeconomic strata. The final determination of fiscal 2003 highway funding
under TEA-21 will be resolved as Congress approves the budget, which should
coincide with the October 1 fiscal year.
However, funding for federal transportation appropriations continues to be
subject to balanced budget and other proposals that may impact the additional
funding available for the Highway Fund. Congress must also annually appropriate
highway funding levels, and there is no assurance that
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Congress will continue to follow the TEA-21 legislated minimum funding guarantee
firewall or the highway funding distribution formula.
Federal highway funding reauthorization hearings began in January 2002 with the
Bush Administration indicating that its reauthorization plan should be completed
by January 2003. The Administration included, as one of its core principles for
reauthorization, assuring adequate and predictable funding sources for
investment in the nation's transportation system. However, there is no assurance
that a successor bill to TEA-21 will be authorized.
The American Road and Transportation Builders Association ("ARTBA") forecasts a
3% to 6% growth in the 2002 highway construction market supported by the full
funding of the 2002 federal highway obligation authority under TEA-21 and
additional RABA funding. ARTBA further indicated that states increased their
obligation of federal highway funds for projects during 2001. The 9% increase in
state obligation over 2000 levels should mean additional highway construction
work during 2002. However, the increase in the obligation of federal highway
funds by the states has led to declines in state funds available for local
construction projects. There is a continued, near-term risk that the states will
be unable to fund federal and local highway construction projects, as the
recession continues to affect the states' economic well-being, and that states
may delay, or put on hold, long-term highway construction projects due to the
projected decline in fiscal 2003 federal highway funding. The degree to which
the Corporation could be affected varies by state. However, the state economies
of the Corporation's five largest revenue-generating states, namely Texas, North
Carolina, Ohio, Georgia and Iowa, may disproportionately affect performance.
The Aviation Investment and Reform Act for the 21st Century ("AIR-21") provides
funding for airport improvements throughout the United States. Congress approved
$3.3 billion for the Aviation Improvement Program under AIR-21 for fiscal year
2002, which represents a $100 million increase over fiscal year 2001 funding.
The Corporation's capital expansion and acquisition program is focused on taking
advantage of construction growth, through investment in both permanent and
portable quarrying operations. However, there is no guarantee that the
Corporation will fully benefit from its acquisition and expansion program.
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 the federal and certain state departments of
transportation, asserting that highway construction should be delayed until the
municipal area is in compliance with the Clean Air Act. The EPA lists several
major metropolitan areas in the Corporation's markets, including Atlanta,
Georgia, and Houston/Galveston and Dallas/Fort Worth, Texas, as nonattainment
areas with deadlines to reduce air pollutants or face fines or control by the
EPA. Federal transportation funding through TEA-21 is directly tied to
compliance with the Clean Air Act. As such, more stringent federal air quality
standards could negatively affect public-works construction spending in the
Corporation's markets. In fact, the EPA has proposed new, more stringent air
quality standards that could increase the current non-attainment areas in the
United States from 29 areas to 81 areas. Some of these possible non-attainment
areas include metropolitan areas in the Corporation's markets. Implementation is
typically phased in over a number of years, and implementation details for the
proposed new standards are being determined by the U.S. Court of Appeals. There
are no current indications of an implementation timetable for the proposed new
standards.
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.
Page 32 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
As anticipated, the general economy continued to soften in 2001, and, in fact,
entered into a recessionary state, which many economists believe began as early
as March 2001. Many corporations reduced capital investment during 2001 to
better match capacity with weakening demand. As demand continued to slow,
inventories began to build, and excess capacity led to employee layoffs and
increasing vacancy rates. Residential construction, as measured by housing
starts, held relatively steady during the year, buoyed by consumer confidence
and low mortgage rates. However, commercial construction declined throughout the
year. An already weak economy, absorbed an unexpected shock from the September
11, 2001, terrorist attacks and continued its recessionary decline. The
Corporation experienced a period of slower sales volume in the weeks immediately
following the attacks.
During 2001, the Federal Reserve Open Market Committee decreased the federal
funds rate eleven times, reducing the rate 475 basis points to a 40-year low of
1.75%. The current federal funds rate 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 sensitivity
of public-works construction spending to interest-rate changes is somewhat
mitigated.
While the Aggregates division's operations cover a wide geographic area, because
of the high cost of transportation relative to the price of the product, the
division's -- and, consequently, the Corporation's -- operating performance and
financial results depend on the strength of local regional economies. Until
recently, economic growth in the United States has been generally strong in the
areas served by the Corporation. However, weakening regional economies,
particularly in the southeast and central areas of the United States, have
adversely affected results. 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 Texas, North
Carolina, Ohio, Georgia and Iowa, accounted for approximately 56% of its 2001
net sales by state of destination. Further, some of the Corporation's market
areas are more profitable than others due to, among other things, the maturity
of the underlying aggregates operations.
While the level of state public-works spending is varied across the nation and
dependent upon individual state economies, North Carolina, one of the
Corporation's leading states, passed new funding in 2001 which is projected to
lead to an increase in road spending over the next year. Special contract
lettings were held in October and November 2001 to assure quick release of $170
million of new spending, primarily for asphalt resurfacing. However, North
Carolina has also experienced a greater than expected reduction in 2002 federal
highway RABA funds. As state economies deal with the recessionary environment,
the level of state spending on public works is at risk.
Houston, Texas, and the surrounding area, is one of the Corporation's largest
metropolitan markets, contributing $102 million to 2001 net sales. The
bankruptcy of Enron Corporation could adversely affect growth in Houston's
construction market because of Enron's size and influence. Additionally, the
Aggregates division is further exposed to potential losses in customer accounts
receivable as the recessionary economy increases the risk of nonpayment and
bankruptcy.
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, typically in the spring,
summer and fall. The division's operations that are concentrated in the northern
region of the United States generally experience more severe winter weather
conditions than the division's operations in the Southeast and Southwest.
Meridian, which was acquired in April 2001, typically experiences operating
losses, during the first quarter of the fiscal year, that result from winter
weather conditions at its operations in western and upper midwestern states.
Therefore, first quarter 2002 operating results will be adversely affected by
Meridian's winter losses. North Carolina, one of the Corporation's largest
revenue generating states, is at risk for Atlantic Ocean hurricane activity and
has experienced hurricane-related losses in recent years. The southeastern and
Gulf Coast regions of the United States are also at risk for hurricane activity.
Texas, the Corporation's largest revenue generating state, has also experienced
significant adverse weather during the past year.
A growing percentage of the Corporation's aggregates shipments are being moved
by rail or water through a distribution yard network. The Corporation's
acquisition of Dravo
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Corporation in 1995 established its waterborne capabilities, both by barge and
oceangoing ship, which was enhanced by the 1995 acquisition of a deep-water
quarry in Nova Scotia, while the 1998 acquisition of Redland Stone and the 2001
acquisition of Meridian increased its rail-based distribution network. As the
Corporation continues to move more aggregates by rail and water, embedded
freight costs have eroded profit margins. The freight costs for aggregates
products often equal or exceed the selling price of the underlying aggregates
products. The Corporation handles freight costs principally in two ways:
Option 1: The customer supplies transportation.
Option 2: The Corporation will arrange for a third party carrier to
deliver the aggregates material and specifically pass through
the freight costs to the customer. These freight and delivery
revenues and costs are presented in the consolidated statement
of earnings as required by Emerging Issues Task Force Issue
No.00-10, Accounting For Shipping and Handling Fees and Costs.
When the Corporation transports, either by rail or water, aggregates from a
production location to a distribution terminal, the selling price includes the
freight component. Subsequent transportation from the distribution location is
accounted for as described above in options 1 and 2.
2001 TRANSPORT MODE 1994 TRANSPORT MODE
(% OF 2001 SHIPMENTS OF (% OF 1994 SHIPMENTS OF
191.7 MILLION TONS) 71.2 MILLION TONS
77% TRUCK 93% TRUCK
15% RAIL 7% RAIL
8% WATER
When products are transported to a distribution terminal, margins are negatively
affected because the customer does not generally pay the Corporation a profit
associated with the transportation component of the selling price. For example,
a truck customer will pick up the material from the quarry and pay $6.50 for one
ton of aggregate. Assuming a $1.50 gross profit per ton, the Corporation would
recognize a 23% gross margin. However, if that same customer drove to a local
distribution terminal and picked up one ton of aggregate the selling price may
be $12.50 per ton, assuming $6.00 cost of internal freight. With the same $1.50
gross profit per ton and no profit associated with the transportation component,
the gross margin would be reduced to 12% as a result of the embedded freight.
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 77% by truck, 15% by rail and 8% by water in 2001. 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. The waterborne distribution
network increases the Corporation's exposure to certain risks, including among
other items, the ability to negotiate favorable shipping contracts, demurrage
costs and barge or ship availability.
Currently, management expects to operate during 2002 in a recessionary economy
with a significant decline in commercial building construction, as corporate
layoffs continue, office vacancy rates increase and businesses control the
expenditure of both maintenance and expansion capital. Further, residential
construction could decline depending on weakening consumer confidence, continued
unemployment and the duration of the recession. However, man-
Page 34 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
agement expects the aggregates business to perform better than the general
economy in 2002, buoyed by the level of public-works construction spending.
Therefore, based on current economic conditions and forecasts, management
expects a 3% to 6% volume growth in aggregates shipments, supported by $31.8
billion in fiscal 2002 federal transportation spending, offset somewhat by
declining commercial and residential construction. Management further expects a
2% to 3% increase in average selling prices. The Corporation's net earnings for
the year are expected to range from $2.40 to $2.70 per diluted share, inclusive
of $0.23 from the elimination of the recognition of goodwill amortization
charges and adjustments to the 2002 estimated tax rate. For the first quarter
2002, the favorable effect of the new amortization provisions will be largely
offset by the winter losses expected to be incurred at Meridian and other newly
acquired operations, as well as normal start-up costs associated with new plant
operation. Management has begun its evaluation of impairment as required by FAS
142. While the evaluation is not completed, the Corporation may recognize a
goodwill impairment loss as it reevaluates the long-term expected returns in
certain markets.
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 the anticipated authorization
of a new federal highway funding bill, coupled with moderate growth in
residential and commercial construction. Strong backlog of contractors' existing
construction work is expected to somewhat offset a temporary decline, if any, in
fiscal 2003 federal highway spending. 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, increasing market share in the Corporation's core businesses and
pursuing new technological opportunities that are related to the Corporation's
existing markets.
During 2001, the Corporation expanded its market opportunities by consummating
13 transactions for the acquisition of aggregates and other operations,
internally expanding aggregates annual production capacity and either opened, or
began the process of opening, two new locations.
The Corporation's aggregates reserves, including the reserves of its 2001
acquisitions, exceed 55 years of production, based on current levels of
activity.
Through its Magnesia Specialties division, the Corporation manufactures and
markets magnesia-based chemicals products for industrial, agricultural and
environmental applications, including wastewater treatment and acid
neutralization, and dolomitic lime for use primarily in the steel industry.
Magnesia Specialties' products used within the steel industry accounted for
approximately 65% of the division's net sales for 2001. Accordingly, the
division's profitability is dependent on the production of steel and the related
marketplace, and a significant portion of the division's product pricing
structure is affected by current business economic trends within the steel
industry. The United States' steel industry continues to be weak as the slowdown
in demand and continued high levels of steel imports have led to rapidly
deteriorating performance. The division's performance will continue to be
directly tied to the steel industry, and with the absence of federal
restrictions on foreign steel imports, the prospects for significant, long-term
improvement is weak. The Magnesia Specialties division is further exposed to
potential losses in customer accounts receivable, if the steel industry
continues to deteriorate and customers declare bankruptcy. At December 31, 2001,
management believes that the allowance for uncollectible accounts receivable is
appropriate.
The May 1, 2001, sale of Magnesia Specialties' refractories products line
lessens the Magnesia Specialties' division's dependence on the steel industry.
Excluding the refractories products line, Magnesia Specialties' sales to the
steel industry would account for 52% of the division's 2001 net sales, as
compared to 65% including refractories. However, earnings have been negatively
affected as the division realigns fixed costs associated with the refractories
business and converts the Manistee, Michigan, plant to a magnesia chemicals
facility. As the division continues to lower its production rates during 2002,
underabsorption of fixed costs will continue to impact results. There can be no
assurance that management's strategy will be successful.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Continued high natural gas costs negatively affected earnings from operations in
2001. Further, due to the high levels of fixed costs associated with the
Magnesia Specialties production facilities, operating leverage can be
substantial.
Approximately 12% 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), Central and South
America (principally Brazil, Columbia and Chile) 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.
The Corporation continued research and development activities during 2001 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 and commercial 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 had limited revenue in 2001 from SC27(TM)
soil inoculant, a microbial soil enhancer, used to enhance plant growth.
Further, as expected, the technological areas did not generate profits in 2001.
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. Commercial viability of these
technological product areas is not assured. 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 sector 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. Wage
inflation and the resulting increase in labor costs may be somewhat mitigated by
increases in productivity. However, rising health care costs have increased
total labor costs in recent years and will continue to affect labor costs in the
near term. 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 recently completed, large expansion projects may take
time to increase shipments and absorb increased depreciation costs.
The Corporation is replacing its existing information systems with an
enterprise-wide information solution through J. D. Edwards World Solutions
Company. Management successfully completed the system design and implementation
phase of the accounting, financial reporting and human resources packages in
2001. The capital requirements for this project, which exclude systems
replacement for acquisitions not currently on the Corporation's Raleigh-based
systems, principally Redland Stone and Meridian, are expected to be $26.3
million, with $13.0 million expended in 2001 and $4.0 million in 2000. Current
expectation is that full system implementation will take an additional two
years. The Corporation believes it has deployed sufficient personnel 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, 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
Page 36 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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 dolomitic lime used in domestic basic steel production and chemicals
products used in domestic and foreign industrial, agricultural and environmental
applications. The magnesia-based products segment generally derives a
significant portion of its sales and earnings from the products used in the
steel industry.
The Corporation's evaluation of performance and allocation of resources is based
primarily on earnings from operations. Earnings from operations is total
revenues less operating expenses; selling, general and administrative expenses;
and research and development; and excludes interest expense and other income
(expense). The accounting policies of the reportable segments are the same as
those described in Note A to the audited consolidated financial statements on
pages 14 through 16. 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 $118,365,000 in
2001; $15,325,000 in 2000; and $44,747,000 in 1999.
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, 2001.
SELECTED FINANCIAL DATA BY BUSINESS SEGMENT
years ended December 31
(add 000)
NET SALES 2001 2000 1999
- -------------------------------------------------------------------------------
Aggregates $ 1,406,179 $ 1,202,581 $ 1,125,636
Magnesia Specialties 99,512 130,419 133,191
- -------------------------------------------------------------------------------
Total $ 1,505,691 $ 1,333,000 $ 1,258,827
- -------------------------------------------------------------------------------
Gross profit
- -------------------------------------------------------------------------------
Aggregates $ 289,805 $ 276,640 $ 283,998
Magnesia Specialties 13,945 26,931 26,701
- -------------------------------------------------------------------------------
Total $ 303,750 $ 303,571 $ 310,699
- -------------------------------------------------------------------------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2001 2000 1999
- -------------------------------------------------------------------------------
Aggregates $ 95,988 $ 82,088 $ 75,568
Magnesia Specialties 9,961 16,680 17,053
- -------------------------------------------------------------------------------
Total $ 105,949 $ 98,768 $ 92,621
- -------------------------------------------------------------------------------
EARNINGS FROM
OPERATIONS
- -------------------------------------------------------------------------------
Aggregates $ 194,027 $ 194,232 $ 208,011
Magnesia Specialties 3,218 8,245 7,278
- -------------------------------------------------------------------------------
Total $ 197,245 $ 202,477 $ 215,289
- -------------------------------------------------------------------------------
ASSETS EMPLOYED
- -------------------------------------------------------------------------------
Aggregates $ 2,088,170 $ 1,703,752 $ 1,598,948
Magnesia Specialties 61,253 99,913 105,362
Corporate headquarters 75,157 37,774 38,264
- -------------------------------------------------------------------------------
Total $ 2,224,580 $ 1,841,439 $ 1,742,574
- -------------------------------------------------------------------------------
DEPRECIATION, DEPLETION
AND AMORTIZATION
- -------------------------------------------------------------------------------
Aggregates $ 145,488 $ 125,697 $ 114,457
Magnesia Specialties 6,390 8,532 8,468
Corporate headquarters 2,757 2,144 1,829
- -------------------------------------------------------------------------------
Total $ 154,635 $ 136,373 $ 124,754
- -------------------------------------------------------------------------------
PROPERTY ADDITIONS
- -------------------------------------------------------------------------------
Aggregates $ 287,954 $ 174,797 $ 177,318
Magnesia Specialties 2,315 6,817 3,942
Corporate headquarters 22,482 4,516 1,307
- -------------------------------------------------------------------------------
Total $ 312,751 $ 186,130 $ 182,567
- -------------------------------------------------------------------------------
AGGREGATES. The Aggregates division's net sales increased 17% to $1.406 billion
for the year ended December 31, 2001, compared with the prior year's net sales.
The division's operating earnings for 2001 were $194.0 million compared to
$194.2 million in the prior year. The "Results of Operations" section of this
Management's Discussion and Analysis includes a discussion of the factors
affecting the performance of the Aggregates business segment.
For the year ended December 31, 2000, the Aggregates division had net sales of
$1.203 billion, which were $77 million, or 7%, higher than the 1999 net sales of
$1.126 billion. The increase in net sales reflects a slight 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 average
selling price. The division's operating earnings for 2000 decreased 7% to $194.2
million from the prior year's earnings from operations of $208.0 million.
Operating earnings decreased, principally as a result of higher-than-expected
energy-related costs, a slowdown of construction activity and weather-related
events.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating results in 1999 reflected record volume and 3.6% price increases, both
compared with the prior year, and growth from acquisitions.
MAGNESIA SPECIALTIES. For the year ended December 31, 2001, the Magnesia
Specialties division had net sales of $99.5 million, a decrease of $30.9
million, or 24%, from 2000 net sales of $130.4 million. The division's earnings
from operations for 2001 of $3.2 million decreased $5.0 million, or 61%, when
compared to 2000 earnings from operations of $8.2 million. As expected, net
sales for the division decreased, primarily due to the divestiture of the
refractories business. In 2000, the refractories business contributed $57.3
million to net sales compared with $26.8 million in 2001. The decline in
operating earnings results principally from higher energy-related costs for
natural gas and underabsorption of fixed costs as the division repositioned its
Manistee, Michigan, operating facility to focus on production of chemicals
products.
Magnesia Specialties division's 2000 net sales of $130.4 million were 2% below
the prior year's. The division's operating earnings for 2000 of $8.2 million
were 13% above the 1999 operating earnings. The division's improvement in 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 inventory and production levels in 2000, along
with effective cost controls, also provided a favorable year-over-year
comparison between 2000 and 1999. The Magnesia Specialties division's 1999 net
sales of $133.2 million were 3% below the prior year, and operating earnings for
1999 of $7.3 million were 39% below 1998 operating earnings.
CONSOLIDATED OPERATING CASH FLOW
(IN MILLIONS)
1997 $195.6
1998 $222.6
1999 $223.7
2000 $212.9
2001 $252.9
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 $252.9 million in 2001, as compared to $212.9 million in 2000,
and $223.7 million in 1999. 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) 2001 2000 1999
- -------------------------------------------------------------------------
Depreciation $ 119,606 $ 108,540 $ 98,559
Depletion 6,036 4,681 5,369
Amortization 28,993 23,152 20,826
---------------------------------------
Total $ 154,635 $ 136,373 $ 124,754
=======================================
Changes in working capital for 2001 included increases in accounts receivable
from higher sales, particularly in the fourth quarter, as compared with the
prior-year period, and in inventories due to a slight increase in heritage
aggregates inventory levels, as well as changes in mix and valuation; partially
offset by increases in accounts payable. Increases in receivables and
inventories were partially offset due to reductions caused by the divestiture of
the refractories business. The 2000 working capital increases were due primarily
to increases in the value of the Aggregates division's inventories because of
increases in inventory quantity and valuation and changes in mix, off-set 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 inventories, as a result of expected increases
in demand in 2000 and an increase in accounts receivable balances, primarily
associated with the increased level of sales. Other assets and liabilities, net,
include changes to both current and noncurrent balance sheet accounts. In
addition to other somewhat offsetting amounts, other assets and liabilities,
net, included in 2001 increases in accrued interest; in 2000, increases in
receivables from affiliates and suppliers and payment of certain obligations
accrued in the previous year; and in 1999, an increase in certain postretirement
benefits accruals.
Net cash used for investing activities was $370.2 million in 2001, an increase
of $168.4 million from $201.8 million reported in 2000. Of that amount, the
Corporation used $221.8 million for the purchase of Meridian and twelve other
Page 38 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Aggregates division-related acquisitions, compared with $39.3 million in 2000
for the purchase of five Aggregates division-related acquisitions, and $77.1
million in 1999 used to finance the purchase of ten Aggregates division-related
acquisitions. Additions to property, plant and equipment, excluding
acquisitions, of $194.4 million, were 14% higher in 2001, compared with 2000.
Comparable full-year capital expenditures were $170.8 million in 2000 and $137.8
million in 1999. The Corporation's acquisitions 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 three years ended 2001, the Corporation's
management had anticipated a more significant increase in property, plant and
equipment additions. However, as planned net sales growth in the heritage
operations was delayed, due to weather-related conditions and softening building
construction demand, management scaled back capacity expansion to better match
the timing of market expansion. Spending for property, plant and equipment,
exclusive of acquisitions and property and equipment acquired under operating
leases, is expected to be $125 million in 2002. Other investing activities
included, among other things, proceeds from the sale of surplus land and
equipment; in 2001, the sale of the refractories business; in 2000, the
Corporation's additional investment in Industrial Microwave Systems ("IMS"); and
in 1999, the Corporation's initial 19% investment in IMS and loans to Meridian.
Approximately $123.4 million of cash was provided by financing activities during
2001, compared with $19.3 million and $20.3 million of cash used for financing
activities in 2000 and 1999, respectively. The Corporation incurred net
indebtedness of $149.9 million in 2001, excluding $5.1 million reflected in
acquisitions, net, principally in connection with the acquisition of Meridian
and twelve other acquisitions completed during the year; $4.0 million in 2000,
excluding $1.0 million reflected in acquisitions, net, principally in connection
with the five acquisitions completed during the year; and $14.7 million in 1999,
excluding $9.2 million reflected in acquisitions, net, principally in connection
with the ten acquisitions completed. During 2001, $2.2 million of cash was used
in connection with the issuance of the 6.875% Notes issued March 2001.
In 2001, the Board of Directors approved total cash dividends on the
Corporation's common stock of $0.56 a share. Regular quarterly dividends were
authorized and paid by the Corporation at a rate of $0.14 a share. During 2001,
the Corporation issued stock under its stock-based award plans, providing $2.6
million in cash. Comparable cash provided by issuance of common stock was $2.0
million in both 2000 and 1999. Further, during 2001 and 1999, the Corporation
issued approximately 1,684,400 and 311,100 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 six 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 2001 or 2000.
CAPITAL STRUCTURE AND RESOURCES
Long-term debt, including current maturities of long-term debt and commercial
paper, increased to $801.9 million at the end of 2001, from $646.7 million at
the end of 2000. Total debt represented approximately 44% of total
capitalization at December 31, 2001, compared with 43% at December 31, 2000. The
Corporation's debt at December 31, 2001, was principally in the form of publicly
issued long-term, fixed-rate notes and debentures, and United States' commercial
paper. Shareholders' equity grew to $1.022 billion at December 31, 2001, from
$863.3 million at December 31, 2000.
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
$225 million (the "Long-Term Credit Agreement"), which expires in August 2006,
and a 364-day unsecured revolving credit agreement in the amount of $225 million
(the "Short-Term Credit Agreement"), which expires in August 2002. During the
year, the Corporation terminated its revolving credit agreements and entered
into these new revolving credit agreements, which contained substantially the
same terms as the prior agreements. The Corporation has the ability to extend
its Short-Term Credit Agreement for an additional 364-day term at its option
(see Note F to audited consolidated financial statements on pages 17 and 18).
No borrowings were outstanding under either of the revolving credit agreements
at December 31, 2001. However, the
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Long- and Short-Term Credit Agreements support commercial paper borrowings of
$95 million outstanding at December 31, 2001, of which $95 million has been
classified as long-term debt on the Corporation's consolidated balance sheet,
based on management's ability and intention, as appropriate, to maintain this
debt outstanding for at least one year. Therefore, $355 million was available
under the revolving credit agreements at December 31, 2001.
The 6.875% Notes, due April 1, 2011, with an effective interest rate of 6.98%,
were issued in March 2001 in the aggregate principal amount of $250 million
through private placement in connection with the acquisition of Meridian. The
6.875% Notes were subsequently registered with the Securities and Exchange
Commission in July 2001. The initial purchasers in the private placement
offering exchanged $249,650,000 of their outstanding notes for registered notes
with substantially identical terms.
In connection with normal, ongoing operations, the Corporation enters into
leases for property, plant and equipment and royalty commitments associated with
leased land. Future minimum lease and royalty commitments are detailed in Note K
to the audited consolidated financial statements on page 23. Management
anticipates that during 2002 the Corporation will enter into additional
operating leases for certain mobile and other equipment, as well as for land and
mineral reserves.
The Corporation's long-term commitments for debt, excluding commercial paper,
and minimum lease and royalty commitments for all noncancelable operating leases
and royalty agreements as of December 31, 2001, are as follow:
Long-term Operating Royalty
(add 000) Debt Leases Agreements Total
- ----------------------------------------------------------------------------
2002 $ 4,490 $12,691 $ 3,745 $ 20,926
2003 1,647 10,547 3,840 16,034
2004 273 8,455 3,510 12,238
2005 123 6,959 3,485 10,567
2006 300 5,461 2,923 8,684
Thereafter 700,042 18,642 29,722 748,406
- ----------------------------------------------------------------------------
Total $706,875 $62,755 $47,225 $816,855
============================================================================
Amounts due under noncancelable operating leases and royalty agreements are
expensed in the period incurred. Notes F and K to the audited consolidated
financial statements on pages 17 and 18 and page 23, respectively, contain
additional information regarding these commitments and should be read in
conjunction with this table.
The Corporation has entered into standby letter of credit agreements relating to
workers' compensation and auto and general liability self-insurance. On December
31, 2001, the Corporation had contingent liabilities under these outstanding
letters of credit of approximately $13.8 million. In the normal course of
business, the Corporation is currently contingently liable for performance under
$84.9 million in performance bonds required by certain states and municipalities
and their related agencies. The bonds are principally for certain construction
contracts, reclamation obligations and mining permits. Two of these bonds
totaling $35.5 million, or 42% of all outstanding performance bonds, relate to
specific performance for road construction projects currently under way. The
Corporation has indemnified the underwriting insurance company against any
exposure under the performance bonds. In the Corporation's past experience, no
material claims have been made against these financial instruments.
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 30 through 36). Aside from these inherent risks from
within its operations, the Corporation's earnings are affected also by changes
in short-term interest rates, as a result of its outstanding commercial paper
obligations and temporary cash investments, including overnight investments in
Eurodollars. However, management believes that the Corporation's exposure to
short-term interest rate market risk is not material.
Long-term interest rates influence assumptions used to develop the costs for the
Corporation's employee retirement and postretirement benefit plans. The
Corporation's pension and postretirement benefit expense in 2001 increased,
compared with 2000, by $5.6 million, excluding the impact of the curtailment and
settlement gains resulting from the divesture of the refractories business, as a
result of the decreased discount rate for the retirement and postretirement
benefit plans, and, most significantly, from unfavorable 2000 investment returns
on employee retirement plan assets. The Corporation's management anticipates
another significant increase in pension and postretirement benefit expense in
2002 as a result of a continued decrease in the discount rate and investment
returns experienced in
Page 40 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
2001. There is no assurance that pension and postretirement benefit expense will
continue at current levels, due to the underlying volatility of interest rates
and investment returns (see Note I to the audited consolidated financial
statements on pages 19 through 21).
Currently, the Board has granted management the authority to file a universal
shelf registration statement with the Commission for up to $500 million in
issuance of either debt or equity securities. However, management has not
determined the timing when, or the amount for which, it may file such shelf
registration.
Martin Marietta Materials' internal cash flows and availability of financing
resources, including its access to capital markets, both debt and equity, and
its revolving credit agreements, are expected to continue to be sufficient to
provide the capital resources necessary to support anticipated operating needs,
to cover debt service requirements, to meet capital expenditures and
discretionary investment needs and to allow for payment of dividends for the
foreseeable future. The Corporation's ability to borrow or issue securities is
dependent upon, among other things, prevailing economic, financial and market
conditions.
The Corporation'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 FitchRatings. In
July 2001, Standard & Poor's revised its outlook for the Corporation to negative
from stable while reaffirming its ratings. The outlook revision reflects
Standard & Poor's belief that the Corporation's acquisition activity could make
it more difficult for the Corporation to restore credit quality measures to
certain levels.
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 AND LITIGATION 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.
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 Notes A and M to the audited consolidated financial statements on pages 14
through 16 and page 24, respectively.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB"), issued
Statements of Financial Accounting Standards No. 141, Business Combinations,
which applied to business combinations for which the date of acquisition was
July 1, 2001, or later, and No. 142, Goodwill and Other Intangible Assets ("FAS
142"), effective January 1, 2002, (collectively the "Statements"). Under the new
rules, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized but are subject to annual impairment tests in accordance with
the Statements. Other intangible assets continue to be amortized over their
useful lives.
The Corporation applied the new rules on accounting for goodwill and other
intangible assets, beginning with four purchase business combinations completed
after June 30, 2001; and began January 1, 2002 for all purchase business
combinations. Application of the nonamortization provisions of FAS 142 will
favorably impact 2002 earnings, versus 2001 as related to such amortization. The
Corporation recognized $22.4 million in 2001 and $16.2 million for 2000 in
goodwill amortization. (See "Business Combinations, Divestitures and Capacity
Expansion" on pages 25 and 26 and "Business Environment" on pages 30 through
36).
During 2002, the Corporation will perform the first of the required impairment
tests of goodwill and indefinite-lived intangible assets as of January 1, 2002.
The effect that the results of the impairment tests will have on the earnings
and financial position of the Corporation has not yet been determined; however,
they may be material to the financial position of the Corporation.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, Accounting for Asset Retirement Obligations ("FAS 143"). FAS 143 requires
recognition of the fair value of a liability representing an asset retirement
obligation in the period in which it is identified. The asset retirement
obligation is recorded at the acquisition date of a long-lived tangible asset if
the fair value can be reasonably estimated. The Corporation incurs some
reclamation liabilities as part of its aggregates mining process. However,
certain reclamation costs are currently treated as normal, ongoing operating
expenses and expensed generally in the period in which they are incurred. FAS
143 is effective the first quarter of 2003 for the Corporation. The effect of
the adoption of FAS 143 on the earnings and financial position of the
Corporation has not yet been determined but is not expected to have a material
impact.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FAS 144"),
which is effective the first quarter of 2002 for the Corporation. FAS 144
supercedes Statement of Financial Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and Accounting Principles Board Opinion No. 30, Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions. FAS
144 requires, among other things, the recognition of an impairment loss for
long-lived assets to be held and used, and defines classification of continuing
and discontinued operations. The Corporation does not expect the impact of
adoption to be material to earnings or financial position.
FORWARD-LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
This Annual Report on Form 10-K contains statements which 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, and are based on assumptions that the Corporation believes in
good faith are reasonable, but which may be materially different from actual
results.
Factors that the Corporation currently believes could cause its actual results
to differ materially from those in the forward-looking statements include, but
are not limited to, national and regional economic conditions in the markets the
Corporation serves, the level and timing of federal and state transportation
funding, levels of construction spending in the markets the Corporation serves,
unfavorable weather conditions, fuel costs, transportation costs, competition
from new or existing competitors, changes in environmental and other
governmental regulations, ability to recog-
Page 42 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
nize quantifiable savings from internal expansion programs, ability to
successfully integrate acquisitions quickly and in a cost-effective manner,
changes in capital availability or costs, and the timing and occurrence of
events that may be subject to circumstances beyond the Corporation's control.
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 Securities and Exchange Commission filings,
including, but not limited to, the discussion of "Competition" of this Annual
Report on Form 10-K, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 25 through 43 of the 2001 Annual
Report and "Note A: Accounting Policies" and "Note M: Commitments and
Contingencies" of the "Notes to Financial Statements" on pages 14 through 16 and
page 24, respectively, of the Audited Consolidated Financial Statements included
in the 2001 Annual Report.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 43
QUARTERLY PERFORMANCE
UNAUDITED
Basic Earnings Per
(add 000, except per share) Net Sales(1) Gross Profit Net Earnings Common Share(2)
- --------------------------------------------------------------------------------------------------------------------------
Quarter 2001 2000 2001 2000 2001(3) 2000 2001(3) 2000
- --------------------------------------------------------------------------------------------------------------------------
First $ 263,658 $ 276,131 $ 27,164 $ 44,358 $ (4,652) $ 7,330 $ (0.10) $ 0.16
Second 420,218 362,474 93,461 96,832 39,002 42,122 0.82 0.90
Third 437,014 380,305 105,882 95,426 45,917 42,051 0.95 0.90
Fourth 384,801 314,090 77,243 66,955 25,095 20,524 0.52 0.44
- --------------------------------------------------------------------------------------------------------------------------
Totals $1,505,691 $1,333,000 $303,750 $303,571 $ 105,362 $112,027 $ 2.20 $ 2.40
==========================================================================================================================
Per Common Share
----------------------------------------------------------------------------------
Stock Prices
Diluted Earnings Per ------------------------------------------------------
Common Share(2) Dividends Paid High Low High Low
- ------------------------------------------------------------------------------------------------------------------------------
Quarter 2001(3) 2000 2001 2000 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
First $ (0.10) $ 0.16 $ 0.14 $ 0.13 $ 47.45 $ 38.00 $ 49.38 $ 35.50
- -------------------------------------------------------------------
Second 0.82 0.90 0.14 0.13 $ 51.60 $ 41.95 $ 54.25 $ 40.45
- -------------------------------------------------------------------
Third 0.95 0.90 0.14 0.14 $ 50.39 $ 34.75 $ 46.94 $ 35.24
- -------------------------------------------------------------------
Fourth 0.52 0.44 0.14 0.14 $ 46.60 $ 37.90 $ 44.10 $ 32.25
- -------------------------------------------------------------------
Totals $ 2.19 $ 2.39 $ 0.56 $ 0.54
===================================================================
(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 10.
(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.
(3) Net earnings and basic and diluted earnings per common share in the
second quarter include recognition of a gain on the divestiture of
certain refractories - related assets of Magnesia Specialties (see Note
B: Business Combinations and Divestitures in the consolidated audited
financial statements, on pages 16 and 17).
Page 44 Martin Marietta Materials, Inc. and Consolidated Subsidiaries
FIVE YEAR SUMMARY
(add 000, except per share) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATING RESULTS
Net sales $1,505,691 $1,333,000 $1,258,827 $1,057,691 $ 900,863
Freight and delivery revenues 212,359 184,517 175,292 143,805 128,326
----------------------------------------------------------------------------------
Total revenues 1,718,050 1,517,517 1,434,119 1,201,496 1,029,189
- -----------------------------------------------------------------------------------------------------------------------------------
Cost of sales, other costs and expenses 1,308,446 1,130,523 1,043,538 861,137 738,093
Freight and delivery costs 212,359 184,517 175,292 143,805 128,326
----------------------------------------------------------------------------------
Cost of operations 1,520,805 1,315,040 1,218,830 1,004,942 866,419
- -----------------------------------------------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS 197,245 202,477 215,289 196,554 162,770
Interest expense on debt 46,792 41,895 39,411 23,759 16,899
Other income and (expenses), net 7,986 8,239 18,435 1,347 5,341
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes on income 158,439 168,821 194,313 174,142 151,212
Taxes on income 53,077 56,794 68,532 58,529 52,683
- -----------------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 105,362 $ 112,027 $ 125,781 $ 115,613 $ 98,529
===================================================================================================================================
BASIC EARNINGS PER COMMON SHARE $ 2.20 $ 2.40 $ 2.70 $ 2.49 $ 2.14
===================================================================================================================================
DILUTED EARNINGS PER COMMON SHARE $ 2.19 $ 2.39 $ 2.68 $ 2.48 $ 2.13
===================================================================================================================================
CASH DIVIDENDS PER COMMON SHARE $ 0.56 $ 0.54 $ 0.52 $ 0.50 $ 0.48
===================================================================================================================================
CONDENSED CONSOLIDATED BALANCE SHEET DATA
Current deferred income tax benefits $ 19,696 $ 16,750 $ 21,899 $ 18,978 $ 16,873
Current assets - other 476,536 408,251 381,466 350,410 305,139
Property, plant and equipment, net 1,082,189 914,072 846,993 777,528 591,420
Goodwill, net 571,186 374,994 375,327 348,026 148,481
Other intangibles, net 35,782 34,462 31,497 27,952 26,415
Other noncurrent assets 39,191 92,910 85,392 65,695 17,385
===================================================================================================================================
TOTAL $2,224,580 $1,841,439 $1,742,574 $1,588,589 $1,105,713
===================================================================================================================================
Current liabilities - other $ 187,547 $ 143,958 $ 142,974 $ 136,576 $ 106,804
Current maturities of long-term debt
and commercial paper 4,490 45,155 39,722 15,657 1,431
Long-term debt and commercial paper 797,385 601,580 602,011 602,113 310,675
Pension and postretirement benefits 81,650 84,950 85,839 76,209 63,070
Noncurrent deferred income taxes 102,664 86,563 81,857 75,623 50,008
Other noncurrent liabilities 28,632 15,947 16,165 14,712 11,889
Shareholders' equity 1,022,212 863,286 774,006 667,699 561,836
===================================================================================================================================
TOTAL $2,224,580 $1,841,439 $1,742,574 $1,588,589 $1,105,713
===================================================================================================================================
Martin Marietta Materials, Inc. and Consolidated Subsidiaries Page 45