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EXHIBIT 13.01
[MARTIN MARIETTA MATERIALS LOGO]
1998 Annual Report
Portions Incorporated by Reference
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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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, 1998 and 1997, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Raleigh, North Carolina
January 25, 1999
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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STATEMENT OF FINANCIAL RESPONSIBILITY
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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 generally
accepted accounting principles applied on a consistent basis.
The Corporation maintains a system of internal accounting controls
designed and intended to provide reasonable assurance that assets are
safeguarded, that transactions are executed and recorded in accordance with
management's authorization, and that accountability for assets is maintained. An
environment that establishes an appropriate level of control-consciousness is
maintained and monitored and includes examinations by an internal audit staff
and by the independent auditors in connection with their annual audit.
The Corporation's management recognizes its responsibility to foster a
strong ethical climate. Management has issued written policy statements which
document the Corporation's business code of ethics. The importance of ethical
behavior is regularly communicated to all employees through the distribution of
the Code of Ethics and Standards of Conduct booklet and through ongoing
education and review programs designed to create a strong commitment to ethical
business practices.
The Audit Committee of the Board of Directors, which consists of four
outside directors, meets periodically and when appropriate, separately with the
independent auditors, management and the internal auditors to review the
activities of each.
The consolidated financial statements have been audited by Ernst &
Young LLP, independent auditors, whose report appears on the preceding page.
/s/ JANICE K. HENRY
Janice K. Henry
Senior Vice President, Chief Financial Officer
and Treasurer
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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CONSOLIDATED STATEMENT OF EARNINGS
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for years ended December 31
(add 000, except per share) 1998 1997 1996
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NET SALES $1,057,691 $900,863 $721,947
Cost of sales 776,043 665,594 539,437
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GROSS PROFIT 281,648 235,269 182,510
Selling, general and administrative expenses 82,041 69,093 59,937
Research and development 3,053 3,406 1,897
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EARNINGS FROM OPERATIONS 196,554 162,770 120,676
Interest expense on debt 23,759 16,899 10,121
Other income and (expenses), net 1,347 5,341 8,398
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Earnings before taxes on income 174,142 151,212 118,953
Taxes on income 58,529 52,683 40,325
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NET EARNINGS $ 115,613 $ 98,529 $ 78,628
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EARNINGS PER COMMON SHARE-BASIC $ 2.49 $ 2.14 $ 1.71
EARNINGS PER COMMON SHARE-DILUTED $ 2.48 $ 2.13 $ 1.71
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Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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CONSOLIDATED BALANCE SHEET
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at December 31
ASSETS
(add 000) 1998 1997
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CURRENT ASSETS:
Cash and cash equivalents $ 14,586 $ 18,661
Accounts receivable, net 171,511 147,432
Inventories 157,104 132,583
Current deferred income tax benefits 18,978 16,873
Other current assets 7,209 6,463
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TOTAL CURRENT ASSETS 369,388 322,012
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Property, plant and equipment, net 777,528 591,420
Cost in excess of net assets acquired 348,026 148,481
Other intangibles 27,952 26,415
Other noncurrent assets 65,695 17,385
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TOTAL ASSETS $1,588,589 $1,105,713
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LIABILITIES AND SHAREHOLDERS' EQUITY
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(add 000)
CURRENT LIABILITIES:
Accounts payable $ 57,720 $ 49,599
Accrued salaries, benefits and payroll taxes 23,502 19,742
Accrued insurance and other taxes 25,370 16,440
Income taxes 7,201 4,691
Current maturities of long-term debt and commercial paper 15,657 1,431
Other current liabilities 22,783 16,332
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TOTAL CURRENT LIABILITIES 152,233 108,235
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Long-term debt and commercial paper 602,113 310,675
Pension, postretirement and postemployment benefits 76,209 63,070
Noncurrent deferred income taxes 75,623 50,008
Other noncurrent liabilities 14,712 11,889
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TOTAL LIABILITIES 920,890 543,877
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SHAREHOLDERS' EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized 466 462
Additional paid-in capital 349,245 335,766
Retained earnings 317,988 225,608
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TOTAL SHAREHOLDERS' EQUITY 667,699 561,836
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,588,589 $1,105,713
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The notes on pages 16 to 26 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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CONSOLIDATED STATEMENT OF CASH FLOWS
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for the years ended December 31
(add 000) 1998 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 115,613 $ 98,529 $ 78,628
Adjustments to reconcile net earnings to cash provided by
operating activities:
Depreciation, depletion and amortization 98,765 79,720 61,210
Other items, net (4,573) (3,638) (3,984)
Changes in operating assets and liabilities:
Deferred income taxes (3,457) 7,090 61
Net changes in receivables, inventories and payables (9,661) (2,865) (12,131)
Other assets and liabilities, net 25,886 16,782 11,161
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NET CASH PROVIDED BY OPERATING ACTIVITIES 222,573 195,618 134,945
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (123,926) (86,440) (79,503)
Acquisitions, net (347,882) (279,056) (3,660)
Transactions with Lockheed Martin Corporation -- 23,768 63,615
Other investing activities, net (34,014) 8,359 8,195
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NET CASH USED FOR INVESTING ACTIVITIES (505,822) (333,369) (11,353)
CASH FLOWS FROM FINANCING ACTIVITIES AND DIVIDENDS:
Repayments of long-term debt (1,704) (226,367) (103,729)
Increase in long-term debt 198,994 349,947 --
Commercial paper, net 105,000 60,000 --
Debt issue costs (1,745) (938) --
Dividends paid (23,233) (22,134) (21,196)
Issuances of common stock 1,862 164 --
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NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 279,174 160,672 (124,925)
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,075) 22,921 (1,333)
CASH AND CASH EQUIVALENTS (BOOK OVERDRAFT), beginning of year 18,661 (4,260) (2,927)
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CASH AND CASH EQUIVALENTS (BOOK OVERDRAFT), end of year $ 14,586 $ 18,661 $ (4,260)
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Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
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for the years ended December 31
Additional Total
Common Paid-In Retained Shareholders'
(add 000) Stock Capital Earnings Equity
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Balance at December 31, 1995 $461 $331,303 $ 91,781 $ 423,545
Net earnings -- -- 78,628 78,628
Dividends declared ($0.46 a share) -- -- (21,196) (21,196)
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Balance at December 31, 1996 461 331,303 149,213 480,977
Net earnings -- -- 98,529 98,529
Dividends declared ($0.48 a share) -- -- (22,134) (22,134)
Issuances of common stock 1 4,463 -- 4,464
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Balance at December 31, 1997 462 335,766 225,608 561,836
NET EARNINGS -- -- 115,613 115,613
DIVIDENDS DECLARED ($0.50 A SHARE) -- -- (23,233) (23,233)
ISSUANCES OF COMMON STOCK 4 13,479 -- 13,483
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BALANCE AT DECEMBER 31, 1998 $466 $349,245 $ 317,988 $ 667,699
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The notes on pages 16 to 26 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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NOTES TO FINANCIAL STATEMENTS
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NOTE A: ACCOUNTING POLICIES
Organization. Martin Marietta Materials, Inc. ("Martin Marietta
Materials" or the "Corporation") is engaged principally in the construction
aggregates business. Aggregates products are used primarily for construction of
highways and other infrastructure projects in the United States, and in the
domestic commercial and residential construction industries. In addition, the
Corporation produces magnesia-based chemicals and refractories products used in
a wide variety of industrial, environmental and agricultural applications, with
a majority of its products used by customers in the worldwide steel industry.
Basis of Consolidation and Use of Estimates. The consolidated financial
statements include the accounts of the Corporation and its wholly owned and
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of the
Corporation's financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates and
assumptions. Such judgments affect the reported amounts in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
Reclassifications. Certain amounts for the prior years have been
reclassified to conform to the 1998 presentation. Such reclassifications had no
impact on previously reported net earnings or financial position.
Revenue Recognition. Substantially all revenues are recognized, net of
discounts, if any, when finished products are shipped to unaffiliated customers
or services have been rendered, with appropriate provision for uncollectible
amounts.
Cash and Cash Equivalents. Cash and cash equivalents are net of
outstanding checks that are funded daily as presented for payment. Cash
equivalents are comprised generally of highly liquid instruments with original
maturities of three months or less from the date of purchase. The Corporation's
cash and cash equivalents were invested with its former parent, Lockheed Martin
Corporation ("Lockheed Martin"), for years ended prior to January 1, 1997, under
the terms of a cash management agreement. Upon termination of this agreement, on
January 31, 1997, all funds held by Lockheed Martin were transferred to the
Corporation and invested under its own cash management arrangements with third
party commercial banks.
Inventories Valuation. Inventories are stated at the lower of cost or
market. Costs are determined principally by the first-in, first-out ("FIFO")
method.
Properties and Depreciation. Property, plant and equipment are stated
at cost. Depreciation and amortization are computed over estimated service lives
principally by the straight-line method. The estimated service life for
buildings ranges from 10 to 20 years and from 1 to 20 years for machinery and
equipment. Depletion of mineral deposits is calculated over estimated
recoverable quantities principally by the units-of-production method.
Intangible Assets. Cost in excess of net assets acquired (goodwill) is
amortized ratably over appropriate periods ranging from 10 to 30 years. At
December 31, 1998 and 1997, the amounts for accumulated amortization of costs in
excess of net assets acquired were approximately $21,685,000 and $13,520,000,
respectively. Other intangibles represent amounts assigned principally to
noncompete agreements and are amortized ratably over periods based on related
contractual terms, generally 5 to 20 years. At December 31, 1998 and 1997, the
amounts for accumulated amortization of other intangibles were approximately
$20,826,000 and $15,944,000, respectively.
The carrying values of intangible assets are reviewed if the facts and
circumstances indicate potential impairment of their carrying value. Any
impairment in the carrying value of such intangibles is recorded when
identified.
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 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.
Through October 1996, the results of operations of the Corporation were
included in consolidated income tax returns with Lockheed Martin. Income taxes
allocable to the operations of the Corporation through
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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this date were calculated as if it had filed separate federal and state income
tax returns for each tax-reporting period. For all periods subsequent to October
1996, the Corporation's results of operations are reported separately for income
tax purposes.
Related Party Transactions. Lockheed Martin disposed of its ownership
of the Corporation's common stock in October 1996. Prior to the disposition,
Lockheed Martin provided certain general, administrative and employee benefit
services and subsequent to the disposition, certain services were provided, for
a brief period, under a transition agreement. The Corporation was charged
$5,701,000 for these services from January to October 1996 and the amounts
charged for the remainder of 1996 and 1997 were not material.
Research and Development and Similar Costs. Research and development
and similar costs are charged to operations as incurred. Pre-operating costs and
start-up costs for new facilities and products are generally charged to
operations as incurred.
Derivative Financial Instruments. From time to time, the Corporation
uses derivative financial instruments to manage its exposure to fluctuations in
interest rates. The Corporation designates its interest rate swap agreements as
hedges of specific debt instruments and recognizes the interest differentials as
adjustments to interest expense over the terms of the related debt obligations.
When using interest rate swap agreements, the intermediaries to such agreements
expose the Corporation to the risk of nonperformance, though such risk is not
considered likely under the circumstances. The Corporation does not hold or
issue financial instruments for trading purposes. The Corporation did not
utilize any derivative financial instruments during 1998.
Segment Information. Information concerning business segment data is
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 34 through 36.
Earnings Per Common Share. Basic earnings per common share are based on
the weighted-average number of common shares outstanding during the year. The
weighted-average number of common shares outstanding was approximately
46,453,900, 46,121,800 and 46,079,300 in 1998, 1997 and 1996, respectively.
Diluted earnings per common share were computed assuming that the
weighted-average number of common shares was increased by the conversion of
fixed awards (employee stock options and incentive stock awards) and nonvested
stock awards to be issued to employees and non-employee members of the
Corporation's Board of Directors under certain stock-based compensation
arrangements. The diluted per-share computations reflect a change in the number
of common shares outstanding (the "denominator") to include the number of
additional shares that would have been outstanding if the potentially dilutive
common shares had been issued. In each year presented, the income available to
common shareholders (the "numerator") is the same for both basic and dilutive
per-share computations. The following table sets forth a reconciliation of the
denominators for the basic and diluted earnings per share computations for each
of the years ended December 31:
1998 1997 1996
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BASIC EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares 46,453,900 46,121,800 46,079,300
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EFFECT OF DILUTIVE SECURITIES:
Employee fixed awards 234,800 113,300 21,700
Employee and Directors'
nonvested stock 18,900 2,700 --
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DILUTED EARNINGS PER
COMMON SHARE:
Adjusted weighted-average
number of shares and
assumed conversions 46,707,600 46,237,800 46,101,000
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Accounting Changes. The Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 132, Employers' Disclosures About Pensions
and Other Postretirement Benefits ("FAS 132"), as required for the year ended
December 31, 1998, by the Financial Accounting Standards Board ("FASB"). FAS 132
revises and standardizes the disclosures for pensions and postretirement
benefits (see Note I).
Effective January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("FAS 131"), which superceded Statement of
Financial Accounting Standards No. 14, Financial Reporting for Segments of a
Business Enterprise. FAS 131 establishes standards for the way public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. FAS 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of FAS 131 did not affect net earnings or
financial position.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income, ("FAS 130"). FAS
130 requires all non-owner changes in equity that are excluded from net earnings
under existing FASB standards be included as comprehensive income. The
Corporation presently does not have any material transactions that directly
affect equity other than those transactions with owners in their capacity as
owners. Therefore, the provisions of FAS 130 did not materially affect net
earnings or financial position.
In April 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities ("SOP 98-5"). The adoption of SOP 98-5 requires that all
costs related to start-up activities, including organizational costs, be
expensed as incurred effective January 1, 1999. The Corporation currently
expenses all appropriate start-up costs; therefore, SOP 98-5 will not impact the
Corporation's net earnings or financial position.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("FAS 133"), which is required to be adopted in years beginning after June 15,
1999. Because of the Corporation's minimal use of derivatives, if any,
management does not anticipate that the adoption of FAS 133 will have a
significant impact on net earnings or the financial position of the Corporation.
Further, in March 1998, the AICPA issued Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use ("SOP 98-1"). The Corporation adopted SOP 98-1 on January 1, 1999. SOP 98-1
requires the capitalization of certain costs incurred after the date of adoption
in connection with developing or obtaining software for internal use. The
Corporation expensed such costs as incurred for the year ended December 31,
1998. While the Corporation does not expect the impact of the adoption of SOP
98-1 to be material, it has not completed the determination of the impact of
adoption.
NOTE B: ACQUISITION OF REDLAND STONE PRODUCTS COMPANY
As of December 4, 1998, Martin Marietta Materials purchased all of the
outstanding common stock of Redland Stone Products Company ("Redland Stone")
from an affiliate of Lafarge S.A. The operating results of the acquired business
have been included with those of the Corporation since that date.
The purchase price consisted of approximately $272 million in cash plus
normal balance sheet liabilities, subject to certain post-closing adjustments
relating to working capital, and approximately $8 million estimated for certain
other assumed liabilities and transaction costs. The acquisition has been
accounted for under the purchase method of accounting wherein the Corporation
recognized approximately $165 million in costs in excess of net assets acquired
after recording other purchase adjustments necessary to allocate the purchase
price to the fair value of assets acquired and liabilities assumed. Goodwill is
being amortized over a 30-year period. Management expects the preliminary
purchase price allocation will be adjusted during the applicable period provided
by Accounting Principles Bulletin No. 16, Business Combinations.
For comparative purposes, the following unaudited pro forma summary
financial information presents the historical results of operations of the
Corporation and the Redland Stone business for the years ended December 31, 1998
and 1997. The financial information reflects pro forma adjustments as if the
acquisition had been consummated as of the beginning of the periods presented.
The pro forma financial information is based upon certain estimates and
assumptions that management of the Corporation believes are reasonable in the
circumstances. The unaudited pro forma information presented below is not
necessarily indicative of what results of operations actually would have been if
the acquisition had occurred on the date indicated. Moreover, they are not
necessarily indicative of future results.
PRO FORMA INFORMATION (UNAUDITED)
years ended December 31
(add 000, except per share) 1998 1997
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Net sales $1,185,278 $1,018,459
Net earnings $ 113,113 $ 94,690
Earnings per common
share:
Basic $ 2.44 $ 2.05
Diluted $ 2.42 $ 2.05
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Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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NOTE C: ACCOUNTS RECEIVABLE
December 31
(add 000) 1998 1997
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Customer receivables $ 172,372 $ 145,773
Other current receivables 3,569 6,448
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175,941 152,221
Less allowances (4,430) (4,789)
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Total $ 171,511 $ 147,432
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NOTE D: INVENTORIES
December 31
(add 000) 1998 1997
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Finished products $ 127,904 $ 108,707
Products in process and
raw materials 12,342 7,886
Supplies and expendable
parts 25,307 23,161
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165,553 139,754
Less allowances (8,449) (7,171)
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Total $ 157,104 $ 132,583
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NOTE E: PROPERTY, PLANT AND EQUIPMENT, NET
December 31
(add 000) 1998 1997
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Land and
improvements $ 164,362 $ 85,261
Mineral deposits 150,684 125,128
Buildings 63,205 56,116
Machinery and equipment 1,072,258 942,162
Construction in progress 52,003 34,010
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1,502,512 1,242,677
Less allowances for
depreciation, depletion
and amortization (724,984) (651,257)
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Total $ 777,528 $ 591,420
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NOTE F: LONG-TERM DEBT AND COMMERCIAL PAPER
December 31
(add 000) 1998 1997
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6.9% Notes, due 2007 $ 124,952 $ 124,948
5.875% Notes, due 2008 198,980 --
7% Debentures, due 2025 124,204 124,195
Commercial Paper,
interest rates ranging
from 5.3% to 6.0% 165,000 60,000
Acquisition notes, interest
rates ranging from 5%
to 10% 3,299 1,337
Other notes 1,335 1,626
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Total 617,770 312,106
Less current maturities (15,657) (1,431)
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Total $ 602,113 $ 310,675
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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 agreed to exchange the Notes for publicly
registered notes. These Notes are carried net of original issue discount, which
is being amortized by the effective interest method over the life of the issue.
The effective interest rate on these securities is 6.03%. The Notes are not
redeemable prior to their maturity on December 1, 2008.
During August 1997, the Corporation offered and sold the 6.9% Notes at
99.7% of their principal amount of $125,000,000. The entire amount of these
long-term fixed rate debt securities was registered under the Corporation's
shelf registration statement on file with the Securities and Exchange
Commission. These Notes are carried net of original issue discount, which is
being amortized by the effective interest method over the life of the issue. The
effective interest rate on these securities is 6.906%. The Notes are not
redeemable prior to their maturity on August 15, 2007.
The 7% Debentures were sold at 99.341% of their principal amount of
$125,000,000 in December 1995. These Debentures are carried net of original
issue discount, which is being amortized by the effective interest method over
the life of the issue. The effective interest rate is 7.053% and the Debentures
are not redeemable prior to their maturity date of December 1, 2025.
In 1997, the Corporation entered into a revolving credit agreement,
syndicated with a group of domestic and foreign commercial banks, which provides
for borrowings of up to $150,000,000 for general corporate purposes through
January 2002 (the "Long-Term Credit Agreement"). Borrowings under this credit
agreement 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); (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). The Long-Term Credit Agreement
contains restrictive covenants relating to leverage, requirements for
limitations on encumbrances, and provisions that relate to certain changes in
control. The Corporation is required to pay an annual loan commitment fee to the
bank group.
In addition, the Corporation has a revolving credit agreement with a
group of commercial banks which provides for borrowings of up to an additional
$300,000,000 for general corporate purposes through December 1999 (the
"Short-Term Credit Agreement"). Borrowings under this short-term agreement are
also
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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unsecured and bear interest, at the Corporation's option, at rates based upon:
(i) the Eurodollar rate (as defined on the basis of a LIBOR); (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). The Short-Term Credit Agreement is subject to
the same restrictive covenants as those contained in the above-referenced
long-term revolving credit agreement. The Corporation is also required to pay a
loan commitment fee to the bank group.
No borrowings were outstanding under either of the revolving credit
agreements at December 31, 1998. However, the Long-Term Credit Agreement and
Short-Term Credit Agreement support commercial paper borrowings of $165,000,000
outstanding at December 31, 1998. Of this amount, $150,000,000 has been
classified as long-term debt on the Corporation's consolidated balance sheet
based on management's ability and intention to maintain this debt outstanding
for at least one year. The remaining $15,000,000 is classified as a current
liability.
Excluding commercial paper, the Corporation's long-term debt maturities
for the five years following December 31, 1998, are: $657,000 in 1999; $579,000
in 2000; $595,000 in 2001; $933,000 in 2002; $317,000 in 2003; and $449,689,000
thereafter.
Total interest paid was $23,677,000, $14,487,000 and $12,004,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
Amounts reflected in acquisitions, net, in the statement of cash flows
include assumed or incurred indebtedness of $3,373,000, $1,364,000 and
$2,166,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
In addition, the amount reflected in acquisitions, net, for 1998 and 1997
excludes the effect of the issuance of approximately 280,100 and 123,500 shares,
respectively, of the Corporation's common stock.
NOTE G: FINANCIAL INSTRUMENTS
In addition to its long-term debt arrangements, the Corporation's
financial instruments also include temporary cash investments, customer accounts
and notes receivable, and commercial paper borrowings. Temporary investments are
placed with creditworthy financial institutions, primarily in Euro-time
deposits. The Corporation's cash equivalents principally have maturities of less
than three months. Due to the short maturity of these investments, they are
carried on the balance sheet at cost, which approximates market value. Customer
receivables are due from a large number of customers that are dispersed across
wide geographic and economic regions. At December 31, 1998 and 1997, the
Corporation had no significant concentrations of credit risk.
The carrying amounts reported in the Corporation's consolidated balance
sheet for cash and cash equivalents approximate fair value due to the short
maturity of these instruments. The estimated fair values of customer receivables
and commercial paper borrowings approximate their carrying amounts. The
estimated fair values of the Corporation's long-term debt instruments (excluding
commercial paper borrowings) at December 31, 1998, aggregated approximately
$461,140,000 compared with a carrying amount of $452,770,000 on the consolidated
balance sheet. The fair values of long-term debt were estimated based on quoted
market prices for those instruments publicly traded. For privately placed debt,
the fair values were estimated based on the quoted market prices for similar
issues, or on current rates offered to the Corporation for debt of the same
remaining maturities.
NOTE H: INCOME TAXES
The components of the Corporation's tax expense (benefit) on income are
as follows:
years ended December 31
(add 000) 1998 1997 1996
- --------------------------------------------------------------
Federal income taxes:
Current $52,663 $40,916 $33,771
Deferred (4,486) 2,566 (416)
- --------------------------------------------------------------
Total federal
income taxes 48,177 43,482 33,355
- --------------------------------------------------------------
State income taxes:
Current 11,360 9,032 6,560
Deferred (1,008) 169 410
- --------------------------------------------------------------
Total state
income taxes 10,352 9,201 6,970
- --------------------------------------------------------------
Total provision $58,529 $52,683 $40,325
- --------------------------------------------------------------
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 20
13
The Corporation's effective income tax rate varied from the statutory
United States income tax rate because of the following permanent tax
differences:
years ended December 31 1998 1997 1996
- -----------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
Increase (reduction)
resulting from:
Excess of tax over
book depletion (6.6) (5.8) (5.5)
State income taxes 3.9 4.0 3.8
Other items 1.3 1.6 0.6
- -----------------------------------------------------------
Effective tax rate 33.6% 34.8% 33.9%
- -----------------------------------------------------------
The principal components of the Corporation's deferred tax assets and
liabilities at December 31 are as follows:
Deferred
Assets (Liabilities)
(add 000) 1998 1997
- ------------------------------------------------------
Property, plant and
equipment $(77,954) $(61,465)
Employee benefits 15,159 21,559
Financial reserves 7,436 7,708
Other items, net (1,286) (937)
- ------------------------------------------------------
Total $(56,645) $(33,135)
- ------------------------------------------------------
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, 1998 or 1997.
The Corporation's total income tax payments were $59,466,000 and
$54,181,000, respectively, during the years ended December 31, 1998 and 1997.
Total income taxes paid by Lockheed Martin attributable to the Corporation were
$29,229,000 for the year ended December 31, 1996 (see Note A).
NOTE I: RETIREMENT PLANS, POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
Effective January 1, 1998, the Corporation adopted the provisions of
FAS 132 that revise disclosure requirements of Statement of Financial Accounting
Standards No. 87, Employers' Accounting for Pensions ("FAS 87"), Statement of
Financial Accounting Standards No. 88, Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and
Statement of Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. FAS 132 does not change the
recognition or measurement of pension or postretirement benefit obligations or
expenses, but standardizes disclosure requirements for pensions and other
postretirement benefits, eliminates certain disclosures and requires some
additional information.
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 employees' 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'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 FAS 87
and FAS 132, which establish rules for financial accounting and reporting. When
any funded plan exceeds the full-funding limits of ERISA, no contribution is
made to that plan. FAS 87 specifies that certain key actuarial assumptions be
adjusted annually to reflect current, rather than long-term, trends in the
economy.
It is the Corporation's funding policy to stabilize annual
contributions with assumptions selected on the basis of expected long-term
trends. The net periodic benefit cost of defined benefit plans included the
following components:
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 21
14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
years ended December 31
(add 000) 1998 1997 1996
- ------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 5,965 $ 5,039 $ 5,305
Interest cost 9,231 8,245 7,255
Expected return
on assets (11,454) (9,598) (7,677)
Amortization of:
Prior service cost 512 537 480
Actuarial gain (464) (648) (4)
Transition asset (331) (360) (403)
- ------------------------------------------------------------------------
Net periodic benefit
cost $ 3,459 $ 3,215 $ 4,956
- ------------------------------------------------------------------------
Weighted-average assumptions used as of December 31 are as follows:
1998 1997 1996
- ------------------------------------------------------------------------
Plan discount rates 6.75% 7.25% 7.75%
Rates of increase in
future compensation
levels 5.00% 5.50% 5.50%
Expected long-term
rates of return on
assets 9.00% 9.00% 8.75%
The following table sets forth the defined benefit plans' change in
benefit obligations, change in plan assets, funded status and amounts recognized
on the respective balance sheets as of:
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
Change in benefit obligations:
Net benefit obligation at
beginning of year $ 125,973 $ 102,191
Service cost 5,965 5,039
Interest cost 9,231 8,245
Actuarial loss 4,473 3,940
Acquisitions 4,600 11,940
Gross benefits paid (6,133) (5,382)
- -------------------------------------------------------------------
Net benefit obligation at
end of year $ 144,109 $ 125,973
- -------------------------------------------------------------------
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 130,345 $ 108,270
Actual return on plan
assets, net 20,180 16,657
Acquisitions 2,600 8,100
Employer contributions 195 2,700
Gross benefits paid (6,133) (5,382)
- -------------------------------------------------------------------
Fair value of plan assets
at end of year $ 147,187 $ 130,345
- -------------------------------------------------------------------
December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
Funded status of the plan
at end of year $ 3,078 $ 4,372
Unrecognized net
actuarial gain (21,998) (18,279)
Unrecognized prior
service cost 4,661 5,173
Unrecognized net
transition asset (1,105) (1,436)
- -------------------------------------------------------------------
Accrued benefit cost $ (15,364) $ (10,170)
- -------------------------------------------------------------------
December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
Amounts recognized in the
balance sheet consist of:
Prepaid benefit cost $ 101 $ --
Accrued benefit cost (15,465) (10,170)
- -------------------------------------------------------------------
Net amount recognized
at end of year $ (15,364) $ (10,170)
- -------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for a pension plan with accumulated benefit
obligations in excess of plan assets were $3,124,000, $1,375,000 and $0,
respectively, as of December 31, 1998, and $2,499,000, $1,025,000 and $0,
respectively, as of December 31, 1997.
Postretirement Benefits. The Corporation provides other postretirement
benefits including medical benefits for certain retirees and their spouses (and
Medicare Part B reimbursement for certain retirees) and retiree life insurance.
The net periodic benefit cost of postretirement plans included the following
components:
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 22
15
years ended December 31
(add 000) 1998 1997 1996
- ----------------------------------------------------------------------------
Components of net periodic
benefit cost:
Service cost $ 1,732 $ 1,360 $ 1,664
Interest cost 4,034 3,539 4,346
Expected return
on assets (121) (246) (375)
Amortization of:
Prior service cost 25 36 70
Actuarial (gain) loss (85) (372) 254
- ----------------------------------------------------------------------------
Net periodic benefit
cost $ 5,585 $ 4,317 $ 5,959
- ----------------------------------------------------------------------------
The postretirement health care plans' change in benefit obligations,
change in plan assets, funded status and amounts recognized in the Corporation's
consolidated balance sheets are as follows:
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------
Change in benefit obligations:
Net benefit obligation at
beginning of year $ 52,158 $ 58,890
Service cost 1,732 1,360
Interest cost 4,034 3,539
Plan participants'
contributions 164 150
Actuarial loss (gain) 6,713 (10,976)
Acquisitions -- 1,430
Gross benefits paid (2,420) (2,235)
- -------------------------------------------------------------
Net benefit obligation at
end of year $ 62,381 $ 52,158
- -------------------------------------------------------------
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year $ 2,926 $ 4,971
Actual return on plan
assets, net (92) 40
Plan participants'
contributions 164 150
Gross benefits paid (2,420) (2,235)
- -------------------------------------------------------------
Fair value of plan assets
at end of year $ 578 $ 2,926
- -------------------------------------------------------------
December 31
(add 000) 1998 1997
- -------------------------------------------------------------
Funded status of the plan
at end of year $(61,803) $(49,232)
Unrecognized net
actuarial loss (gain) 2,270 (4,644)
Unrecognized prior
service cost 456 481
- -------------------------------------------------------------
Accrued benefit cost $(59,077) $(53,395)
- -------------------------------------------------------------
December 31
(add 000) 1998 1997
- -------------------------------------------------------------
Amounts recognized in the
balance sheet consist of:
Accrued benefit cost $(59,077) $(53,395)
- -------------------------------------------------------------
Net amount recognized
at end of year $(59,077) $(53,395)
- -------------------------------------------------------------
Weighted-average assumptions used as of December 31 are as follows:
1998 1997 1996
- ---------------------------------------------------
Discount rates 6.75% 7.25% 7.75%
Expected long-term
rate of return on
assets 9.00% 9.00% 8.75%
The assumed trend rate for health care inflation used in measuring the
net periodic benefit cost and benefit obligation is 5.5% for 1998, declining to
4.5% in the year 2001 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, 1998:
ONE-PERCENTAGE POINT
(add 000) INCREASE (DECREASE)
- ----------------------------------------------------------
Total service and interest
cost components $ 1,168 $ (1,111)
Postretirement
benefit obligation $ 9,462 $ (7,567)
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 23
16
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
Defined Contribution Plans. The Corporation maintains two defined
contribution plans, that 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. Under certain provisions of these 401(k) plans, the
Corporation, at established rates, matches employees' eligible contributions.
The Corporation's matching obligations were $2,381,000 in 1998, $1,418,000 in
1997 and $1,336,000 in 1996. Effective January 1, 1998, salaried and certain
hourly employees of the former American Aggregates business that was acquired by
the Corporation during 1997 were eligible to participate in the Corporation's
401(k) plans. The employees of Redland Stone participate in a separate defined
contribution plan established prior to the Corporation's acquisition. The
Corporation will continue to support the existing plan in the near-term.
Postemployment Benefits. The Corporation provides certain benefits to
former or inactive employees after employment but before retirement, such as
workers' compensation and disability benefits. The Corporation has accrued
postemployment benefits of $1,734,000 at December 31, 1998 and 1997.
NOTE J: STOCK OPTIONS AND AWARD PLANS
In 1994, the shareholders of the Corporation approved an Amended
Omnibus Securities Award Plan ("Amended Omnibus Plan") that provided
authorization for the Corporation to repurchase 2,000,000 shares of the
Corporation's Common Stock for issuance under the Amended Omnibus Plan. On May
8, 1998, the repurchase authorization was decreased to approximately 1,007,000
shares, which represented the aggregate number of shares that were subject to
grants made through May 8, 1998. The shareholders approved, on May 8, 1998, the
Martin Marietta Materials, Inc. Stock-Based Award Plan, as amended from time to
time (the "Plan"). In connection with the Plan the Corporation was authorized to
repurchase up to 5,000,000 shares of the Corporation's Common Stock for issuance
under the Plan.
Under the Plan, employees of the Corporation may be granted stock-based
incentive awards, including options to purchase common stock, restricted stock
or other stock-based incentive awards. These awards may be granted either singly
or in combination with other awards.
Under the Plan, the Corporation grants options to employees to purchase
its common stock at a price equal to the market value at the date of grant.
These options become exercisable in three equal annual installments beginning
one year after date of grant and expire ten years from such date. The Plan
allows the Corporation to provide for financing of purchases, subject to certain
conditions, by interest-bearing notes payable to the Corporation. However, no
such financing has been provided by the Corporation.
Additionally, an incentive stock plan has been adopted under the Plan
whereby certain participants may be awarded stock units that permit them 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 Plan at certain minimum levels. Stock unit awards,
representing 22,905 shares for 1998, 28,029 shares for 1997 and 29,327 shares
for 1996 of the Corporation's common stock, were awarded under the incentive
stock plan. Under the awards outstanding, participants earn the right to acquire
their respective shares at the discounted value generally at the end of a
three-year period of additional employment from the date of award. All rights of
ownership of the common stock convey to the participants upon the issuance of
their respective shares at the end of the ownership-vesting period.
The Plan further provides that each non-employee director receives
1,500 non-qualified stock options annually. The Corporation grants the
non-employee directors options to purchase its common stock at a price equal to
the market value at the date of grant. These options become exercisable one year
from the grant date assuming completion of the service year by the non-employee
director and expire ten years from such date.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 24
17
A summary of the Corporation's stock-based plans' activity and related
information follows:
NUMBER OF SHARES
-----------------------
AVAILABLE WEIGHTED-
FOR AWARDS AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
- -------------------------------------------------------------------
December 31, 1995 1,585,500 414,500 $20.93
Additions -- -- --
Granted (270,026) 270,026 $23.53
Exercised -- -- --
Terminated 1,667 (1,667) $20.00
- -------------------------------------------------------------------
December 31, 1996 1,317,141 682,859 $21.96
Additions -- -- --
Granted (315,327) 315,327 $34.10
Exercised -- (10,030) $21.33
Terminated 2,334 (2,334) $25.57
- -------------------------------------------------------------------
December 31, 1997 1,004,148 985,822 $25.84
Additions 5,000,000 -- --
Authorization
Decrease (993,000) -- --
Granted (360,779) 360,779 $46.31
Exercised -- (165,612) $21.09
Terminated 7,166 (7,166) $30.17
- -------------------------------------------------------------------
DECEMBER 31, 1998 4,657,535 1,173,823 $32.78
- -------------------------------------------------------------------
Approximately 519,000, 411,000 and 202,000 outstanding awards were
exercisable at December 31, 1998, 1997 and 1996, respectively. Exercise prices
for awards outstanding as of December 31, 1998, ranged from $20.00 to $48.75.
The weighted-average remaining contractual life of those awards is 7.7 years.
The weighted-average exercise price of outstanding exercisable awards at
December 31, 1998, is $24.36.
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 performance criteria over a long-term period, as defined. Under the
terms of this plan, 250,000 shares of common stock are reserved for grant. Stock
units potentially representing 24,324 and 26,801 shares of the Corporation's
common stock were granted under this plan in 1998 and 1997, respectively.
Also, the Corporation adopted the Amended and Restated Common Stock
Purchase Plan for Directors, which provides non-employee Directors the election
to receive all or a portion of their total fees in the form of the Corporation's
common stock. Under the terms of this plan, 50,000 shares of common stock are
reserved for issuance. Currently, Directors are required to defer at least 30%
of the retainer portion of their fees in the form of common stock. Directors
elected to defer portions of their fees representing 6,328 and 6,725 shares of
the Corporation's common stock under this plan during 1998 and 1997,
respectively.
In 1996, the Corporation adopted the Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"). In
accordance with FAS 123, the Corporation has elected to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations in accounting for certain of its employee stock-based
compensation plans.
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:
1998 1997 1996
- ----------------------------------------------------------------
Risk-free interest rate 5.40% 6.40% 6.70%
Dividend yield 1.80% 1.70% 2.10%
Volatility factor 17.90% 20.40% 20.90%
Expected life 7 years 7 years 7 years
The Black-Scholes valuation model was developed for use in estimating
the fair value of traded awards which have no vesting restrictions and are fully
transferable. In addition, valuation models require the input of highly
subjective assumptions, including the expected stock price volatility factor.
Because changes in the subjective input assumptions can materially affect the
fair value estimate, in 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:
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 25
18
Notes to Financial Statements (continued)
- -----------------------------------------------------------------------------
(add 000, except per share) 1998 1997 1996
- ------------------------------------------------------------------
Basic earnings per
common share:
Net earnings $ 113,658 $ 97,557 $ 78,174
Earnings per share $ 2.45 $ 2.12 $ 1.70
Diluted earnings per
common share:
Net earnings $ 113,343 $ 97,072 $ 78,174
Earnings per share $ 2.43 $ 2.10 $ 1.70
Note K: Leases
Total rent expense for all operating leases was $23,460,000,
$19,700,000 and $18,480,000 for the years ended December 31, 1998, 1997 and
1996, respectively. The Corporation's operating leases generally contain renewal
and/or purchase options with varying terms. Total mineral royalties for all
leased properties were $19,988,000, $17,750,000 and $14,270,000 for the years
ended December 31, 1998, 1997 and 1996, respectively. Future minimum rental and
royalty commitments for all non-cancelable operating leases and royalty
agreements as of December 31, 1998, are as follows:
(add 000)
- -----------------------------------------------
1999 $ 8,531
2000 6,667
2001 4,439
2002 3,518
2003 and thereafter 33,897
- -----------------------------------------------
Total $ 57,052
===============================================
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, 1998 and
1997, there were approximately 46,621,000 and 46,211,200 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 1998, the Board of Directors authorized the repurchase of up to
5,000,000 shares of the Corporation's common stock for issuance under various
stock-based compensation and common stock purchase plans. The Board of Directors
also decreased the number of shares available under a previous authorization to
approximately 1,007,000 shares (see Note J).
Under the North Carolina Business Corporation Act, shares of common
stock reacquired by a corporation constitute unissued shares. For financial
reporting purposes, reacquired shares are recorded as reductions to issued
common stock and to additional paid-in capital.
Note M: Commitments and Contingencies
The Corporation is engaged in certain legal and administrative
proceedings incidental to its normal business activities. While it is not
possible to determine the ultimate outcome of those actions at this time, in the
opinion of management and counsel, it is unlikely that the outcome of such
litigation and other proceedings, including those pertaining to environmental
matters (see Note A and Management's Discussion and Analysis of Financial
Condition and Results of Operations, pages 38 and 39), will have a material
adverse effect on the results of the Corporation's operations or on its
financial position.
Environmental Matters. The Corporation was notified by the U.S.
Environmental Protection Agency (the "EPA") that it is a potentially responsible
party (a "PRP") with respect to environmental remediation at sites in Kansas
City, Missouri, and Kansas City, Kansas. Meetings have been held between the EPA
and several of the other named PRPs, and site assessments have begun to
determine the required level of corrective action. Although a loss is considered
probable, it is not possible at this time to reasonably estimate the amount of
any obligation for remediation of the sites. The extent of environmental impact
studies, allocation among the other named PRPs, remediation alternatives, and
concurrence of the regulatory authorities have not yet advanced to the stage
where such estimate of any loss to the Corporation can be made. However,
management believes that any costs incurred by the Corporation associated with
these sites would not have a material adverse effect on the Corporation's
consolidated results of operations or on its consolidated financial position.
Letters of Credit. The Corporation has entered into a standby letter of
credit agreement relating to workers' compensation self-insurance requirements.
At December 31, 1998, the Corporation had a contingent liability on this
outstanding letter of credit of approximately $6,700,000.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 26
19
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 and refractories
products used in a wide variety of industries. The discussion and analysis that
follows reflects management's assessment of the financial condition and results
of operations of Martin Marietta Materials, and should be read in conjunction
with the audited consolidated financial statements on pages 12 through 26.
BUSINESS COMBINATIONS AND INVESTMENTS
On December 4, 1998, the Corporation purchased all of the issued and
outstanding capital stock of Redland Stone Products Company ("Redland Stone")
from an affiliate of Lafarge S.A. The purchase consideration consisted of $272
million in cash plus normal balance sheet liabilities, subject to certain
post-closing adjustments to working capital, and $8 million estimated for
certain other assumed liabilities and transaction costs. The Corporation did
not assume any long-term debt of Redland Stone in the acquisition. This
acquisition has been accounted for under the purchase method of accounting, and
the operating results of the Redland Stone business acquired are included with
those of the Corporation from the December 4, 1998, acquisition date. The
Corporation recognized $165 million in goodwill after recording purchase
adjustments necessary to allocate the purchase price to the value of the
underlying assets acquired and liabilities assumed based on their estimated
fair values as of the closing date. Goodwill is being amortized over a 30-year
period. Management expects that the preliminary purchase price allocation will
be adjusted during the applicable period provided by Accounting Principles
Bulletin No. 16, Business Combinations.
The funds for the consummation of the Redland Stone acquisition were
provided initially through $280 million in borrowings under the Corporation's
United States commercial paper program. A portion of the commercial paper
borrowings was repaid with the proceeds obtained from the private placement of
5.875% Notes due December 1, 2008, that were issued in the aggregate principal
amount of $200 million. The Corporation agreed to exchange the notes for
publicly registered notes. The $280 million borrowings remained outstanding at
December 31, 1998. Additional information regarding this acquisition and the
related financing is contained in Notes B and F to the audited consolidated
financial statements on pages 18 and 19 through 20 and under "Business
Environment" on pages 28 through 34 and "Liquidity and Cash Flows" and "Capital
Structure and Resources" on pages 36 through 38.
On October 31, 1998, the Corporation completed an initial 14%
investment in the business of Meridian Aggregates Company ("Meridian"). The
transaction provides the Corporation with a mechanism to purchase the remaining
interests at a predetermined formula price within five years. The initial
purchase has been accounted for as an investment. The Corporation's exercise of
its option to purchase the remaining interests of Meridian is dependent, among
other things, on the financial and economic condition of Meridian at the
exercise date commencing in 2003. Further, the other investors in Meridian have
an annual option to require the Corporation to purchase their interests
beginning December 31, 2000, or earlier in the event of the death of an
investor.
RESULTS OF OPERATIONS
The Corporation's Aggregates division's business is characterized by a
high level of dependence on construction-sector spending, and the Magnesia
Specialties' product lines, particularly refractories and dolomitic lime
products, are used principally within the steel industry. Therefore, the
Corporation's operating results are highly dependent upon activity within the
construction and steel-related marketplaces, both of which are subject to
interest rate fluctuations and economic cycles within the public and private
business sectors. Factors such as seasonal and other weather-related conditions
also affect the Corporation's business production schedules and levels of
profitability. Accordingly, the financial results for a particular year, or
year-to-year comparisons of reported results, may not be indicative of future
operating results. The following comparative analysis and discussion should be
read in that context.
The Corporation's 1998 net earnings of $115.6 million, or $2.48 per
diluted share, represent an increase of 17% over 1997 net earnings of $98.5
million, or $2.13 per diluted share. The 1997 net earnings were 25% higher than
1996 net earnings of $78.6 million, or $1.71 per diluted share. The
Corporation's consolidated net sales of $1.1 billion in 1998 represent an
increase of $156.8 million, or 17%, over 1997 net sales of $900.9 million. The
1996
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 27
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------
consolidated net sales were $721.9 million. Consolidated earnings from
operations were $196.6 million in 1998 and $162.8 million in 1997, reflecting
an increase of $33.8 million, or 21%, in 1998 and $42.1 million, or 35%, in
1997, both over the prior year. The Corporation's 1996 operating earnings were
$120.7 million. The Corporation's financial results for 1998 include the
operations of the Redland Stone business from the December 4, 1998, acquisition
date.
Other income and expenses, net, for the year ended December 31, 1998,
was $1.3 million in income compared to income of $5.3 million and $8.4 million
in 1997 and 1996, respectively. In addition to other offsetting amounts, other
income and expenses, net, is typically comprised principally of interest
income, gains and losses associated with the disposition of certain assets,
costs associated with minority ownership, gains and losses related to certain
accounts receivable, income from non-operating services and net equity earnings
from nonconsolidated investments. In 1998, other income and expenses, net, also
included costs associated with the initial commercialization of certain new
technologies, with closing a manufacturing facility that mills and grinds
shells into calcium carbonate products, and with certain due diligence for
acquisitions not consummated.
Interest expense for the year ended December 31, 1998, was $23.8
million. This represents an increase of $6.9 million, or 41%, in 1998 over
1997. Interest expense was $16.9 million in 1997, an increase of $6.8 million,
or 67%, over 1996 interest expense of $10.1 million. The increased interest
expense in 1998 results primarily from additional borrowings to finance the
acquisition of Redland Stone coupled with the full-year impact of borrowings to
finance the acquisition of American Aggregates Corporation ("American
Aggregates"), which was consummated in May 1997. The interest expense increase
from 1996 to 1997 resulted from the American Aggregates purchase.
The Corporation's effective income tax rate for 1998 was 33.6%,
compared with 34.8% in 1997 and 33.9% in 1996. The favorable variance in the
effective income
[CHART]
DESCRIPTION OF GRAPHIC
1998 AGGREGATES DIVISION MARKETS
48% Infrastructure
9% Chemical, Railroad Ballast & Other
17% Residential
26% Commercial
tax rates for these years, when compared to the federal
corporate tax rate of 35%, is due to the effect of several offsetting factors.
In this regard, the Corporation's effective tax rates for these years reflect
the impact of differences in financial and tax accounting arising from the net
permanent benefit associated with the depletion allowances for mineral
reserves, amortization of certain goodwill balances, foreign operating
earnings, and earnings from nonconsolidated investments. The acquisition of
Redland Stone had no material impact on the Corporation's 1998 effective tax
rate. However, management expects an increase in the 1999 effective tax rate
resulting from the Redland Stone acquisition, arising principally from the
amortization of non-deductible goodwill.
The Corporation's debt-to-capitalization ratio increased from 36% at
December 31, 1997, to 48% at December 31, 1998, with total debt, including
commercial paper obligations, increasing from $312.1 million to $617.8 million,
and shareholders' equity increasing from $561.8 million to $667.7 million.
During 1998, the Corporation paid common stock dividends of $23.2 million, or
$0.50 per common share. Additional information regarding the Corporation's debt
and capital structure is contained in Note F to the audited consolidated
financial statements on pages 19 and 20 and under "Liquidity and Cash Flows"
and "Capital Structure and Resources" on pages 36 through 38.
BUSINESS ENVIRONMENT
The Corporation's principal lines of business include Martin Marietta
Aggregates, which primarily serves commercial customers in the construction
aggregates-related markets, and Martin Marietta Magnesia Specialties, which
manufactures and markets magnesia-based products principally for use in the
steel industry. These businesses are strongly affected by activity within the
construction and steel-related marketplaces, respectively, both of which
represent industries that are cyclical in nature.
The Aggregates division markets its products primarily to the
construction industry, with approximately half of its shipments made to
contractors
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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21
in connection with highway and other public infrastructure projects
and the balance of its shipments made primarily to contractors in connection
with commercial and residential construction projects. Accordingly, the
Corporation's profitability is sensitive to national, regional, and local
economic conditions, and particularly to cyclical swings in construction
spending, which is affected by fluctuations in interest rates, demographic and
population shifts, and to changes in the levels of infrastructure spending
funding by the public sector. Due to the high level of fixed costs associated
with aggregates production, the Corporation's operating leverage can be
substantial.
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. Even considering the effect of favorable economic
conditions on construction spending within the private sector during 1998, we
believe public works projects consumed more than 50% of the total annual
aggregates consumption in the United States. This has consistently been the
trend in construction spending for each year since 1990. Additionally, since
public sector-related shipments account for approximately 50% of the
Corporation's 1998 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
[CHART] AGGREGATES DIVISION CAPACITY
(in millions of tons)
1994 85.7
1995 117.3
1996 120.0
1997 165.8
1998 222.6
NOTE: 1998 capacity includes 25.0 million
tons from the Meridian investment.
[CHART] UNITED STATES AGGREGATES
CONSUMPTION (in millions of tons)
Crushed Sand &
Stone Gravel
------- ------
1994 1,360 982
1995 1,389 1,003
1996 1,437 1,008
1997 1,565 1,046
1998 1,667 1,127
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. During the first half of 1998, as
Congress worked through a successor bill to replace the six-year Intermodal
Surface Transportation Efficiency Act ("ISTEA"), public-sector construction
spending experienced a slight retrenchment. ISTEA expired on September 30,
1997, and was extended, with comparable funding levels, until May 1, 1998, to
serve as the interim highway construction funding mechanism. However, due to
the uncertainty surrounding successor financing for public-sector construction
spending, many highways and other infrastructure construction projects were
delayed.
On May 22, 1998, Congress passed the Transportation Equity Act for the
21st Century ("TEA-21"), which replaced ISTEA. TEA-21 became law on June 9,
1998, and provides relatively few policy changes from ISTEA, thereby continuing
to offer states leeway to shift funds from one mode of transportation to
another (such as from highways to mass transit). However, the most significant
change TEA-21 provides is in the amount of funding-$218 billion ($168 billion
for highway construction and $50 billion for other programs) is authorized over
the next six years, representing an approximately 40% increase over the ISTEA
funding levels. TEA-21 increases funding for highway construction alone by 44%.
Other changes resulting from TEA-21 include the minimum funding guarantee for
the Highway Account of the Highway Trust Fund and the minimum percentage of
funding guarantees for each state. The Highway Trust Fund, established in 1956,
is the funding mechanism for
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
highway and mass transit construction and, before TEA-21, was funded by
Congressional allocation of principally federal gasoline taxes. In recent
years, a portion of federal gasoline tax revenues was used for general fund
debt reduction at the federal level. TEA-21 changed the budget rules that apply
to funding the Highway Trust Fund and now requires that 100% of the federal
gasoline tax revenues go into this fund as a minimum funding guarantee.
Although the Highway Trust Fund is guaranteed a minimum level of funding equal
to the federal gasoline tax revenues collected, Congress must annually
appropriate highway funding levels and could choose to fund at a level below
the actual gasoline tax revenues. However, the transportation appropriation
bill for fiscal 1999 reflects the guaranteed spending level authorized under
TEA-21, up to $26.7 billion from $23.1 billion for the prior year.
Further, TEA-21 includes a revised highway funding distribution
formula that guarantees each state will receive a minimum percentage of highway
funding equal to 90.5% of the state's share of total gasoline tax
contributions. This change in funding partially adjusts for deficiencies under
ISTEA funding allocations that favored states in the Northeast and West and
left others, mostly in the South, paying more money into the Highway Trust Fund
than they received. Many states in the South are expected to experience an
increase in funding in excess of the 44% national average as a result of the
revised highway funding distribution formula. Highway construction spending is
expected to increase further as state departments of transportation match the
federal funds received under TEA-21.
The Corporation's six largest production states are expected to
experience a 55% increase in six-year annual public-works construction funding
as compared with the prior bill. Management expects that the ultimate level of
spending for public-works construction projects will increase in 1999 as a
result of TEA-21.
Management further expects that the impact on operations
[CHART] TEA-21 Funding Increases
Six Largest Production States
NC 55%
OH 37%
IA 43%
GA 70%
TX 61%
IN 52%
Wtd. Avg. 55%
should be positive during 1999, primarily in the second half of the year, and
on into 2000. The Corporation's ability to benefit fully from the expected
increase in public-works construction projects may be limited by its near-term
capability to meet anticipated demand.
Because of the Aggregates division's operations in the southeastern,
southwestern, midwestern and central regions of the nation, the division's -
and consequently, the Corporation's - operating performance and financial
results depend on the strength of these specific regional economies. In recent
years, the general economic growth in these regions of the United States, and
particularly in the Southeast, has been strong, and the Corporation's
management expects the trend to continue. However, if federal appropriation
levels are reduced, if a reduction occurs in state and local spending or if the
specific regional economies decline, the Aggregates division could be adversely
affected.
Some financial and economic analysts expect the general economy will
experience an economic slowdown during 1999 for a variety of reasons including:
an overdue recession based on historical trends; a tightening of the United
States' labor market; and problems in many foreign economies. However,
inflation continues to be negligible, which provides the Federal Reserve with
the flexibility to adjust monetary policy and sustain the economic growth
curve. As a result, some economists expect the U.S. economy to grow in 1999,
but at a slower rate. In contrast to the slowdown in the general economy, many
aggregates industry analysts believe the construction industry will continue to
benefit from enhanced public-works construction funding, lower interest rates
and supportive demographics. However, within the construction industry, the
anticipated increases in public works construction could be offset by potential
decreases, somewhat mitigated by low interest rates, in the residential and
commercial construction markets. Public-works construction shipments comprise
approximately 50% of
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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23
the Aggregates division's shipments. Therefore, management expects that
increased federal and state funding related to TEA-21 will drive growth in 1999
and offset expected declines in the division's residential and commercial
construction shipments.
Currently, while management believes the construction industry's
overall consumption levels and the Corporation's production and shipments will
grow moderately in 1999, there is no assurance that these levels will be
achieved and will continue. Over the longer term, the Aggregates division's
business and financial results will continue to follow national, regional and
local, general economic, construction and industry trends.
While the aggregates business is cyclical in nature, another
characteristic of the business involves the significant impact of seasonal
changes and other weather-related conditions on business production schedules.
Consequently, the Aggregates division's production and shipment levels coincide
with general construction activity levels, most of which occur in the
division's markets typically during the spring, summer and fall seasons.
Principally as a result of the expansion into the Indiana, Illinois and Ohio
area, the division's operations have a higher level of exposure to
weather-related risk during the winter months. The division's operations that
are concentrated principally in the north central region of the Midwest
generally experience more severe winter weather conditions than the division's
operations in the Southeast. Expansion into Texas through the Redland Stone
acquisition may mitigate some of the Corporation's winter weather operating
exposure.
The Corporation's management believes the overall long-term trend for
the construction aggregates industry continues to be one of consolidation. The
Corporation's Board of Directors and management continue to review and monitor
the Corporation's strategic long-term plans. These plans include assessing
business combinations and arrangements with other companies engaged in similar
businesses, building market share in the Corporation's core businesses, and
pursuing new technological opportunities that are related to the Corporation's
existing markets.
[CHART] RAW STEEL PRODUCTION AND IMPORTS
(in millions of short tons)
North American
Production Imports
-------------- -------
1994 127.1 32.7
1995 134.1 27.2
1996 136.0 32.1
1997 138.2 34.4
1998 est. 134.2 42.2
During 1998, the Corporation expanded its market opportunities by
consummating transactions for the acquisition of Redland Stone, along with the
acquisition of nine additional smaller aggregates operations. Further, the
Corporation either opened, or began the process of opening, 11 quarry site
locations - known as greensiting - in the Southeast and Midwest during 1997 and
1998. The Corporation also completed an initial investment in Meridian with an
option to purchase the remaining investment interests in five years. The other
investors in Meridian have the option to require the Corporation to purchase
their remaining interests annually beginning December 31, 2000.
The Corporation's aggregates reserves are sufficient to permit
production at present levels for the foreseeable future. The strategic
expansion completed in 1998, including the Meridian investment, added 3.0
billion tons of reserves. Based on 1998 shipments adjusted for the Redland
acquisition and the Meridian investment, the Corporation's aggregates reserves
exceed 50 years of production activity.
Through its Magnesia Specialties division, the Corporation also
manufactures and markets magnesia-based products, including heat-resistant
refractories products for the steel industry and magnesia-based chemicals
products for industrial, agricultural and environmental uses, including
wastewater treatment and acid neutralization. The Magnesia Specialties
division's products, particularly refractories products and dolomitic lime,
which are used within the steel industry, currently account for approximately
71% of the division's net sales. Accordingly, the division's profitability
highly depends on the production of steel and the related marketplace, and a
significant portion of the division's product pricing structure is affected by
current business economic trends within the steel industry. Further, due to the
high level of fixed costs associated with its products' production, the
Corporation's operating leverage can be substantial.
In 1998, global industry conditions negatively impacted the division's
major product areas. Economic uncertainties in Asia resulted in a high level of
imports from Asian steelmakers. The increased Asian
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
imports negatively impacted domestic and worldwide levels of steel production
and prices and, consequently, had a negative impact on the division's lime and
refractories products areas.
In spite of problems with the Asian economy, the division's
refractories and lime products, which are sold primarily to the steel industry,
experienced a strong first half of the year. But the devaluation of the Russian
currency, coupled with economic instability in Brazil, resulted in an influx of
imports from these countries atop already increased steel imports from Asia.
Heavy importing forced steelmakers, without success, to pressure the United
States government to invoke fair trade practices against dumping of steel.
However, production had already slowed dramatically, along with demand for the
division's refractories and lime products. In addition, the division continued
to experience competitive pricing pressures. Further, the division experienced
receivables losses from bankruptcies in the steel-related marketplace during
1998. The division, as a result of domestic and foreign competitive pressure
and industry consolidation in the refractory brick market, lost two major
periclase customers.
Economic uncertainty in Asia also continued to slow sales of the
division's industrial-chemicals products in that part of the world. Despite
yielding to pricing concessions, as the year progressed, the division lost more
chemicals sales to Pacific Rim suppliers that were selling products at prices
too low for the division to be competitive. The intensified pressure also
affected the division's chemicals sales in the United States and Europe, as its
chemicals customers were unable to export their finished goods into Asia.
Management expects competitive pressure within its steel-related
product areas to continue throughout 1999 and net sales and earnings from
operations of the Magnesia Specialties division are expected to continue to
decline in 1999. The union contract for the division's employees at its major
operating facility in Manistee, Michigan, expires in August 1999. During the
1995 labor negotiations, the division experienced a labor strike that adversely
affected its earnings.
Approximately 15% of the Magnesia Specialties division's products are
sold in foreign jurisdictions with no single country accounting for 10% or more
of the division's sales. While the division's products are manufactured and
sold principally in the United States, the division also markets its products
in the Canadian, Mexican, European (principally England and Germany) and
Pacific Rim (primarily Korea) markets. As a result of these foreign market
sales, the division's financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in the
foreign markets in which the division distributes its products. In addition, as
of January 1, 1999, most of the European Union member states began conversion
to a common European currency, the Eurodollar, whose monetary policy will be
exercised by the new European Central Bank. To mitigate the short-term effect
of changes in currency exchange rates and the Eurodollar conversion on the
division's operations, the division uses the U.S. dollar as the functional
currency in substantially all foreign transactions. Therefore, it is not
expected that the conversion of the European monetary markets to a common
currency will impact the division. However, adverse general economic conditions
within a foreign market where the Magnesia Specialties division conducts
business could have a negative impact on the division's results of operations,
as discussed above. The division does not have a significant presence in the
Southeast Asian markets.
To mitigate its exposure to market dependence on the steel industry,
the division's management has taken steps to emphasize new product development
and concentrate on additional products for use in environmental, agricultural
and other industrial applications and to transition its existing products
toward higher margin specialty applications.
The Corporation continued research and development activities during
1998 in several new technological product areas in related product markets.
Composite materials have been used for bridge deck installation and
replacement, and research is continuing in a variety of other
construction-related uses. Both ECO-MIN(R), a patented soil remineralization
product, and SC27(TM), a microbial soil enhancer, used to enhance plant growth,
along with a laser-measuring device for use in measuring refractory thickness
in steel production furnaces, reached commercialization in 1998. Management
expects limited sales from these technologies in 1999, but does not expect to
generate profits until beyond 2000. However, there can be no assurance that any
of the technologies will become profitable. Commercialization of microwave
technology used for cleaning ready mixed concrete equipment has been deferred
for the near future as research and development continues. The Corporation will
continue to pursue opportunities that provide proprietary
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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25
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.
The impact of inflation on the Corporation's businesses has become
less significant with the benefit of lower inflation rates in recent years.
When the Corporation incurs higher costs to replace productive facilities and
equipment, increased capacity and productivity, increased selling prices and
various other offsetting factors generally counterbalance increased
depreciation costs.
The past practice of computer programs being written using two digits
rather than four to define the applicable year has resulted in the "Year 2000
Issue." Any of the Corporation's computer programs or hardware that has date
sensitive software or embedded chips may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations or a temporary inability to
engage in normal business activities. In response to this issue, the
Corporation developed, in late 1997, a Year 2000 Task Force ("Task Force")
whose project scope included the assessment and ongoing monitoring of all
information technology computer hardware and software and non-information
technology equipment affected by the Year 2000 Issue. The Task Force is granted
the authority and resources to address the Year 2000 Issue and receives
supervisory support, as needed, from a Steering Committee made up of key
executive management personnel representing all areas of the Corporation. The
Corporation's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date, the Task
Force has completed its assessment of all systems that could be significantly
affected by the Year 2000 Issue, remediated, tested and implemented as Year
2000 compliant its processes that are critical to ongoing operations and begun
remediation of the information technology for non-critical processes.
The Corporation's information technology infrastructure consists
primarily of internally developed software, some unique to the Aggregates or
Magnesia Specialties divisions, running in a mainframe environment. The
Corporation also has a network of personal computers, through both wide area
and local area networks. A Year 2000 environment has been installed on the
Corporation's mainframe operating system for testing. The wide area and local
area networks of personal computers and related software are substantially Year
2000 compliant.
The Corporation's information technology mainframe software
applications that support its critical processes have been remediated, tested
and determined to be Year 2000 compliant. However, although the Corporation has
renovated and tested its critical processes computer software in its Year 2000
testing environment, the ultimate effectiveness of the information technology
will be unknown until January 1, 2000, and there is no assurance that there
will not be a material adverse effect. After completion of the Year 2000
compliance of critical processes, the Corporation shifted its focus to begin
remediation and testing of its legacy accounting and reporting information
technology software, which is scheduled to be Year 2000 compliant by June 30,
1999.
Redland Stone's information technology computer hardware and software
are not Year 2000 compliant. The Corporation's assessment of both critical and
non-critical information and non-information technologies is ongoing. While
initial remediation of some technologies has begun, management expects that
remediation and testing will be complete and that critical and non-critical
information and non-information systems will be Year 2000 compliant by
September 30, 1999.
The Corporation has no significant single supplier, vendor or customer
("external agents") that is critical to its ongoing operations; however, it is
currently querying major external agents regarding their Year 2000 compliance.
The Corporation expects to complete this review by early in the second quarter
of 1999. To date, the Corporation is not aware of any external agent with a
Year 2000 Issue that would materially impact the Corporation's results of
operations, liquidity or capital resources. However, the Corporation has no
means of ensuring that external agents will be Year 2000 ready. The inability
of external agents - principally financial institutions, insurance companies,
energy suppliers, state governments (as payor to many of the Corporation's
customers) and other third party employee benefit related providers - to
complete their Year 2000 resolution process in a timely manner could materially
impact the Corporation. The effect of non-compliance by external agents is not
determinable.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The Corporation has and will continue to use both internal and
external resources to renovate, test and implement the software and operating
equipment for Year 2000 modifications. The total costs of the Year 2000 project
are estimated to be approximately $4.1 million, including $500,000 in estimated
costs for Redland Stone. The Corporation spent approximately $2.6 million in
1998 related to all phases of the Year 2000 project, with funding coming from
operating cash flows. The remaining Year 2000 project costs will be incurred in
1999. The results of ongoing remediation and testing, however, could result in
additional costs to the Corporation.
Management of the Corporation believes it has an effective program in
place to resolve the impact of the Year 2000 Issue in a timely manner and does
not expect the Year 2000 Issue to have a material adverse effect on the
Corporation. But, as noted above, the Corporation has not yet completed the
conversion of all information technologies identified in its Year 2000 program.
If the Corporation does not complete any additional Year 2000 work, the
Corporation might be unable to effectively account for or report its financial
position and results of operations using its current information technology. In
addition, the ultimate effectiveness of the remediated information technology
will be unknown until January 1, 2000, and there is no assurance that there
will not be a material adverse effect. Further, disruptions in the economy
generally resulting from Year 2000 Issues could have a material adverse effect
on the Corporation. The amount of the potential liability and lost revenue, if
any, resulting from these risks cannot be reasonably estimated at this time.
The Corporation currently has no formal contingency plans in place if
it does not complete all phases of the Year 2000 program. However, the progress
of the Year 2000 program is being closely monitored, and additional measures
will be taken as risks are identified. The Corporation plans to evaluate the
status of completion in the first half of 1999 and determine whether such a
plan is necessary.
DISCUSSION OF BUSINESS SEGMENTS
The Corporation conducts its operations through two reportable
business segments: Aggregates and Magnesia Specialties. The Aggregates division
is the second largest producer of construction aggregates in the United States.
The Corporation's sales and earnings are predominantly derived from its
aggregates segment which processes and sells granite, sandstone, limestone 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 Corporation's Magnesia Specialties division produces refractory materials
and dolomitic lime used in domestic and foreign basic steel production and
produces chemicals products used in domestic and foreign industrial,
agricultural and environmental applications. The magnesia-based products
segment derives a major portion of its sales and earnings from the products
used in the steel industry.
The Corporation's evaluation of performance and allocation of
resources is based primarily on earnings from operations. Earnings from
operations is total revenue less operating expenses (excluding interest expense
and other income (expense)), selling, general and administrative expenses, and
research and development expenses. The accounting policies of the reportable
segments are the same as those described in Note A to the audited consolidated
financial statements on pages 16 through 18. Assets employed by segment include
assets directly identified with those operations. Corporate headquarters assets
consist primarily of cash and cash equivalents and property, plant and
equipment for corporate operations. Substantially all debt, and the related
interest expense, is recorded at corporate headquarters. For years prior to
1997, the Corporation's cash and cash equivalents were included with affiliates
receivable or with other current receivables for financial reporting purposes.
Property additions include property, plant and equipment that have been
purchased through acquisitions in the amount of $154,445,000 in 1998,
$174,339,000 in 1997 and $1,880,000 in 1996.
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, 1998.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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SELECTED FINANCIAL DATA BY BUSINESS SEGMENT
years ended December 31
(add 000)
NET SALES
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 920,767 $ 760,702 $ 591,268
Magnesia Specialties 136,924 140,161 130,679
- -------------------------------------------------------------------------------------------
Total $ 1,057,691 $ 900,863 $ 721,947
- -------------------------------------------------------------------------------------------
GROSS PROFIT
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 249,516 $ 202,197 $ 152,179
Magnesia Specialties 32,132 33,072 30,331
- -------------------------------------------------------------------------------------------
Total $ 281,648 $ 235,269 $ 182,510
- -------------------------------------------------------------------------------------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 64,106 $ 52,062 $ 42,788
Magnesia Specialties 17,935 17,031 17,149
- -------------------------------------------------------------------------------------------
Total $ 82,041 $ 69,093 $ 59,937
- -------------------------------------------------------------------------------------------
EARNINGS FROM OPERATIONS
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 184,648 $ 148,944 $ 109,391
Magnesia Specialties 11,906 13,826 11,285
- -------------------------------------------------------------------------------------------
Total $ 196,554 $ 162,770 $ 120,676
- -------------------------------------------------------------------------------------------
ASSETS EMPLOYED
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 1,423,031 $ 959,883 $ 616,268
Magnesia Specialties 117,549 115,682 122,365
Corporate headquarters 48,009 30,148 30,285
- -------------------------------------------------------------------------------------------
Total $ 1,588,589 $ 1,105,713 $ 768,918
- -------------------------------------------------------------------------------------------
DEPRECIATION, DEPLETION AND AMORTIZATION
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 89,487 $ 70,552 $ 52,650
Magnesia Specialties 8,738 8,716 8,342
Corporate headquarters 540 452 218
- -------------------------------------------------------------------------------------------
Total $ 98,765 $ 79,720 $ 61,210
- -------------------------------------------------------------------------------------------
PROPERTY ADDITIONS
1998 1997 1996
- -------------------------------------------------------------------------------------------
Aggregates $ 260,112 $ 248,215 $ 66,977
Magnesia Specialties 6,874 11,072 9,503
Corporate headquarters 11,385 1,492 4,903
- -------------------------------------------------------------------------------------------
Total $ 278,371 $ 260,779 $ 81,383
- -------------------------------------------------------------------------------------------
Aggregates. The Aggregates division's sales increased 21% to $920.8
million for the year ended December 31, 1998, compared with the prior year's
sales. This increase in sales reflects a 20.4 million-ton increase in total
aggregates tons shipped during 1998 to 149.5 million tons. Acquisitions,
including Redland Stone from December 4, 1998 and a full year of American
Aggregates operations in 1998, versus only seven months in 1997, contributed
17.4 million-tons of shipments in 1998. Further, the heritage aggregates
operations, which exclude acquisitions that have not been included in the prior
year operations for a full year, generated an additional 3.0 million-tons of
shipments in 1998. As a result of the Corporation's 1998 strategic growth
activities, including greensiting - the opening of new quarry sites - and
acquisitions, the division's aggregates production capacity increased
approximately 34%, including Meridian, during the year ended December 31, 1998.
The division's heritage operations experienced improvements during 1998 of
approximately 5% in its average net selling price, while the division's overall
average net selling price increased approximately 3% when compared with prior
year's prices. As in 1997, the pricing structure in the operations acquired
reflects lower overall net average selling prices, principally because of
differences in product group, production costs, demand and competitive
conditions, when compared with product sales from the Corporation's heritage
operations.
The division's operating earnings for the full year 1998 increased 24%
to $184.6 million from the prior year's earnings from operations of $148.9
million. The division's operating profits during the year reflected continued
record volume, price increases at heritage locations, and growth from recent
acquisitions.
For the year ended December 31, 1997, the Aggregates division had net
sales of $760.7 million, which were $169.4 million, or 29% higher than the
year-earlier net sales of $591.3 million. This improvement reflects a 27.9
million-ton increase in total tons shipped during 1997 to 129.1 million-tons
and reflects an increase of approximately 1% in the division's average net
selling price, when compared with the prior year's. Earnings from operations in
the year were $148.9 million, an increase of 36% over the division's operating
earnings for 1996. The division's 1997 operating profits reflect an
approximately 4% increase in prices and certain operating performance
improvements both in its heritage operations, as well as synergies achieved in
the
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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acquired businesses, which were offset somewhat by costs associated with
higher levels of greensiting activities during the year. Operating results in
1996 were somewhat depressed from the effects of Hurricane Fran, which hit the
southeastern region of the country, and the extreme winter weather conditions
that existed throughout the country during the first quarter of 1996.
Magnesia Specialties. For the year ended December 31, 1998, the
Magnesia Specialties division had sales of $136.9 million, a decrease of $3.2
million, or 2%, from 1997 sales of $140.2 million. The division's earnings from
operations for 1998 of $11.9 million were down $1.9 million, or 14%, when
compared to 1997 earnings from operations of $13.8 million. Strong production
in 1998, resulting in inventory build-up, favorably impacted operating
earnings. The division's operating earnings in 1999 will be negatively impacted
as the production rate is slowed to allow the sale of inventory. During 1998,
the division's sales to the steel industry accounted for 71% of the division's
total net sales, compared with 73% in the prior year. Magnesia Specialties
experienced softening in its refractories and dolomitic lime products as a
direct result of decreased steel production from United States mills. While
U.S. steel demand remains strong, foreign imports, principally from Japan,
Korea, Russia and Brazil, are currently supplying a substantially increased
percentage of U.S. demand. Also, worldwide competition in the periclase and
industrial-chemicals products areas continues to intensify. Management expects
these market trends to continue and expects the Magnesia Specialties division's
product sales and earnings to continue to decline in 1999. The division's 1998
operating earnings were also negatively impacted by the operating losses of a
calcium carbonate grinding facility that was closed at the end of the year.
The Magnesia Specialties division's 1997 net sales of $140.2 million
were 7% above the prior year's. Shipment levels of all the division's product
lines increased in 1997 and the division experienced some modest pricing
improvements, when compared with the year-earlier period. The division's
operating earnings for 1997 of $13.8 million were 23% over the 1996 operating
earnings.
[CHART CONSOLIDATED OPERATING CASH FLOW]
(in millions)
1994 $ 79.5
1995 $128.6
1996 $134.9
1997 $195.6
1998 $222.6
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 $222.6 million in 1998 as compared to $195.6 million in 1997
and $134.9 million in 1996. These positive cash flows were derived
substantially from net earnings before deduction of certain non-cash charges
for depreciation, depletion and amortization of its properties and intangible
assets, as well as changes in operating assets and liabilities. Working capital
increases for 1998 included in the above-referenced changes in operating assets
and liabilities were due primarily to an increase in the Magnesia Specialties
division's inventory, as a result of strong production in 1998 coupled with
reduced demand in certain product areas, and a decrease in trade accounts
payable balances, partially offset by a decrease in accounts receivable
balances resulting from accelerated cash collections. The 1997 working capital
increases included in changes in operating assets and liabilities reflect
increases in accounts receivable balances resulting from increased sales volume
activity, offset by increased trade accounts payable balances and reduction of
inventory balances on hand at the end of the year.
Net cash used for investing activities was $505.8 million in 1998, an
increase of $172.5 million over $333.4 million reported in 1997. Of that
amount, the Corporation used $347.9 million to finance the purchase of Redland
Stone and nine other acquisitions compared with $279.1 million in 1997 that
included the acquisition of American Aggregates and $3.7 million in 1996. Other
investing activities in 1998 principally include the Corporation's initial
investment in Meridian. Additions to property, plant and equipment, excluding
acquisitions, of $123.9 million were 43% higher in 1998 compared with 1997,
primarily as a result of the impact of American Aggregates, which was acquired
in May 1997, and capacity expansion projects. Comparable full-year capital
expenditures were $86.4 million in 1997 and $79.5 million in 1996. The
Corporation's acquisition and capital expenditures reflect planned strategic
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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29
growth and capital spending activities that are consistent with management's
strategy for investment and expansion within the consolidating aggregates
industry. Through January 1997, the Corporation's cash and cash equivalents
balances were invested under a cash management agreement with its former
parent, Lockheed Martin (see Note A to the audited consolidated financial
statements on pages 16 and 17). Consequently, changes in these balances were
reflected as cash provided by investing activities in the statements of cash
flows for 1997 and 1996 as presented. During the years ended December 31, 1997
and 1996, the Corporation reduced the balance of cash and cash equivalents
invested with Lockheed Martin by $23.8 million and $63.6 million, respectively.
Approximately $279.2 million of cash was provided by financing
activities during 1998, compared with $160.7 million of cash provided by
financing activities in 1997 and $124.9 million of cash used for financing
activities in 1996. Cash was provided to the Corporation from $302.3 million of
net indebtedness incurred in 1998 principally in connection with the
acquisition of Redland Stone, which was financed initially through the issuance
of United States commercial paper. The Corporation subsequently issued $200
million of long-term debt securities, the net proceeds of which were used to
reduce the amount of commercial paper outstanding. Excluding commercial paper
obligations, $0.7 million of long-term debt will mature in 1999.
During 1997, the Corporation paid net cash consideration of $242
million for the acquisition of all of the outstanding common stock of American
Aggregates. The sources of funds for this acquisition were a combination of
borrowings under revolving credit facilities and the issuance of commercial
paper. The Corporation subsequently issued $125 million of long-term debt
securities, the net proceeds of which were used to repay amounts outstanding
under the revolving credit agreements and to reduce the amount of commercial
paper outstanding. In 1996, the Corporation repaid from working capital,
including cash invested under its cash management agreement, and funds borrowed
under its credit agreement, both of which were agreements with Lockheed Martin,
the $100 million aggregate principal amount of indebtedness assumed at the time
of the Corporation's incorporation in 1993. Both of these agreements with
Lockheed Martin were terminated, by their terms, in January 1997.
In 1998, the Board of Directors approved total cash dividends on the
Corporation's common stock at $0.50 a share. Regular quarterly dividends were
authorized and paid by the Corporation at a rate of $0.12 a share in the first
and second quarter and at a rate of $0.13 a share in the third and fourth
quarter.
Under a 1994 authorization from the Corporation's Board of Directors,
the Corporation was authorized to repurchase up to 2,000,000 shares of its
common stock for use in the Corporation's Amended Omnibus Securities Award
Plan. This authorization was subsequently decreased to allow for the repurchase
of approximately 1,007,000 shares that represented the aggregate number of
shares that were subject to grants made through May 8, 1998. The shareholders
of the Corporation approved on May 8, 1998, the Martin Marietta Materials, Inc.
Stock-Based Award Plan, as amended from time to time (the "Plan"). In
connection with the Plan, the Corporation was authorized to repurchase up to
5,000,000 shares of the Corporation's Common Stock for issuance under the Plan.
On August 20, 1998, the Board of Directors rescinded the general
corporate purposes repurchase authorization, which was originally authorized in
1994, for the repurchase of 500,000 shares of Common Stock.
CAPITAL STRUCTURE AND RESOURCES
Long-term debt, including current maturities of long-term debt and
commercial paper, increased to $617.8 million at the end of 1998 from
approximately $312.1 million at the end of 1997. Total debt represented
approximately 48% of total capitalization at December 31, 1998, compared with
36% at December 31, 1997. The Corporation's debt is in the form of publicly
issued, long-term fixed-rate notes and debentures and United States commercial
paper (see Note F to the audited consolidated financial statements on pages 19
and 20). Shareholders' equity grew to approximately $667.7 million at December
31, 1998, from $561.8 million a year ago.
In connection with the initial financing of the Redland Stone
acquisition in December 1998, the Corporation increased its revolving credit
facilities, which are syndicated through a group of commercial domestic and
foreign banks, and amended its United States commercial paper program, to
increase available funds from $300 to $450 million. The credit facilities
consist of a five-year unsecured revolving credit agreement in the amount of
$150 million (the "Long-Term Credit Agreement") which expires in January
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
______________________________________________________________________________
2002, and a 364-day unsecured revolving credit agreement in the amount of $300
million (the "Short-Term Credit Agreement") which expires in December 1999 (see
Note F to the audited consolidated financial statements on pages 19 and 20).
No borrowings were outstanding under either of the revolving credit
agreements at December 31, 1998. However, the Long-Term and Short-Term Credit
Agreements support commercial paper borrowings of $165 million outstanding at
December 31, 1998, of which $150 million has been classified as long-term debt
on the Corporation's consolidated balance sheet based on management's ability
and intention to maintain this debt outstanding for at least one year. The
remaining outstanding commercial paper of $15 million has been classified as a
current liability on the Corporation's consolidated balance sheet.
Prior to January 1997, the Corporation's funds were invested with its
former parent, Lockheed Martin Corporation, under the terms of a cash
management agreement. At December 31, 1996, approximately $23.8 million of the
Corporation's funds were invested under the terms of this agreement. Upon
termination of this cash management agreement on January 31, 1997, all funds
held by Lockheed Martin were transferred to the Corporation and invested under
the terms of its own cash management arrangements with third party commercial
banks.
As discussed earlier, the Corporation's operations are highly
dependent upon the interest-rate sensitive construction and steelmaking
industries. Consequently, these marketplaces could experience lower levels of
economic activity in an environment of rising interest rates (see "Business
Environment" on pages 28 through 34). Aside from these inherent risks from
within its operations, the Corporation's earnings are affected also by changes
in short-term interest rates as a result of its outstanding commercial paper
obligations and temporary cash investments, including overnight investments in
Eurodollars. In this regard, the European Union member states' conversion to
the Eurodollar may create technical challenges to adapt information technology
and may affect market risk with respect to these financial instruments.
However, management believes that the Corporation's exposure to short-term
interest rate market risk, as it relates to outstanding commercial paper
obligations and temporary cash investments, is not material.
The Corporation has entered into a standby letter of credit agreement
relating to workers' compensation self-insurance requirements. At December 31,
1998, the Corporation had a contingent liability on this outstanding letter of
credit of approximately $6.7 million.
The 5.875% Notes, with an effective rate of 6.03%, that were issued in
December 1998, through private placement in connection with the acquisition of
Redland Stone, were subsequently registered with the Securities and Exchange
Commission (the "Commission") in February 1999. The registration provided the
initial purchasers in the private placement offering the opportunity to
exchange their outstanding notes for registered notes with substantially
identical terms.
With respect to the Corporation's ability to further access the public
market, it has an effective shelf registration statement on file with the
Commission for the offering of up to $50 million of debt securities, which may
be issued, from time to time. Presently, 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. The Corporation's ability to borrow
or issue securities is dependent upon, among other things, prevailing economic,
financial and market conditions.
Martin Marietta Materials' internal cash flows and availability of
financing resources, including its access to capital markets 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 senior unsecured debt has been rated "A" by Standard
& Poor's and "A3" by Moody's. The Corporation's $450 million commercial paper
obligations are rated "A-1" by Standard & Poor's, "P-2" by Moody's and "F-1" by
Fitch IBCA, Inc. While management believes its credit ratings will remain at an
investment-grade level, no assurance can be given that these ratings will
remain at the above-mentioned levels.
ENVIRONMENTAL MATTERS
The Corporation is involved in various environmental and reclamation
proceedings and
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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31
potential proceedings, including a matter in which it was designated a
Potentially Responsible Party (a "PRP") by the U.S. Environmental Protection
Agency (the "EPA"). In August 1995, the EPA requested information regarding the
disposal of polychlorinated biphenyl ("PCB") waste during the 1980s at sites
operated by PCB Treatment Site, Inc. ("PCB Treatment"), which had facilities in
Kansas City, Missouri, and Kansas City, Kansas (the "Sites"). PCB Treatment had
the proper permits to operate the Sites. According to the EPA, PCB Treatment
received waste shipments of PCBs from more than 1,500 parties and received
total shipments of materials in excess of 25 million pounds, of which
approximately 9,500 pounds of PCB waste was shipped by the Aggregates division
of Lockheed Martin Corporation, which is the Corporation's predecessor in
interest. The Sites closed in 1986.
PCB Treatment removed the waste material from the Sites but did not
complete the remediation. The EPA has identified the Sites as requiring removal
or remedial action under the federal Superfund laws. A group of PRPs, each of
which disposed of more than 200,000 pounds of waste at the Sites, has formed a
steering committee that is conducting site assessments to further evaluate the
corrective action that will be required. It is anticipated that the remaining
work that needs to be completed involves the clean-up of contamination in two
buildings - which may require demolition of the building structures - as well
as the clean-up of the surrounding soils. Based on the expected level of
remediation, total clean-up costs have been estimated by the steering committee
at approximately $10 million to $40 million.
In a letter from the EPA, dated September 16, 1997, the Corporation
was designated a PRP for these Sites. Generally, PRPs that are ultimately
determined to be responsible parties are strictly liable for site clean-ups and
usually agree among themselves to share, on an allocated basis, in the costs
and expenses for investigation and remediation of the hazardous materials.
Under existing environmental laws, however, responsible parties are jointly and
severally liable and, therefore, the Corporation was potentially liable for the
full cost of funding such remediation. On February 18, 1999, the Corporation
agreed to an Administrative Order of Consent pursuant to which it agreed to pay
approximately $1,500 in full and complete settlement of any liability it might
have with respect to the Sites.
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
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 M to the audited consolidated financial
statements on page 26).
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("FAS 133"), which is required to
be adopted in years beginning after June 15, 1999. Because of the Corporation's
minimal use of derivatives, if any, management does not anticipate that the
adoption of FAS 133 will have a significant impact on net earnings or the
financial position of the Corporation.
The Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits ("FAS 132"), as required for the year ended December
31, 1998. FAS 132 revises and standardizes the disclosures for pensions and
postretirement benefits (see Note I to the audited consolidated financial
statements on pages 21 through 24), and therefore, had no impact on net
earnings or financial position of the Corporation.
Effective January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
Information ("FAS 131"), which superceded Statement of Financial Accounting
Standards No. 14, Financial Reporting for Segments of a Business Enterprise. FAS
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. FAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of FAS 131 did not affect net earnings or financial position, nor
did it significantly change the disclosure of segment information (see
"Discussion of Business Segments" on pages 34 through 36).
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130"). FAS
130 requires all non-owner changes in equity that are excluded from net earnings
under FASB standards be included as comprehensive income. The Corporation
presently does not have any material transactions that directly affect equity
other than those transactions with owners in their capacity as owners.
Therefore, the provisions of FAS 130 currently have no material effect on the
Corporation.
In April 1998, the American Institute of Certified Public Accountants
(the "AICPA") issued Statement of Position 98-5, Reporting on the Costs of
Start-Up Activities ("SOP 98-5"). Effective January 1, 1999, SOP 98-5 requires
that all costs related to start-up activities, including organizational costs,
be expensed as incurred. Since the Corporation currently expenses all
appropriate start-up costs, the adoption of SOP 98-5 will not impact the
Corporation's net earnings or financial position. Further, in March 1998, the
AICPA issued Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use ("SOP 98-1"). Also effective
January 1, 1999, SOP 98-1 requires capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal use. The Corporation currently expenses such costs as incurred. The
Corporation does not expect the impact of the adoption of SOP 98-1 to be
material.
CAUTIONARY STATEMENTS
This Annual Report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that
all forward-looking statements involve risks and uncertainties, including those
arising out of economic, climatic, political, regulatory, competitive and other
factors. The forward-looking statements in this document are intended to be
subject to the safe harbor protection provided by Sections 27A and 21E. For a
discussion identifying some important factors that could cause actual results to
vary materially from those anticipated in the forward-looking statements, see
the Corporation's filings with the Securities and Exchange Commission including
but not limited to, the discussion of "Competition" on pages 8 and 9 of the
Corporation's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (Form 10-K), and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 27 through 40 of this Annual
Report and "Note A: Accounting Policies" on pages 16 through 18, and "Note M:
Commitments and Contingencies" on page 26 of the Notes to Financial Statements
of the Audited Consolidated Financial Statements included in this Annual Report,
incorporated by reference into the Form 10-K.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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33
Quarterly Performance
- --------------------------------------------------------------------------------
(Unaudited)
Basic Earnings Per
(add 000, except per share) Net Sales Gross Profit Net Earnings Common Share*
- ------------------------------------------------------------------------------------------------------------------------------
Quarter 1998 1997 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
First $ 186,535 $158,163 $ 29,479 $ 30,144 $ 2,636 $ 8,907 $ 0.06 $ 0.19
Second 277,737 232,190 83,235 65,487 36,356 30,369 0.78 0.66
Third 312,445 271,717 95,830 79,936 45,907 36,274 0.99 0.79
Fourth 280,974 238,793 73,104 59,702 30,714 22,979 0.66 0.50
- ------------------------------------------------------------------------------------------------------------------------------
Totals $1,057,691 $900,863 $281,648 $235,269 $115,613 $98,529 $ 2.49 $ 2.14
===============================================================================================================================
Common Dividends Paid and Stock Prices
---------------------------------------------------------------------
Market Prices
Diluted Earnings --------------------------------------------------
Per Common Share* Dividends Paid High Low High Low
- ------------------------------------------------------------------------------------------------------------
Quarter 1998 1997 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
First $ 0.06 $ 0.19 $ 0.12 $ 0.12 $47 3/4 $35 13/16 $28 3/8 $23
Second 0.78 0.66 0.12 0.12 49 5/16 42 3/16 33 25
Third 0.98 0.78 0.13 0.12 51 1/4 41 11/16 37 3/8 32 1/4
Fourth 0.66 0.50 0.13 0.12 62 3/16 38 5/8 38 1/2 33 13/16
- ------------------------------------------------------------------------------------------------------------------------------
Totals $ 2.48 $ 2.13 $ 0.50 $ 0.48
===============================================================================================================================
*The first three quarters of 1997 earnings per share amounts have been restated,
where appropriate, to comply with the Statement of Financial Accounting
Standards No. 128, Earnings per Share.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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34
FIVE YEAR SUMMARY
- --------------------------------------------------------------------------------
(add 000, except per share) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Operating Results
Net sales $1,057,691 $ 900,863 $721,947 $664,406 $ 501,660
Cost of sales, other costs and expenses 861,137 738,093 601,271 556,841 409,773
- ---------------------------------------------------------------------------------------------------------------------
Earnings From Operations 196,554 162,770 120,676 107,565 91,887
Interest expense on debt 23,759 16,899 10,121 9,733 6,865
Other income and (expenses), net 1,347 5,341 8,398 5,959 5,398
- ---------------------------------------------------------------------------------------------------------------------
Earnings before taxes on income and
extraordinary item 174,142 151,212 118,953 103,791 90,420
Taxes on income 58,529 52,683 40,325 36,240 32,075
- ---------------------------------------------------------------------------------------------------------------------
Earnings Before Extraordinary Item 115,613 98,529 78,628 67,551 58,345
Extraordinary loss on early extinguishment
of debt -- -- -- -- (4,641)
- ---------------------------------------------------------------------------------------------------------------------
Net Earnings $ 115,613 $ 98,529 $ 78,628 $ 67,551 $ 53,704
=====================================================================================================================
Basic Earnings Per Common Share
Income before extraordinary item $ 2.49 $ 2.14 $ 1.71 $ 1.47 $ 1.30
Extraordinary item -- -- -- -- (0.11)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2.49 $ 2.14 $ 1.71 $ 1.47 $ 1.19
=====================================================================================================================
Diluted Earnings per Common Share
Income before extraordinary item $ 2.48 $ 2.13 $ 1.71 $ 1.47 $ 1.30
Extraordinary item -- -- -- -- (0.11)
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2.48 $ 2.13 $ 1.71 $ 1.47 $ 1.19
=====================================================================================================================
Cash Dividends $ 0.50 $ 0.48 $ 0.46 $ 0.44 $ 0.22
=====================================================================================================================
Condensed Balance Sheet Data
Current deferred income tax benefits $ 18,978 $ 16,873 $ 15,547 $ 12,622 $ 9,979
Current assets - other 350,410 305,139 255,619 301,733 178,054
Property, plant and equipment, net 777,528 591,420 408,820 392,223 291,622
Cost in excess of net assets acquired 348,026 148,481 39,952 37,245 22,968
Other intangibles 27,952 26,415 23,216 23,967 17,091
Other noncurrent assets 65,695 17,385 25,764 21,581 74,177
- ---------------------------------------------------------------------------------------------------------------------
Total $1,588,589 $1,105,713 $768,918 $789,371 $ 593,891
=====================================================================================================================
Current liabilities - other $ 136,576 $ 106,804 $ 86,871 $ 69,596 $ 51,134
Current maturities of long-term debt
and commercial paper 15,657 1,431 1,273 103,740 4,478
Long-term debt and commercial paper 602,113 310,675 125,890 124,986 103,746
Pension and postretirement benefits 76,209 63,070 52,646 47,483 42,286
Noncurrent deferred income taxes 75,623 50,008 13,592 10,606 10,178
Other noncurrent liabilities 14,712 11,889 7,669 9,415 5,800
Shareholders' equity 667,699 561,836 480,977 423,545 376,269
- ---------------------------------------------------------------------------------------------------------------------
Total $1,588,589 $1,105,713 $768,918 $789,371 $ 593,891
=====================================================================================================================
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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