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1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the fiscal year ended DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 1-12744
MARTIN MARIETTA MATERIALS, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1848578
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
2710 WYCLIFF ROAD, RALEIGH, NORTH CAROLINA 27607-3033
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 781-4550
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock (par value $.01 per share) New York Stock Exchange
(including rights attached thereto)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of voting stock (based on the closing price
on the New York Stock Exchange on March 12, 1999 as published in the Wall Street
Journal) held by non-affiliates of the Company was $1,731,699,736. Shares of
Common Stock held by each executive officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of each of the Registrant's classes of
common stock on March 12, 1999 as follows:
Common Stock (par value $.01 per share) 46,641,549 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Martin Marietta Materials, Inc. 1999 Proxy Statement are
incorporated by reference into Part III.
Portions of the Martin Marietta Materials, Inc. 1998 Annual Report to
Shareholders are incorporated by reference into Parts I, II and IV.
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TABLE OF CONTENTS
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PART I Page
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Item 1 Business............................................................................3
Item 2 Properties.........................................................................13
Item 3 Legal Proceedings..................................................................13
Item 4 Submission of Matters to a Vote of Security Holders................................14
Forward Looking Statements - Safe Harbor Provisions.........................................15
Executive Officers of the Registrant........................................................16
PART II
Item 5 Market for the Registrant's Common Equity and Related Stockholder Matters..........17
Item 6 Selected Financial Data............................................................17
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................17
Item 7A Qualitative And Quantitative Disclosures About Market Risk.........................17
Item 8 Financial Statements and Supplementary Data........................................18
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................................18
PART III
Item 10 Directors and Executive Officers of the Registrant.................................19
Item 11 Executive Compensation.............................................................19
Item 12 Security Ownership of Certain Beneficial Owners and Management.....................19
Item 13 Certain Relationships and Related Transactions.....................................19
PART IV
Item 14 Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K................................................................20
Signatures..................................................................................26
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PART I
ITEM 1. BUSINESS
GENERAL
Martin Marietta Materials, Inc. (the "Company") is the United States'
second largest producer of aggregates for the construction industry, including
highways, infrastructure, commercial and residential. The Company also
manufactures and markets magnesia-based products, including heat-resistant
refractory products for the steel industry, chemicals products for industrial,
agricultural and environmental uses, and dolomitic lime. In 1998, the Company's
aggregates business accounted for 87% of the Company's total revenues and the
Company's magnesia-based products segment accounted for 13% of the Company's
total revenues.
The Company was formed in November 1993 as a North Carolina corporation
to be the successor to substantially all of the assets and liabilities of the
materials group of Martin Marietta Corporation and its subsidiaries. An initial
public offering of a portion of the common stock of the Company (the "Common
Stock") was completed in February 1994 whereby 8,797,500 shares of Common Stock
(representing approximately 19% of the shares outstanding) were sold at an
initial public offering price of $23 per share. Lockheed Martin Corporation,
which was formed as the result of a business combination between Martin Marietta
Corporation and Lockheed Corporation in March 1995, owned approximately 81% of
the Common Stock directly and through its wholly-owned subsidiary, Martin
Marietta Investments Inc., until October 1996.
In October 1996, the outstanding Common Stock of Martin Marietta
Materials that was held by Lockheed Martin Corporation became available to the
public market when Lockheed Martin disposed of its 81% ownership interest. This
transaction was completed by means of a tax-free exchange offer pursuant to
which Lockheed Martin stockholders were given the opportunity to exchange shares
of Lockheed Martin common stock for shares of the Company's Common Stock, which
resulted in 100% of the outstanding shares of Common Stock being
publicly-traded.
On January 3, 1995, the Company purchased certain assets of Dravo
Corporation relating to its construction aggregates business for a purchase
price of approximately $121 million in cash, plus certain assumed liabilities
(the "Dravo Acquisition"). When acquired, the business had production and
distribution facilities in nine states and the Bahamas. The Dravo Acquisition
added more than 24 million tons of annual production capacity to the Company's
operations. It also expanded the Company's method of conducting business by
adding water distribution by ocean vessels and river barges, in addition to the
use of truck and rail transportation. Further, the Dravo Acquisition expanded
the Company's presence in or sales to nonconstruction aggregate markets,
including the chemical, steel, cement, utility desulfurization, poultry feed and
agricultural lime industries.
On May 28, 1997, the Company purchased all of the outstanding common
stock of American Aggregates Corporation ("American Aggregates") along with
certain other assets from American Aggregates' former parent, CSR America, Inc.,
for an acquisition price of approximately $242 million in cash plus certain
assumed liabilities (the "American Aggregates Acquisition"). The American
Aggregates Acquisition included the Ohio and Indiana operations of American
Aggregates with 29 production facilities and increased the Company's annual
production capacity by more than 25 million
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tons -- in addition to adding over 1 billion tons of mineral reserves, of which
approximately 700 million are zoned for production, and 11,000 acres of
property. American Aggregates is a leading supplier of aggregates products in
Indianapolis, Cincinnati, Dayton and Columbus.
On December 4, 1998, the Company acquired the common stock of Redland
Stone Products Company ("Redland Stone") from an affiliate of Lafarge SA for
$272 million in cash plus normal balance sheet liabilities, subject to certain
post-closing adjustments relating to working capital, plus approximately $8
million estimated for certain other assumed liabilities and transaction costs.
The Company did not assume any long-term debt of Redland Stone. Redland Stone is
the leading producer of aggregates and asphaltic concrete in the state of Texas
and has mineral reserves which exceed 1.0 billion tons. Redland Stone serves the
San Antonio, Houston and south Texas areas. Aggregates production in 1998 for
Redland Stone was approximately 14 million tons, asphaltic concrete production
was approximately 3 million tons and revenue was approximately $131 million.
Redland Stone expanded the Aggregates division's business by adding operating
facilities in the southwest United States, expanding the Company's presence in
the asphalt production business and adding significant long-term mineral reserve
capacity.
As of October 31, 1998, the Company purchased an initial 14% interest
in the business of Meridian Aggregates Company ("Meridian"). The transaction
provides a mechanism for the Company to purchase the remaining interest in
Meridian at a predetermined formula price within five years, and the Meridian
investors may require the Company to purchase their interests beginning December
31, 2000, or earlier in the event of the death of an investor. Meridian operates
26 aggregates production facilities and eight rail-served distribution yards in
11 states in the southwestern and western United States with approximately 1.4
billion tons of mineral reserves. Meridian's revenue in 1998 was approximately
$146 million on sales of over 23 million tons.
The Company announced in February 1997 that it had entered into
agreements giving the Company rights to commercialize certain proprietary
technologies related to the Company's business. One of the agreements gives the
Company the opportunity to pursue the use of certain composites technology for
products where corrosion resistance and high strength-to-weight ratios are
important factors, such as bridge decks, marine applications and other
structures. The Company has also developed and commercialized a laser device
that is used to measure the refractory thickness of steel furnaces. In addition,
as part of the American Aggregates Acquisition, the Company is working on
certain technology related to remineralization of soil and microbial products
for enhanced plant growth. The Company continued its research and development
activities during 1998 in these new product areas, and began manufacturing and
marketing certain of the products beginning in late 1997 through 1998. These
technologies, if fully developed by the Company, would complement and expand the
Company's business; however, there can be no assurance that any of the
technologies will become profitable.
BUSINESS SEGMENT INFORMATION
The Company operates in two reportable business segments. These
segments are aggregates products and magnesia-based, chemicals and dolomitic
lime products. Information concerning the Company's net sales, operating profit,
assets employed and certain additional information attributable to each
reportable industry segment for each year in the three-year period ended
December 31, 1998 is included in "Management's Discussion and Analysis of
Financial Condition and Results of
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Operations" on pages 34 through 36 of the Company's 1998 Annual Report to
Shareholders (the "1998 Annual Report"), which information is incorporated
herein by reference.
AGGREGATES
The Company's aggregates segment processes and sells granite,
sandstone, limestone, sand and gravel and other aggregates products for use in
all sectors of the public infrastructure, commercial and residential
construction industries. The Company is the United States' second largest
producer of aggregates. In 1998, the Company shipped approximately 149 million
tons of aggregates primarily to customers in 24 southeastern, southwestern,
midwestern and central states, generating net sales and earnings from operations
of $920.8 million and $184.6 million, respectively. In 1998, approximately 84%
of the aggregates shipped by the Company were crushed stone, primarily granite
and limestone, and approximately 16% were sand and gravel.
The Aggregates division markets its products primarily to the
construction industry, with approximately one-half of its shipments made to
contractors in connection with highway and other public infrastructure projects
and the balance of its shipments made primarily to contractors in connection
with commercial and residential construction projects. As a result of dependence
upon the construction industry, the profitability of aggregates producers 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, and demographic and population shifts and to changes in the
level of infrastructure spending funded by the public sector. The Company's
aggregates business is concentrated principally in the southeast, southwest,
midwest and central states. Aggregates products are sold and shipped from a
network of approximately 300 quarries and distribution facilities in more than
20 states, although the Company's five largest shipment states account for
approximately 60% of total shipments. The Company's business is accordingly
affected by the economies in these regions. The addition of the Dravo operations
opened extensive markets for the aggregates business along the Ohio and
Mississippi River systems from Western Pennsylvania throughout the central and
southern United States. The distribution centers acquired along the Gulf of
Mexico and Atlantic coasts, as well as operating facilities in the Bahamas,
provided entry into those markets for aggregates. The Gulf and Atlantic coastal
areas are being supplied primarily from the Bahamas location, two large quarries
on the Ohio River system and a Canadian quarry on the Strait of Canso in Nova
Scotia, the assets related to which were purchased in October 1995 by the
Company (the "Canadian Acquisition"). In addition, the Company's recent
acquisitions have expanded its ability to ship by rail. Accordingly, in addition
to increasing the Company's geographic presence through acquisitions, the
Company has also enhanced its reach through its ability to provide
cost-effective coverage of certain coastal markets on the east coast and
reaching as far as Texas, and to ship products in and to Canada, the Caribbean
and parts of South America, as well as to additional geographic areas which can
be accessed economically by its expanded distribution system.
The Company's aggregates business is also highly seasonal, due
primarily to the effect of weather conditions on construction activity within
its markets. As a result of the American Aggregates Acquisition and several
other smaller acquisitions in the north central region of the United States,
more of the Company's aggregates operations have 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
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the South. Due to these factors, the Company's second and third quarters are
generally the strongest, with the first quarter generally reflecting the weakest
results.
Aggregates can be found in abundant quantities throughout the United
States, and there are many producers nationwide. However, as a general rule,
shipments from an individual quarry are limited because the cost of transporting
processed aggregates to customers is high in relation to the value of the
product itself. As a result, proximity of quarry facilities to customers is the
most important factor in competition for aggregates business and helps explain
the highly fragmented nature of the aggregates industry. The Company's
distribution system mainly uses trucks. Access to a lower-cost, extensive river
barge and ocean vessel network was provided as a result of certain acquisitions
made by the Company, including the Dravo Acquisition and the Canadian
Acquisition. The Redland Stone transaction enables the Company to extend its
reach through increased access to rail transportation.
Historically, the Company has focused on the production of aggregates
and has not integrated vertically in a substantial manner into other
construction materials businesses. The Company's purchase of Redland Stone in
1998 included asphalt production and ready mixed concrete operations for roads
and other commercial uses, which accounts for approximately 60% of the Redland
Stone operation's sales. In addition, the Company purchased Mid-State
Construction & Materials in 1998 with sales in Louisiana, Arkansas and Texas,
which included four ready mixed concrete plants, three asphalt plants and a
small construction company, that establishes a vertically integrated position in
these geographical areas.
Environmental and zoning regulations have made it increasingly
difficult for the construction aggregates industry to expand existing quarries
and to develop new quarry operations. Although it cannot be predicted what
policies will be adopted in the future by federal, state and local governmental
bodies regarding these matters, the Company anticipates that future restrictions
will not have a material adverse effect upon its business.
Management believes the Aggregates division's raw material reserves are
sufficient to permit production at present operational levels for the
foreseeable future. The Company does not anticipate any material difficulty in
obtaining the raw materials that it uses for production in its aggregates
segment.
The Company generally delivers products in its aggregates segment upon
receipt of orders or requests from customers. Accordingly, there is no
significant backlog information. Inventory of aggregates is generally maintained
in sufficient quantities to meet rapid delivery requirements of customers.
MAGNESIA SPECIALTIES
The Company also manufactures and markets dolomitic lime and
magnesia-based products, including heat-resistant refractory products for the
steel industry and magnesia-based chemicals products for industrial,
agricultural and environmental uses, including wastewater treatment, sulfur
dioxide scrubbing and acid neutralization. In 1998, the Company's Magnesia
Specialties division generated net sales of $136.9 million and earnings from
operations of $11.9 million. Magnesia Specialties' refractory and dolomitic lime
products are sold primarily to the steel industry.
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Accordingly, the division's profitability 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 economic conditions within the steel
industry.
In 1998, global steel 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 imports
negatively impacted domestic and worldwide levels of steel production and prices
and, consequently, had a negative impact on the division's lime and refractory
products areas. In addition, 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. Coupled with declines
in demand, the division continued to experience competitive pricing pressure.
Further, the division experienced receivables losses from bankruptcies in the
steel related marketplace during 1998. Also, the division, as a result of
domestic and foreign competitive pressure and industry consolidation in the
refractory brick market, lost two of its major periclase customers. Economic
uncertainty in Asia also reduced 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 that the division chose not to
match. 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 the Asian Market.
The principal raw materials used in the Company's Magnesia Specialties
division's products are dolomitic lime, brine and imported magnesia. Management
believes that its reserves of dolomitic limestone to produce dolomitic lime and
its reserves of brine are sufficient to permit production at present operational
levels for the foreseeable future. The supply of natural and synthetic magnesia
is abundant worldwide. In 1998, the Company purchased some of its magnesia
requirements from various sources located in China. While the Company does not
expect an interruption in the supply of magnesia from these sources, various
factors associated with economic and political uncertainty in China could result
in future supply interruptions. If such an interruption were to occur, the
Company believes it could obtain alternate supplies worldwide, although there
could be no assurance that the Company could do so at current prices.
Alternatively, the Company believes it could adjust its mix of products and/or
increase production capacity at its Manistee, Michigan, operation.
The Company generally delivers its Magnesia Specialties division's
products upon receipt of orders or requests from customers. Accordingly, there
is no significant backlog information. Inventory for the Magnesia Specialties
division's products is generally maintained in sufficient quantities to meet
rapid delivery requirements of customers. The Company has provided extended
payment terms to certain international customers.
PATENTS AND TRADEMARKS
As of March 12, 1999, the Company owns, has the right to use, or has
pending applications for approximately 84 patents pending or granted by the
United States and various countries and approximately 97 trademarks related to
its Magnesia Specialties business and its developing technologies and services
business. The Company believes that its rights under its existing patents,
patent applications and trademarks are of value to its operations, but no one
patent or trademark or group of patents or trademarks is material to the conduct
of the Company's business as a whole.
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CUSTOMERS
No material part of the business of either segment of the Company is
dependent upon a single customer or upon a few customers, the loss of any one of
which would have a material adverse effect on the segment. The Company's
products are sold principally to commercial customers in private industry.
Although large amounts of construction materials are used in public works
projects, relatively insignificant sales are made directly to federal, state,
county or municipal governments, or agencies thereof.
COMPETITION
Because of the impact of transportation costs on the aggregates
business, competition tends to be limited to producers in proximity to the
Company's individual production facilities. Although all of the Company's
locations experience competition, the Company believes that it is generally a
leading producer in the areas it serves. Competition is based primarily on
quarry location and price, but quality of aggregates and level of customer
service are also factors.
The Company is the second largest producer of aggregates in the United
States based on tons shipped. There are over 4,000 companies in the United
States that produce aggregates. The largest five producers account for less than
25% of the total market. The Company competes with a number of other large and
small producers. The Company believes that its ability to transport materials by
ocean vessels and river barges as a result of certain acquisitions made by the
Company, including the Dravo Acquisition and the Canadian Acquisition, and its
increased access to rail transportation as a result of the Redland Stone
transaction, has enhanced the Company's ability to compete in certain extended
areas. Certain of the Company's competitors in the aggregates industry have
greater financial resources than the Company.
The Magnesia Specialties division of the Company competes with various
companies in different geographic and product areas. The Company believes that
the Magnesia Specialties division is one of the largest suppliers of monolithic
(unshaped) refractory products and dolomitic lime to the steel industry in the
United States and one of the largest suppliers of magnesia-based chemicals
products to various industries. The Company's largest competitors for monolithic
refractory sales are Mineral Technologies, Inc. and Alpine Group, Inc., and its
largest competitor for hydroxide slurry is The Dow Chemical Company. The
division competes principally on the basis of quality, price and technical
support for its products. The Magnesia Specialties division also competes for
sales to customers located outside the United States with sales to such
customers accounting for approximately $20.5 million in sales in 1998
(representing approximately 15% of total sales of the Magnesia Specialties
segment) principally in Canada, Mexico, the United Kingdom, Germany and Korea.
The Magnesia Specialties division's sales to foreign customers were $24.1
million in 1997 and $19.2 million in 1996.
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RESEARCH AND DEVELOPMENT
The Company conducts research and development activities for its
Magnesia Specialties segment at its laboratory located near Baltimore, Maryland
and at various locations for the new proprietary technologies. In general, the
Company's research and development efforts are directed to applied technological
development for the use of its refractories and chemicals products and for
composite materials, soil remineralization products, microbial products, a
laser-measuring device and a microwave technology. The Company spent
approximately $3.1 million in 1998, $3.4 million in 1997 and $1.9 million in
1996 on research and development activities.
ENVIRONMENTAL REGULATIONS
The Company's operations are subject to and affected by federal, state
and local laws and regulations relating to the environment, health and safety
and other regulatory matters. Certain of the Company's operations may from time
to time involve the use of substances that are classified as toxic or hazardous
substances within the meaning of these laws and regulations. Environmental
operating permits are, or may be, required for certain of the Company's
operations and such permits are subject to modification, renewal and revocation.
The Company regularly monitors and reviews its operations, procedures and
policies for compliance with these laws and regulations. Despite these
compliance efforts, risk of environmental liability is inherent in the operation
of the Company's businesses, as it is with other companies engaged in similar
businesses, and there can be no assurance that environmental liabilities will
not have a material adverse effect on the Company in the future. In accordance
with the Company's accounting policy for environmental costs, amounts are not
accrued and included in the Company's financial statements until it is probable
that a liability has been incurred and such amount can be estimated reasonably.
Costs incurred by the Company in connection with environmental matters in the
preceding two fiscal years were not material to the Company's operations or
financial condition.
The Company believes that its operations and facilities, both owned or
leased, are in substantial compliance with applicable laws and regulations and
that any noncompliance is not likely to have a material adverse effect on the
Company's operations or financial condition. See "Legal Proceedings" on page 13
of this Form 10-K and "Note M: Commitments and Contingencies" of the "Notes to
Financial Statements" on page 26 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 27 through 40 of the
1998 Annual Report. However, future events, such as changes in or modified
interpretations of existing laws and regulations or enforcement policies, or
further investigation or evaluation of the potential health hazards of certain
products or business activities, may give rise to additional compliance and
other costs that could have a material adverse effect on the Company.
In general, quarry sites must comply with noise, water discharge and
dust suppression regulations, zoning and special use permitting requirements,
applicable mining regulations and federal health and safety requirements. As new
quarry sites are located and acquired, the Company works closely with local
authorities during the zoning and permitting processes to design new quarries in
such a way as to minimize disturbances. The Company frequently acquires large
tracts of land so that quarry and production facilities can be situated
substantial distances from surrounding property
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owners. The Company maintains a centralized blasting function for its quarry
operations, and has established policies designed to minimize disturbances to
surrounding property owners.
The Company is required by state laws to reclaim quarry sites after
use. The Company generally reclaims its quarries on an ongoing basis, reclaiming
mined-out areas of the quarry while continuing operations at other areas of the
site. Historically, the Company has not incurred extraordinary or substantial
costs in connection with the closing of quarries. Reclaimed quarry sites owned
by the Company are available for sale, typically for commercial development.
As is the case with other companies in the same industries, some of the
Company's products contain varying amounts of crystalline silica, a common
mineral. Excessive, prolonged inhalation of very small-sized particles of
crystalline silica has been associated with non-malignant lung disease. The
carcinogenic potential of crystalline silica was evaluated by the International
Agency for Research on Cancer and later by the U.S. National Toxicology Program.
In 1987, the agency found limited evidence of carcinogenicity in humans but
sufficient evidence of carcinogenicity in animals. The National Toxicology
Program concluded in 1991 that crystalline silica is "reasonably anticipated to
be a carcinogen." In October 1996, the International Agency for Research on
Cancer issued another report stating that "inhaled crystalline silica in the
form of quartz or cristobalite from occupational sources is carcinogenic to
humans." The Company, through safety information sheets and other means,
communicates what it believes to be appropriate warnings and cautions to
employees and customers about the risks associated with excessive, prolonged
inhalation of mineral dust in general and crystalline silica in particular.
At the Magnesia Specialties division's Manistee, Michigan, facility,
the Company maintains a stockpile of off-specification magnesia and binder
materials, and fine-particle product generated in processing magnesium oxide.
These materials are used at the Manistee plant as a portion of the feed stock
for producing certain of its magnesium oxide products. In 1986, the U.S.
Environmental Protection Agency (the "EPA") investigated the stockpile for
possible designation under the Comprehensive Environmental Response Compensation
and Liability Act (the "Superfund" statute), but has not taken any action since
that date. In addition, the Michigan Department of Environmental Quality (the
"DEQ") reviewed information submitted by the Company to determine the
appropriate classification of the pile. In 1998 the DEQ classified the pile as
"low hazard industrial waste." Accordingly, the Company is required to obtain an
appropriate license for the continued storage of these recyclable materials and
to perform certain modifications that will not have a material adverse effect on
the Company's operations or its financial condition.
As a result of the processing of dolomitic limestone at the Magnesia
Specialties division's Woodville, Ohio, facility, lime kiln dust ("LKD") is
produced as a by-product. The Ohio Environmental Protection Agency ("OEPA") has
promulgated regulations that apply to the disposal of LKD. The Company executed
an administrative order with the OEPA on November 24, 1997 requiring the Company
to submit a permit application for a landfill by May 1998, which was duly
submitted. The Company, along with other lime producers, has had certain
discussions with the OEPA, which is in the process of reviewing the applications
and the regulations to determine if changes to the current scope of the
regulations are appropriate. Depending upon the result of these ongoing
discussions, the Company may be required to incur certain compliance costs. The
Company believes that any such costs would not have a material adverse effect on
the Company's operations or
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its financial condition but can give no assurance that the compliance costs will
not have a material adverse effect on the financial condition or results of the
Magnesia Specialties segment's operations.
The Clean Air Act Amendments of 1990 require the EPA to develop
regulations for a broad spectrum of industrial sectors that emit hazardous air
pollutants, including lime manufacturing. The new standards to be established
would require plants to install feasible control equipment for certain hazardous
air pollutants, thereby significantly reducing air emissions. The Company is
actively participating with other lime manufacturers in working with the EPA to
define test protocols, better define the scope of the standards, determine the
existence and feasibility of various technologies, and develop realistic
emission limitations and continuous emissions monitoring/reporting requirements
for the lime industry. The EPA has conducted testing at lime manufacturing
facilities located in Alabama, Texas and Ohio, including the Company's Woodville
facility, the preliminary results of which are expected to be discussed with the
EPA in 1999. The current deadline for establishing the technology-based
standards for the industry is November 15, 2000. The Company will not be able to
determine the applicability of the new regulations or the cost associated with
any required standards until the emission standards are adopted. The Company
believes that any costs associated with the upgrade and/or replacement of
equipment required to comply with the new regulations would not have a material
adverse effect on the Company's operations or its financial condition but can
give no assurance that the compliance costs will not have a material adverse
effect on the financial condition or results of the Magnesia Specialties
segment's operations.
The EPA in November 1996 proposed certain changes to the regulations
relating to the standard for particulate matter in connection with air quality,
which were recently placed into law as the National Ambient Air Quality
Standards. The new law places an ambient air limit on the emission of fine
particles (smaller than 2.5 microns) that typically result from industrial,
motor vehicle and power generation fuel combustion, in addition to the coarse
particles previously regulated. As adopted, the regulations impact many
industries, including the aggregates industry. The National Stone Association
("NSA") has joined a lawsuit with many other industries challenging the standard
and the lack of scientific data available supporting the limits and the ability
of industry to monitor the pollutant. In addition, the NSA filed a petition with
the EPA seeking a mineral particulate exclusion from the PM2.5 standard.
Although it is not known with certainty what the applicability and scope of the
new law will be to the aggregates industry generally and thus to the Company,
the Company believes that the final regulations will not have a material adverse
effect on the Company's operations or its financial condition.
In a letter from the EPA, dated September 16, 1997, the Company was
designated a Potentially Responsible Party (a "PRP") with respect to certain
sites operated by PCB Treatment Site, Inc., which had facilities in Kansas City,
Missouri and Kansas City, Kansas (the "Sites") where the Company's predecessor
in interest disposed of polychlorinated biphenyl waste during the 1980's. On
February 18, 1999, the Company agreed to an Administrative Order of Consent
pursuant to which it agreed to pay $1,520 in full and complete settlement of any
liability it may have with respect to the Sites.
In February 1998, the Georgia Department of Natural Resources ("GDNR")
determined that both the Company and the Georgia Department of Transportation
("GDOT") are responsible parties for investigation and remediation at the
Company's Camak Quarry in Thomson, Georgia, due to the discovery of
trichloroethene ("TCE") above its naturally occurring background concentration
in a drinking water well on site. The Company provided the GDNR with information
indicating that the
11
<PAGE> 12
source of the release was either from an asphalt plant that was on the site in
the early 1970's or from a maintenance shop that was operated on the property in
the 1940's and 1950's before the Company purchased the property. The Company was
designated by virtue of its ownership of the property. GDOT was designated
because it historically used and disposed of TCE at the site for testing
asphalt. The use of the well was discontinued by the Company. The Company has
entered into a Consent Order with GDNR to conduct an environmental assessment of
the site and file a report of the findings on or before July 1, 1999. The need
for corrective action will be evaluated after the assessment is completed. The
Company and GDOT have signed an agreement to share evenly the costs of the
assessment work and are in the process of hiring a consultant to do the work. At
this time, remediation costs have not been estimated because the preliminary
investigation defining the extent of contamination has not been initiated.
Georgia law provides that responsible parties are jointly and severally liable
and, therefore, the Company is potentially liable for the full cost of funding
the investigation and any necessary remediation. If the Company is required to
fund the entire cost of such remediation, the statutory framework provides that
the Company may pursue rights of contribution from the other responsible
parties. Management believes any costs incurred by the Company associated with
the site will not have a material adverse effect on the Company's operations or
its financial condition.
In December 1998, the GDNR determined that the Company, the GDOT and
two other parties which operated an asphalt plant are responsible parties for
investigation and remediation at the Company's Ruby Quarry in Macon, Georgia.
The Company was designated by virtue of its ownership of the property. GDOT was
designated because it caused a release of TCE above its naturally occurring
background concentration in the groundwater at the site. The two other parties
were designated because both entities operated the asphalt plant at the site.
The groundwater contamination was discovered when the Company's tenant vacated
the premises and environmental testing was conducted. At this time, remediation
costs have not been estimated because the preliminary investigation defining the
extent of contamination has not been initiated. GDNR has requested the
responsible parties to conduct an environmental assessment of the site and file
a report on or before June 30, 1999. The Company and GDOT have signed an
agreement to share the costs of the assessment work and are in the process of
negotiating agreements with the two other parties. Management believes any costs
incurred by the Company associated with the site will not have a material
adverse effect on the Company's operations or its financial condition.
EMPLOYEES
As of March 12, 1999, the Company has approximately 5,700 employees.
Approximately 4,200 are hourly employees and approximately 1,500 are salaried
employees. Included among these employees are approximately 900 hourly employees
represented by labor unions. Approximately 15% of the Company's Aggregates
division's hourly employees are members of a labor union, while 96% of the
Magnesia Specialties division's hourly employees are represented by labor
unions. The Company's principal union contracts cover employees at the Manistee,
Michigan, magnesia-based products plant and the Woodville, Ohio lime plant. The
Manistee labor union contract expires in August 1999 and the Woodville labor
union contract expires in 2000. During the 1995 labor negotiations at the
previous renewal of the Manistee labor union contract, the Magnesia Specialties
division experienced a labor strike that adversely affected its earnings. The
Company considers its relations with its employees to be good.
12
<PAGE> 13
ITEM 2. PROPERTIES
AGGREGATES
As of March 12, 1999, the Company processed or shipped aggregates from
279 quarries and distribution yards in 22 states in the southeast, southwest,
midwest and central United States and in Canada and the Bahamas, of which 77 are
located on land owned by the Company free of major encumbrances, 58 are on land
owned in part and leased in part, 131 are on leased land, and 13 are on
facilities neither owned nor leased, where raw materials are removed under an
agreement. In addition, the Company processed and shipped ready mixed concrete
and asphalt products from 16 properties in 3 states in the southern United
States, of which 10 are located on land owned by the Company free of major
encumbrances and 6 are on leased land. At 8 of these locations, aggregates
products are also processed or shipped.
MAGNESIA SPECIALTIES
The Magnesia Specialties division currently operates major
manufacturing facilities in Manistee, Michigan and Woodville, Ohio, and smaller
processing plants in River Rouge, Michigan; Bridgeport, Connecticut; Mobile,
Alabama; Baton Rouge, Louisiana; Lenoir City, Tennessee; and Pittsburgh,
Pennsylvania. All of these facilities are owned, except Pittsburgh and Lenoir
City, which are leased. In addition, the Company has entered into several
third-party toll-manufacturing agreements pursuant to which it processes various
chemical and refractory products.
OTHER PROPERTIES
The Company's corporate headquarters, which it owns, is located in
Raleigh, North Carolina. The Company owns and leases various administrative
offices and research and development laboratories for its Aggregates division
and its Magnesia Specialties division.
The Company's principal properties, which are of varying ages and are
of different construction types, are believed to be generally in good condition,
are well maintained, and are generally suitable and adequate for the purposes
for which they are used. The principal properties are believed to be utilized at
average productive capacities of approximately 85% and are capable of supporting
a higher level of market demand.
ITEM 3. LEGAL PROCEEDINGS
From time to time claims are asserted against the Company arising out
of its operations in the normal course of business. In the opinion of management
of the Company (which opinion is based in part upon consideration of the opinion
of counsel), it is unlikely that the outcome of litigation and other proceedings
relating to the Company, including those relating to environmental matters and
those described specifically below, will have a material adverse effect on the
Company's operations or its financial condition; however, there can be no
assurance that an adverse outcome in any of such litigation would not have a
material adverse effect on the Company.
The Company agreed in 1999 to the terms of a settlement of any
liability it may have with respect to litigation in the State District Court of
Morris County, Texas, James Fowler, Jr. v. Union
13
<PAGE> 14
Carbide Corporation. This case was commenced on November 9, 1987 as separate
claims for unspecified amounts of monetary damages (joined in one lawsuit) by
approximately 3,000 plaintiffs against approximately 400 defendants. The case
involved claims asserted by former employees of Lone Star Steel Company alleging
injuries to their health suffered by exposure to the products supplied to Lone
Star's facility in Morris County, Texas since 1947. It is the Company's
understanding that the current and former defendants in the litigation
constitute almost every supplier to the facility, regardless of the type of
product supplied. The Company agreed to pay $100,000 in accordance with the
settlement.
See also "Note M: Commitments and Contingencies" of the "Notes to
Financial Statements" on page 26 of the 1998 Annual Report and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 27 through 40 of the 1998 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
14
<PAGE> 15
FORWARD LOOKING STATEMENTS - SAFE HARBOR PROVISIONS
This Annual Report on Form 10-K contains statements which constitute
"forward looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors
are cautioned that all forward looking statements involve risks and
uncertainties, 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 Securities and Exchange
Commission filings, including but not limited to, the discussion of
"Competition" on page 8 of this Annual Report on Form 10-K, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 27 through 40 of the 1998 Annual Report and "Note A: Accounting Policies"
and "Note M: Commitments and Contingencies" of the "Notes to Financial
Statements" on pages 16 through 18 and 26, respectively, of the Audited
Consolidated Financial Statements included in the 1998 Annual Report.
15
<PAGE> 16
EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information regarding the executive
officers of Martin Marietta Materials, Inc. as of March 12, 1999:
<TABLE>
<CAPTION>
Present Position Year Assumed Other Positions and Other Business
Name Age at March 12 , 1999 Present Position Experience Within the Last Five Years
---- --- ------------------ ----------------- -------------------------------------
<S> <C> <C> <C> <C>
Stephen P. Zelnak, Jr. 54 Chairman of the 1997 Vice Chairman of the Board of Directors
Board of Directors of Martin Marietta Materials, Inc. (1996-1997)
of Martin Marietta
Materials, Inc.;
President and Chief 1993
Executive Officer
of Martin Marietta
Materials, Inc.;
President of Aggregates 1993
Division
Philip J. Sipling 51 Executive Vice President 1997 Senior Vice President of Martin Marietta
of Martin Marietta Materials, Inc. (1993-1997); President of
Materials, Inc.; Magnesia Specialties Division (1993-1997)
Chairman of Magnesia 1997
Specialties Division;
Executive Vice President 1993
of Aggregates Division
Robert R. Winchester 61 Senior Vice President 1993
of Martin Marietta
Materials, Inc.;
Executive Vice President 1993
of Aggregates Division
Janice K. Henry 47 Senior Vice President; 1998 Vice President, Martin Marietta Materials, Inc.
Chief Financial Officer; 1994 (1994-1998)
Treasurer 1996
Bruce A. Deerson 47 Vice President and 1993 Corporate Secretary (1993 - 1997)
General Counsel
Donald J. Easterlin, III 57 Vice President, 1994
Business Development
Jonathan T. Stewart 50 Vice President, 1993
Human Resources
</TABLE>
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There were approximately 1,624 holders of record of Martin Marietta
Materials, Inc. Common Stock, $.01 par value, as of March 12, 1999. The
Company's Common Stock is traded on the New York Stock Exchange (Symbol: MLM).
Information concerning stock prices and dividends paid is included under the
caption "Quarterly Performance (Unaudited)" on page 41 of the 1998 Annual
Report, and that information is incorporated herein by reference.
On December 7, 1998, the Company sold $200,000,000 aggregate principal
amount of 5.875% Notes due 2008 (the "Notes") to Goldman, Sachs & Co., J.P.
Morgan Securities Inc. and Morgan Stanley & Co. Incorporated, as initial
purchasers (the "Initial Purchasers"). Aggregate discounts and commissions to
the Initial Purchasers were $2,326,000. The Notes were sold to the Initial
Purchasers in a transaction not involving a public offering in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 and Rule 144A. The Notes are exchangeable into registered notes with
substantially identical terms pursuant to an Offer to Exchange by the Company
pursuant to a registration statement on Form S-4 (Registration No. 333-71793),
effective February 18, 1999.
ITEM 6. SELECTED FINANCIAL DATA
The information required in response to this Item 6 is included under
the caption "Five Year Summary" on page 42 of the 1998 Annual Report, and that
information is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required in response to this Item 7 is included under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 27 through 40 of the 1998 Annual Report, and
that information is incorporated herein by reference.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company, from time to time, uses on a limited basis
derivative financial instruments to manage its exposure to fluctuations in
interest rates and foreign exchange rates. The aggregate value of derivative
financial instruments held or issued by the Company is not material to the
Company nor is the market risk posed. For additional discussion of the Company's
market risk see "Management's Discussion and Analysis of Financial Condition and
Results of Operations, Capital Structure and Resources" on pages 37 and 38 of
the 1998 Annual Report and "Note A: Accounting Policies, Derivative Financial
Instruments and Accounting Changes" of the Notes to Consolidated Financial
Statements on pages 17
17
<PAGE> 18
and 18 of the Audited Consolidated Financial Statements included in the 1998
Annual Report, and that information is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required in response to this Item 8 is included under
the caption "Consolidated Statement of Earnings," "Consolidated Balance Sheet,"
"Consolidated Statement of Cash Flows," "Consolidated Statement of Shareholders'
Equity," "Notes to Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Quarterly Performance
(Unaudited)" on pages 12 through 41 of the 1998 Annual Report, and that
information is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors required in response to this Item
10 is included under the captions "Election of Directors" and "Compliance With
Section 16(a) of the Exchange Act" in the Company's definitive proxy statement
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after the close of the Company's fiscal year ended December
31, 1998 (the "1999 Proxy Statement"), and that information is hereby
incorporated by reference in this Form 10-K. Information concerning executive
officers of the Company required in response to this Item 10 is included in Part
I on page 16 of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is included under
the captions "Executive Compensation" and "Compensation Committee Interlocks and
Insider Participation in Compensation Decisions" in the Company's 1999 Proxy
Statement, and that information, except for the information required by Items
402(k) and (l) of Regulation S-K, is hereby incorporated by reference in this
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required in response to this Item 12 is included under
the captions "Voting Securities and Record Date" and "Beneficial Ownership of
Shares" in the Company's 1999 Proxy Statement, and that information is hereby
incorporated by reference in this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this Item 13 is included under
the captions "Compensation Committee Interlocks and Insider Participation in
Compensation Decisions," and "Certain Related Transactions" in the Company's
1999 Proxy Statement, and that information is hereby incorporated by reference
in this Form 10-K.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) List of financial statements filed as part of this Form 10-K.
The following consolidated financial statements of Martin Marietta
Materials, Inc. and consolidated subsidiaries, included in the 1998
Annual Report, are incorporated by reference into Item 8 on page 18 of
this Form 10-K. Page numbers refer to the 1998 Annual Report:
Page
Consolidated Balance Sheet-- 13
December 31, 1998 and 1997
Consolidated Statement of Earnings-- 12
Years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity-- 15
Years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows-- 14
Years ended December 31, 1998, 1997 and 1996
Notes to Financial Statements-- 16 through 26
(2) List of financial statement schedules filed as part of this Form 10-K
The following financial statement schedule of Martin Marietta
Materials, Inc. and consolidated subsidiaries is included in Item
14(d). The page number refers to this Form 10-K.
Schedule II - Valuation and Qualifying Accounts..............25
All other schedules have been omitted because they are not applicable,
not required, or the information has been otherwise supplied in the
financial statements or notes to the financial statements.
The report of the Company's independent auditors with respect to the
above-referenced financial statements appears on page 10 of the 1998
Annual Report, and that report is hereby incorporated by reference in
this Form 10-K. The report on the financial statement schedule and the
consent of the Company's independent auditors appear on page 34 of this
Form 10-K.
20
<PAGE> 21
The report of Redland Stone Products Company and subsidiaries'
independent auditors with respect to the Redland Stone Products Company
and subsidiaries' financial statements as of December 31, 1997, and for
the year then ended, which independent auditors' report is hereby
incorporated by reference in this Form 10-K. The consent of Redland
Stone Products Company and subsidiaries' independent auditors appears
on page 35 of this Form 10-K.
(3) Exhibits
The list of Exhibits on the accompanying Index of Exhibits on pages 22
through 24 of this Form 10-K is hereby incorporated by reference. Each
management contract or compensatory plan or arrangement required to be
filed as an exhibit is indicated by asterisks.
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K on October 9, 1998,
December 18, 1998 (as amended by the Company's Current Report on Form 8-K/A
filed on February 17, 1999) and February 2, 1999.
21
<PAGE> 22
(c) Index of Exhibits
Exhibit
No.
- -------
3.01 --Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibits 3.1 and 3.2 to the Martin
Marietta Materials, Inc. Current Report on Form 8-K, filed on
October 25, 1996)
3.02 --Restated Bylaws of the Company, as amended (incorporated by
reference to Exhibit 3.3 to the Martin Marietta Materials, Inc.
Current Report on Form 8-K, filed on October 25, 1996)
4.01 --Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.01 to the Martin Marietta Materials, Inc. registration
statement on Form S-1 (SEC Registration No. 33-72648))
4.02 --Articles 2 and 8 of the Company's Restated Articles of
Incorporation, as amended (incorporated by reference to Exhibit
4.02 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 1996)
4.03 --Article I of the Company's Restated Bylaws, as amended (incorporated
by reference to Exhibit 4.03 to the Martin Marietta Materials,
Inc. Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
4.04 --Indenture dated as of December 1, 1995 between Martin Marietta
Materials, Inc. and First Union National Bank of North Carolina
(incorporated by reference to Exhibit 4(a) to the Martin Marietta
Materials, Inc. registration statement on Form S-3 (SEC
Registration No. 33-99082))
4.05 --Form of Martin Marietta Materials, Inc. 7% Debenture due 2025
(incorporated by reference to Exhibit 4(a)(i) to the Martin
Marietta Materials, Inc. registration statement on Form S-3 (SEC
Registration No. 33-99082))
4.06 --Form of Martin Marietta Materials, Inc. 6.9% Notes due 2007
(incorporated by reference to Exhibit 4(a)(i) to the Martin
Marietta Materials, Inc. registration statement on Form S-3 (SEC
on Registration No. 33-99082))
4.07 --Exchange and Registration Rights Agreement dated December 2, 1998 by
and among Martin Marietta Materials, Inc., Goldman, Sachs & Co.,
J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated
(incorporated by reference to Exhibit 4.07 to the Martin Marietta
Materials, Inc. registration statement on Form S-4 (SEC
Registration No. 333-71793))
4.08 --Indenture dated as of December 7, 1998 between Martin Marietta
Materials, Inc. and First Union National Bank (incorporated by
reference to Exhibit 4.08 to the Martin Marietta Materials, Inc.
registration statement on Form S-4 (SEC Registration No.
333-71793))
4.09 --Form of Martin Marietta Materials, Inc. 5.875% Note due December 1,
2008 (incorporated by reference to Exhibit 4.09 to the Martin
Marietta Materials, Inc. registration statement on Form S-4 (SEC
Registration No. 333-71793))
10.01 --Assumption Agreement between the Company and Martin Marietta
Technologies, Inc. (now known as Lockheed Martin Corporation)
dated as of November 12, 1993 (incorporated by reference to
Exhibit 10.01 to the Martin Marietta Materials, Inc. registration
statement on Form S-1 (SEC Registration No. 33-72648))
22
<PAGE> 23
Exhibit
No.
- -------
10.02 --Transfer and Capitalization Agreement dated as of November 12, 1993
among Martin Marietta Technologies, Inc. (now known as Lockheed
Martin Corporation), Martin Marietta Investments Inc. and the
Company (incorporated by reference to Exhibit 10.02 to the Martin
Marietta Materials, Inc. registration statement on Form S-1 (SEC
Registration No. 33-72648))
10.03 --Tax Assurance Agreement dated as of September 13, 1996 between the
Company and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.10 to the Martin Marietta Materials, Inc.
Form 10-Q for the quarter ended September 30, 1996)
10.04 --Supplemental Tax Sharing Agreement dated as of September 13, 1996
between the Company and Lockheed Martin Corporation (incorporated
by reference to Exhibit 10.09 to the Martin Marietta Materials,
Inc. Form 10-Q for the quarter ended September 30, 1996)
10.05 --Rights Agreement, dated as of October 21, 1996, between the Company
and First Union National Bank of North Carolina, as Rights Agent,
which includes the Form of Articles of Amendment With Respect to
the Junior Participating Class A Preferred Stock of Martin
Marietta Materials, Inc., as Exhibit A, the Form of Rights
Certificate, as Exhibit B, and the Summary of Rights to Purchase
Preferred Stock, as Exhibit C (incorporated by reference to
Exhibit 1 to the Martin Marietta Materials, Inc. registration
statement on Form 8-A, filed with the Securities and Exchange
Commission on October 21, 1996)
10.06 --Revolving Credit Agreement dated as of January 29, 1997 among the
Company and Morgan Guaranty Trust Company of New York, as Agent
Bank (incorporated by reference to Exhibit 10.06 to the Martin
Marietta Materials, Inc. Annual Report on Form 10-K for the
fiscal year ended December 31, 1996)
10.07 --Martin Marietta Materials, Inc. Shareholder Value Achievement Plan
(incorporated by reference to Exhibit 10.06 to the Martin
Marietta Materials, Inc. Form 10-Q for the quarter ended
September 30, 1996)**
10.08 --Form of Martin Marietta Materials, Inc. Employment Protection
Agreement (incorporated by reference to Exhibit 10.07 to the
Martin Marietta Materials, Inc. Form 10-Q for the quarter ended
September 30, 1996)**
10.09 --Amended and Restated Martin Marietta Materials, Inc. Common Stock
Purchase Plan for Directors (incorporated by reference to
Exhibit 10.10 to the Martin Marietta Materials, Inc. Annual
Report on Form 10-K for the fiscal year ended December 31,
1996)**
10.10 --Martin Marietta Materials, Inc. Executive Incentive Plan, as amended
(incorporated by reference to Exhibit 10.18 to the Martin
Marietta Materials, Inc. Annual Report on Form 10-K for the
fiscal year ended December 31, 1995)**
10.11 --Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.01 to the Martin Marietta Materials,
Inc. Form 10-Q for the quarter ended June 30, 1995)**
10.12 --Amendment No. 1 to the Martin Marietta Materials, Inc. Incentive
Stock Plan (incorporated by reference to Exhibit 10.01 to the
Martin Marietta Materials, Inc. Form 10-Q for the quarter ended
September 30, 1997)**
- ------------------
**Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K
23
<PAGE> 24
Exhibit
No.
- -------
10.13 --Martin Marietta Materials, Inc. Amended and Restated Stock-Based
Award Plan (incorporated by reference to Exhibit 10.01 to the
Martin Marietta Materials, Inc. Form 10-Q for the quarter ended
March 31, 1998)**
10.14 --Martin Marietta Materials, Inc. Amended and Restated Omnibus
Securities Award Plan (incorporated by reference to Exhibit 10.02
to the Martin Marietta Materials, Inc. Form 10-Q for the quarter
ended March 31, 1998)**
10.15 --Revolving Credit Agreement dated as of December 3, 1998 among Martin
Marietta Materials, Inc. and Morgan Guaranty Trust Company of New
York, as Agent Bank (incorporated by reference to Exhibit 99.3 to
the Martin Marietta Materials, Inc. Current Report on Form 8-K,
filed with the Commission on December 18, 1998)
10.16 --Amendment No. 1 to the Credit Agreement dated as of October 16, 1998
among Martin Marietta Materials, Inc. and Morgan Guaranty Trust
Company of New York, as Agent Bank (incorporated by reference to
Exhibit 99.4 to the Martin Marietta Materials, Inc. Current
Report on Form 8-K, filed with the Commission on December 18,
1998)
10.17 --Amendment No. 2 to the Credit Agreement dated as of December 3, 1998
among Martin Marietta Materials, Inc. and Morgan Guaranty Trust
Company of New York, as Agent Bank (incorporated by reference to
Exhibit 99.5 to the Martin Marietta Materials, Inc. Current
Report on Form 8-K, filed with the Commission on December 18,
1998)
*12.01 --Computation of ratio of earnings to fixed charges for the year ended
December 31, 1998
*13.01 --Martin Marietta Materials, Inc. 1998 Annual Report to Shareholders,
portions of which are incorporated by reference in this
Form 10-K. Those portions of the 1998 Annual Report to
Shareholders that are not incorporated by reference shall not
be deemed to be "filed" as part of this report
*21.01 --List of subsidiaries of Martin Marietta Materials, Inc.
*23.01 --Consent of Ernst & Young LLP, Independent Auditors for Martin
Marietta Materials, Inc. and consolidated subsidiaries
*23.02 --Consent of PricewaterhouseCoopers, LLP, Independent Auditors for
Redland Stone Products Company and subsidiaries
*24.01 --Powers of Attorney (included in this Form 10-K at page 26)
*27.01 --Financial Data Schedule (for Securities and Exchange Commission use
only)
Other material incorporated by reference:
Martin Marietta Materials, Inc.'s 1999 Proxy Statement filed pursuant to
Regulation 14A, portions of which are incorporated by reference in this
Form 10-K. Those portions of the 1999 Proxy Statement which are not
incorporated by reference shall not be deemed to be "filed" as part of this
report.
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K
24
<PAGE> 25
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- --------------------------------------------------------------------------------------------------------------------
Additions
-------------------------
(2)
(1) Charged to
Balance At Charged to Other
Beginning of Costs and Accounts-- Deductions-- Balance At End
Description Period Expenses Describe Describe of Period
----------- ------------ ---------- ---------- ------------ --------------
(Amounts in thousands)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts ... $ 4,789 $ 35 $ 500(a) $ 894(d) $ 4,430
Allowance for affiliates receivable -- -- -- -- --
Inventory valuation allowance ..... 7,171 1,278 -- -- 8,449
Amortization of intangible assets . 29,464 11,599 2,430(a) 338(b) 42,511
644(c)
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts ... $ 2,950 $ 411 $1,733(a) $ 305(d) $ 4,789
Allowance for affiliates receivable -- -- -- -- --
Inventory valuation allowance ..... 6,078 556 537(a) -- 7,171
Amortization of intangible assets . 22,044 7,926 -- 325(b) 29,464
181(c)
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts ... $ 4,450 $ -- $ -- $1,500(d) $ 2,950
Allowance for affiliates receivable 954 -- -- 954(e) --
Inventory valuation allowance ..... 7,370 -- -- 1,292(c) 6,078
Amortization of intangible assets . 17,268 5,060 -- 284(b) 22,044
</TABLE>
(a) Purchase accounting adjustments.
(b) Fully-amortized intangible assets written off.
(c) Revaluation adjustments.
(d) To adjust allowance for change in estimates.
(e) Uncollectible accounts written off, net of recoveries.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MARTIN MARIETTA MATERIALS, INC.
By: /s/ Bruce A. Deerson
-------------------------------------
Bruce A. Deerson
Vice President and General Counsel
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below appoints Bruce A. Deerson and Roselyn R. Bar, jointly and
severally, as his true and lawful attorney-in-fact, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact, jointly and severally, full power and authority to
do and perform each in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact, jointly and severally, or their or his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: March 24, 1999
26
<PAGE> 27
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Stephen P. Zelnak, Jr. Chairman of the Board, March 24, 1999
- ------------------------------------ President and Chief Executive
Stephen P. Zelnak, Jr. Officer
/s/Janice K. Henry Senior Vice President, Chief March 24, 1999
- ------------------------------------ Financial Officer, Treasurer
Janice K. Henry and Chief Accounting Officer
/s/Richard G. Adamson Director March 24, 1999
- ------------------------------------
Richard G. Adamson
/s/Marcus C. Bennett Director March 24, 1999
- ------------------------------------
Marcus C. Bennett
/s/Bobby F. Leonard Director March 24, 1999
- ------------------------------------
Bobby F. Leonard
/s/William E. McDonald Director March 24, 1999
- ------------------------------------
William E. McDonald
/s/Frank H. Menaker, Jr. Director March 24, 1999
- ------------------------------------
Frank H. Menaker, Jr.
/s/James M. Reed Director March 24, 1999
- ------------------------------------
James M. Reed
/s/William B. Sansom Director March 24, 1999
- ------------------------------------
William B. Sansom
/s/Richard A. Vinroot Director March 24, 1999
- ------------------------------------
Richard A. Vinroot
</TABLE>
27
<PAGE> 28
EXHIBITS
Exhibit
No.
- -------
3.01 --Restated Articles of Incorporation of the Company, as amended
(incorporated by reference to Exhibits 3.1 and 3.2 to the Martin
Marietta Materials, Inc. Current Report on Form 8-K, filed on
October 25, 1996)
3.02 --Restated Bylaws of the Company, as amended (incorporated by
reference to Exhibit 3.3 to the Martin Marietta Materials, Inc.
Current Report on Form 8-K, filed on October 25, 1996)
4.01 --Specimen Common Stock Certificate (incorporated by reference to
Exhibit 4.01 to the Martin Marietta Materials, Inc. registration
statement on Form S-1 (SEC Registration No. 33-72648))
4.02 --Articles 2 and 8 of the Company's Restated Articles of
Incorporation, as amended (incorporated by reference to Exhibit
4.02 to the Martin Marietta Materials, Inc. Annual Report on Form
10-K for the fiscal year ended December 31, 1996)
4.03 --Article I of the Company's Restated Bylaws, as amended (incorporated
by reference to Exhibit 4.03 to the Martin Marietta Materials,
Inc. Annual Report on Form 10-K for the fiscal year ended
December 31, 1996)
4.04 --Indenture dated as of December 1, 1995 between Martin Marietta
Materials, Inc. and First Union National Bank of North Carolina
(incorporated by reference to Exhibit 4(a) to the Martin Marietta
Materials, Inc. registration statement on Form S-3 (SEC
Registration No. 33-99082))
4.05 --Form of Martin Marietta Materials, Inc. 7% Debenture due 2025
(incorporated by reference to Exhibit 4(a)(i) to the Martin
Marietta Materials, Inc. registration statement on Form S-3 (SEC
Registration No. 33-99082))
4.06 --Form of Martin Marietta Materials, Inc. 6.9% Notes due 2007
(incorporated by reference to Exhibit 4(a)(i) to the Martin
Marietta Materials, Inc. registration statement on Form S-3 (SEC
on Registration No. 33-99082))
4.07 --Exchange and Registration Rights Agreement dated December 2, 1998 by
and among Martin Marietta Materials, Inc., Goldman, Sachs & Co.,
J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated
(incorporated by reference to Exhibit 4.07 to the Martin Marietta
Materials, Inc. registration statement on Form S-4 (SEC
Registration No. 333-71793))
4.08 --Indenture dated as of December 7, 1998 between Martin Marietta
Materials, Inc. and First Union National Bank (incorporated by
reference to Exhibit 4.08 to the Martin Marietta Materials, Inc.
registration statement on Form S-4 (SEC Registration No.
333-71793))
4.09 --Form of Martin Marietta Materials, Inc. 5.875% Note due December 1,
2008 (incorporated by reference to Exhibit 4.09 to the Martin
Marietta Materials, Inc. registration statement on Form S-4 (SEC
Registration No. 333-71793))
10.01 --Assumption Agreement between the Company and Martin Marietta
Technologies, Inc. (now known as Lockheed Martin Corporation)
dated as of November 12, 1993 (incorporated by reference to
Exhibit 10.01 to the Martin Marietta Materials, Inc. registration
statement on Form S-1 (SEC Registration No. 33-72648))
28
<PAGE> 29
Exhibit
No.
- -------
10.02 --Transfer and Capitalization Agreement dated as of November 12, 1993
among Martin Marietta Technologies, Inc. (now known as Lockheed
Martin Corporation), Martin Marietta Investments Inc. and the
Company (incorporated by reference to Exhibit 10.02 to the Martin
Marietta Materials, Inc. registration statement on Form S-1 (SEC
Registration No. 33-72648))
10.03 --Tax Assurance Agreement dated as of September 13, 1996 between the
Company and Lockheed Martin Corporation (incorporated by
reference to Exhibit 10.10 to the Martin Marietta Materials, Inc.
Form 10-Q for the quarter ended September 30, 1996)
10.04 --Supplemental Tax Sharing Agreement dated as of September 13, 1996
between the Company and Lockheed Martin Corporation (incorporated
by reference to Exhibit 10.09 to the Martin Marietta Materials,
Inc. Form 10-Q for the quarter ended September 30, 1996)
10.05 --Rights Agreement, dated as of October 21, 1996, between the Company
and First Union National Bank of North Carolina, as Rights Agent,
which includes the Form of Articles of Amendment With Respect to
the Junior Participating Class A Preferred Stock of Martin
Marietta Materials, Inc., as Exhibit A, the Form of Rights
Certificate, as Exhibit B, and the Summary of Rights to Purchase
Preferred Stock, as Exhibit C (incorporated by reference to
Exhibit 1 to the Martin Marietta Materials, Inc. registration
statement on Form 8-A, filed with the Securities and Exchange
Commission on October 21, 1996)
10.06 --Revolving Credit Agreement dated as of January 29, 1997 among the
Company and Morgan Guaranty Trust Company of New York, as Agent
Bank (incorporated by reference to Exhibit 10.06 to the Martin
Marietta Materials, Inc. Annual Report on Form 10-K for the
fiscal year ended December 31, 1996)
10.07 --Martin Marietta Materials, Inc. Shareholder Value Achievement Plan
(incorporated by reference to Exhibit 10.06 to the Martin
Marietta Materials, Inc. Form 10-Q for the quarter ended
September 30, 1996)**
10.08 --Form of Martin Marietta Materials, Inc. Employment Protection
Agreement (incorporated by reference to Exhibit 10.07 to the
Martin Marietta Materials, Inc. Form 10-Q for the quarter ended
September 30, 1996)**
10.09 --Amended and Restated Martin Marietta Materials, Inc. Common Stock
Purchase Plan for Directors (incorporated by reference to
Exhibit 10.10 to the Martin Marietta Materials, Inc. Annual
Report on Form 10-K for the fiscal year ended December 31,
1996)**
10.10 --Martin Marietta Materials, Inc. Executive Incentive Plan, as amended
(incorporated by reference to Exhibit 10.18 to the Martin
Marietta Materials, Inc. Annual Report on Form 10-K for the
fiscal year ended December 31, 1995)**
10.11 --Martin Marietta Materials, Inc. Incentive Stock Plan (incorporated
by reference to Exhibit 10.01 to the Martin Marietta Materials,
Inc. Form 10-Q for the quarter ended June 30, 1995)**
10.12 --Amendment No. 1 to the Martin Marietta Materials, Inc. Incentive
Stock Plan (incorporated by reference to Exhibit 10.01 to the
Martin Marietta Materials, Inc. Form 10-Q for the quarter ended
September 30, 1997)**
- ------------------
**Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K
29
<PAGE> 30
Exhibit
No.
- -------
10.13 --Martin Marietta Materials, Inc. Amended and Restated Stock-Based
Award Plan (incorporated by reference to Exhibit 10.01 to the
Martin Marietta Materials, Inc. Form 10-Q for the quarter ended
March 31, 1998)**
10.14 --Martin Marietta Materials, Inc. Amended and Restated Omnibus
Securities Award Plan (incorporated by reference to Exhibit 10.02
to the Martin Marietta Materials, Inc. Form 10-Q for the quarter
ended March 31, 1998)**
10.15 --Revolving Credit Agreement dated as of December 3, 1998 among Martin
Marietta Materials, Inc. and Morgan Guaranty Trust Company of New
York, as Agent Bank (incorporated by reference to Exhibit 99.3 to
the Martin Marietta Materials, Inc. Current Report on Form 8-K,
filed with the Commission on December 18, 1998)
10.16 --Amendment No. 1 to the Credit Agreement dated as of October 16, 1998
among Martin Marietta Materials, Inc. and Morgan Guaranty Trust
Company of New York, as Agent Bank (incorporated by reference to
Exhibit 99.4 to the Martin Marietta Materials, Inc. Current
Report on Form 8-K, filed with the Commission on December 18,
1998)
10.17 --Amendment No. 2 to the Credit Agreement dated as of December 3, 1998
among Martin Marietta Materials, Inc. and Morgan Guaranty Trust
Company of New York, as Agent Bank (incorporated by reference to
Exhibit 99.5 to the Martin Marietta Materials, Inc. Current
Report on Form 8-K, filed with the Commission on December 18,
1998)
*12.01 --Computation of ratio of earnings to fixed charges for the year ended
December 31, 1998
*13.01 --Martin Marietta Materials, Inc. 1998 Annual Report to Shareholders,
portions of which are incorporated by reference in this
Form 10-K. Those portions of the 1998 Annual Report to
Shareholders that are not incorporated by reference shall not
be deemed to be "filed" as part of this report
*21.01 --List of subsidiaries of Martin Marietta Materials, Inc.
*23.01 --Consent of Ernst & Young LLP, Independent Auditors for Martin
Marietta Materials, Inc. and consolidated subsidiaries
*23.02 --Consent of PricewaterhouseCoopers, LLP, Independent Auditors for
Redland Stone Products Company and subsidiaries
*24.01 --Powers of Attorney (included in this Form 10-K at page 26)
*27.01 --Financial Data Schedule (for Securities and Exchange Commission use
only)
Other material incorporated by reference:
Martin Marietta Materials, Inc.'s 1999 Proxy Statement filed pursuant to
Regulation 14A, portions of which are incorporated by reference in this
Form 10-K. Those portions of the 1999 Proxy Statement which are not
incorporated by reference shall not be deemed to be "filed" as part of this
report.
- ------------------
*Filed herewith
**Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K
30
<PAGE> 1
EXHIBIT 12.01
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
for the Year Ended December 31, 1998
(Amounts in Thousands)
EARNINGS:
Earnings before income taxes $ 174,142
Earnings of less than 50%-owned associated companies, net (684)
Interest expense 23,759
Portion of rents representative of an interest factor 2,424
---------
Adjusted Earnings and Fixed Charges $ 199,641
=========
FIXED CHARGES:
Interest Expense $ 23,759
Capitalized interest 359
Portion of rents representative of an interest factor 2,424
---------
Total Fixed Charges $ 26,542
=========
Ratio of Earnings to Fixed Charges 7.52
=========
31
<PAGE> 1
EXHIBIT 13.01
[MARTIN MARIETTA MATERIALS LOGO]
1998 Annual Report
Portions Incorporated by Reference
<PAGE> 2
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS AND SHAREHOLDERS
MARTIN MARIETTA MATERIALS, INC.
We have audited the accompanying consolidated balance sheet of Martin Marietta
Materials, Inc., and subsidiaries at December 31, 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
Page 10
<PAGE> 3
STATEMENT OF FINANCIAL RESPONSIBILITY
- --------------------------------------------------------------------------------
SHAREHOLDERS
MARTIN MARIETTA MATERIALS, INC.
The management of Martin Marietta Materials, Inc., is responsible for the
consolidated financial statements and all related financial information
contained in this report. The financial statements, which include amounts based
on estimates and judgments, have been prepared in accordance with 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
Page 11
<PAGE> 4
CONSOLIDATED STATEMENT OF EARNINGS
- --------------------------------------------------------------------------------
for years ended December 31
<TABLE>
<CAPTION>
(add 000, except per share) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $1,057,691 $900,863 $721,947
Cost of sales 776,043 665,594 539,437
- -------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------
Earnings before taxes on income 174,142 151,212 118,953
Taxes on income 58,529 52,683 40,325
- -------------------------------------------------------------------------------------------------------
NET EARNINGS $ 115,613 $ 98,529 $ 78,628
- -------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE-BASIC $ 2.49 $ 2.14 $ 1.71
EARNINGS PER COMMON SHARE-DILUTED $ 2.48 $ 2.13 $ 1.71
- -------------------------------------------------------------------------------------------------------
</TABLE>
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 12
<PAGE> 5
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
at December 31
<TABLE>
<CAPTION>
ASSETS
(add 000) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
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
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 369,388 322,012
- ---------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $1,588,589 $1,105,713
- ---------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 152,233 108,235
- ---------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 920,890 543,877
- ---------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 667,699 561,836
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,588,589 $1,105,713
- ---------------------------------------------------------------------------------------------
</TABLE>
The notes on pages 16 to 26 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 13
<PAGE> 6
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
for the years ended December 31
<TABLE>
<CAPTION>
(add 000) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ---------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------
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 --
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 279,174 160,672 (124,925)
- ---------------------------------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS (BOOK OVERDRAFT), end of year $ 14,586 $ 18,661 $ (4,260)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 14
<PAGE> 7
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
for the years ended December 31
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Shareholders'
(add 000) Stock Capital Earnings Equity
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $466 $349,245 $ 317,988 $ 667,699
- ----------------------------------------------------------------------------------------------------
</TABLE>
The notes on pages 16 to 26 are an integral part of these financial statements.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 15
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A: ACCOUNTING POLICIES
Organization. Martin Marietta Materials, Inc. ("Martin Marietta
Materials" or the "Corporation") is engaged principally in the construction
aggregates business. Aggregates products are used primarily for construction of
highways and other infrastructure projects in the United States, and in the
domestic commercial and residential construction industries. 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
Page 16
<PAGE> 9
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:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER
COMMON SHARE:
Weighted-average
number of shares 46,453,900 46,121,800 46,079,300
- ---------------------------------------------------------------------------------
EFFECT OF DILUTIVE SECURITIES:
Employee fixed awards 234,800 113,300 21,700
Employee and Directors'
nonvested stock 18,900 2,700 --
- ---------------------------------------------------------------------------------
DILUTED EARNINGS PER
COMMON SHARE:
Adjusted weighted-average
number of shares and
assumed conversions 46,707,600 46,237,800 46,101,000
- ---------------------------------------------------------------------------------
</TABLE>
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
Page 17
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION (UNAUDITED)
years ended December 31
(add 000, except per share) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
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
- --------------------------------------------------------------
</TABLE>
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 18
<PAGE> 11
<TABLE>
<CAPTION>
NOTE C: ACCOUNTS RECEIVABLE
December 31
(add 000) 1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Customer receivables $ 172,372 $ 145,773
Other current receivables 3,569 6,448
- ----------------------------------------------------------
175,941 152,221
Less allowances (4,430) (4,789)
- ----------------------------------------------------------
Total $ 171,511 $ 147,432
- ----------------------------------------------------------
<CAPTION>
NOTE D: INVENTORIES
December 31
(add 000) 1998 1997
- ----------------------------------------------------------
<S> <C> <C>
Finished products $ 127,904 $ 108,707
Products in process and
raw materials 12,342 7,886
Supplies and expendable
parts 25,307 23,161
- ----------------------------------------------------------
165,553 139,754
Less allowances (8,449) (7,171)
- ----------------------------------------------------------
Total $ 157,104 $ 132,583
- ----------------------------------------------------------
<CAPTION>
NOTE E: PROPERTY, PLANT AND EQUIPMENT, NET
December 31
(add 000) 1998 1997
- ----------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------
1,502,512 1,242,677
Less allowances for
depreciation, depletion
and amortization (724,984) (651,257)
- ----------------------------------------------------------
Total $ 777,528 $ 591,420
- ----------------------------------------------------------
<CAPTION>
NOTE F: LONG-TERM DEBT AND COMMERCIAL PAPER
December 31
(add 000) 1998 1997
- ----------------------------------------------------------
<S> <C> <C>
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
- ----------------------------------------------------------
Total 617,770 312,106
Less current maturities (15,657) (1,431)
- ----------------------------------------------------------
Total $ 602,113 $ 310,675
- ----------------------------------------------------------
</TABLE>
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
Page 19
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
years ended December 31
(add 000) 1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
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
- --------------------------------------------------------------
</TABLE>
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 20
<PAGE> 13
The Corporation's effective income tax rate varied from the statutory
United States income tax rate because of the following permanent tax
differences:
<TABLE>
<CAPTION>
years ended December 31 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
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%
- -----------------------------------------------------------
</TABLE>
The principal components of the Corporation's deferred tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
Deferred
Assets (Liabilities)
(add 000) 1998 1997
- ------------------------------------------------------
<S> <C> <C>
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)
- ------------------------------------------------------
</TABLE>
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
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
years ended December 31
(add 000) 1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ------------------------------------------------------------------------
</TABLE>
Weighted-average assumptions used as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------
<S> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------
<CAPTION>
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------------
<CAPTION>
December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
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)
- -------------------------------------------------------------------
<CAPTION>
December 31
(add 000) 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
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)
- -------------------------------------------------------------------
</TABLE>
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
<PAGE> 15
<TABLE>
<CAPTION>
years ended December 31
(add 000) 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
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
- ----------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------
<CAPTION>
years ended December 31
(add 000) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
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
- -------------------------------------------------------------
<CAPTION>
December 31
(add 000) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
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)
- -------------------------------------------------------------
<CAPTION>
December 31
(add 000) 1998 1997
- -------------------------------------------------------------
<S> <C> <C>
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)
- -------------------------------------------------------------
</TABLE>
Weighted-average assumptions used as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------
<S> <C> <C> <C>
Discount rates 6.75% 7.25% 7.75%
Expected long-term
rate of return on
assets 9.00% 9.00% 8.75%
</TABLE>
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:
<TABLE>
<CAPTION>
ONE-PERCENTAGE POINT
(add 000) INCREASE (DECREASE)
- ----------------------------------------------------------
<S> <C> <C>
Total service and interest
cost components $ 1,168 $ (1,111)
Postretirement
benefit obligation $ 9,462 $ (7,567)
</TABLE>
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 23
<PAGE> 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
<PAGE> 17
A summary of the Corporation's stock-based plans' activity and related
information follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------
AVAILABLE WEIGHTED-
FOR AWARDS AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
- -------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 18
Notes to Financial Statements (continued)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
(add 000, except per share) 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
(add 000)
- -----------------------------------------------
<S> <C>
1999 $ 8,531
2000 6,667
2001 4,439
2002 3,518
2003 and thereafter 33,897
- -----------------------------------------------
Total $ 57,052
===============================================
</TABLE>
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
<PAGE> 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
<PAGE> 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
Page 28
<PAGE> 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)
<TABLE>
<CAPTION>
Crushed Sand &
Stone Gravel
------- ------
<S> <C> <C>
1994 1,360 982
1995 1,389 1,003
1996 1,437 1,008
1997 1,565 1,046
1998 1,667 1,127
</TABLE>
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
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 29
<PAGE> 22
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
Page 30
<PAGE> 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)
<TABLE>
<CAPTION>
North American
Production Imports
-------------- -------
<S> <C> <C>
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
</TABLE>
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
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 31
<PAGE> 24
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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<PAGE> 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.
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
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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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<PAGE> 27
SELECTED FINANCIAL DATA BY BUSINESS SEGMENT
years ended December 31
(add 000)
NET SALES
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------
</TABLE>
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
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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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<PAGE> 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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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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<PAGE> 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
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 39
<PAGE> 32
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
Page 40
<PAGE> 33
Quarterly Performance
- --------------------------------------------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
===============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
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
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
===============================================================================================================================
</TABLE>
*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
41
<PAGE> 34
FIVE YEAR SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(add 000, except per share) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=====================================================================================================================
</TABLE>
Martin Marietta Materials, Inc. and Consolidated Subsidiaries
Page 42
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF MARTIN MARIETTA MATERIALS, INC.
as of March 12, 1999
<TABLE>
<CAPTION>
Name of Subsidiary Percent Owned
- ------------------ -------------
<S> <C>
Alamo Gulf Coast Railroad Company, a Texas corporation 99.5%(1)
American Aggregates Asset Management Corp., a Delaware corporation 100%(2)
American Aggregates Corporation, a Delaware corporation 100%
American Stone Company, a North Carolina corporation 50%(3)
Bahama Rock Limited, a Bahamas corporation 100%
Bayou Mining, Inc., a Louisiana corporation 100%
Central Rock Company, a North Carolina corporation 100%
Eastside Development Limited Partnership, a Texas limited partnership 99%(4)
Fredonia Valley Railroad, Inc., a Delaware corporation 100%
Martin Marietta Aggregates of Arkansas, Inc., a Delaware corporation 100%
Martin Marietta Aggregates of Iowa, Inc., an Iowa corporation 100%
Martin Marietta Aggregates of Southern Iowa, Inc., an Iowa corporation 100%
Martin Marietta Composites, Inc., a Delaware corporation 100%
Martin Marietta Exports, Inc., a Barbados corporation 100%
Martin Marietta Magnesia Specialties Inc., a Delaware corporation 100%
Martin Marietta Materials Asset Management Corp., a Delaware corporation 100%
Martin Marietta Materials Canada Limited, a Nova Scotia, Canada corporation 100%
</TABLE>
- -----------------
(1) Alamo Gulf Coast Railroad Company is owned by Martin Marietta Materials
Southwest, Inc. (99.5%) and certain individuals (0.5%).
(2) American Aggregates Asset Management Corp. is a wholly-owned subsidiary of
American Aggregates Corporation.
(3) Central Rock Company, a wholly-owned subsidiary of the Company, owns a 50%
interest in American Stone Company.
(4) Eastside Development Limited Partnership is owned by Martin Marietta
Materials Southwest, Inc. (99%) and Redland Development Company (1%), a
wholly-owned subsidiary of Martin Marietta Materials Southwest, Inc.
32
<PAGE> 2
<TABLE>
<S> <C>
Martin Marietta Materials de Mexico, S.A. de C.V., a Mexican corporation 100%(5)
Martin Marietta Materials Southwest Asset Management Corp.,
a Delaware corporation 100%(6)
Martin Marietta Materials Southwest, Inc., a Texas corporation 100%
Martin Marietta Technologies Corp., a Delaware corporation 100%
Mid-State Construction & Materials, Inc., an Arkansas corporation 100%
OK Sand & Gravel, LLC, a Delaware limited liability company 99%(7)
R&S Sand & Gravel, LLC, a Delaware limited liability company 99%(8)
Redland Development Company, a Texas corporation 100%(9)
Redland Park Development Limited Partnership, a Texas limited partnership 87.5%(10)
Redland Stone Development Company, a Texas corporation 100%(11)
Superior Stone Company, a North Carolina corporation 100%
Theodore Holding, LLC, a Delaware limited liability company 51%(12)
</TABLE>
- ---------------
(5) Martin Marietta Materials de Mexico, S.A. de C.V. is owned by Martin
Marietta Magnesia Specialties Inc. (99%) and Martin Marietta Materials, Inc.
(1%).
(6) Martin Marietta Materials Southwest Asset Management Corp. is a wholly-owned
subsidiary of Martin Marietta Materials Southwest, Inc.
(7) Martin Marietta Materials, Inc. is the manager of and owns a 99% interest in
OK Sand & Gravel, LLC.
(8) Martin Marietta Materials, Inc. is the manager of and owns a 99% interest in
R&S Sand & Gravel, Inc.
(9) Redland Development Company is a wholly-owned subsidiary of Martin Marietta
Materials Southwest, Inc.
(10) Redland Park Development Limited Partnership is owned 87.5% by Martin
Marietta Materials Southwest, Inc. directly and through its subsidiaries and
12.5% by Quarry, Inc., an unaffiliated corporation.
(11) Redland Stone Development Company is a wholly-owned subsidiary of Martin
Marietta Materials Southwest, Inc.
(12) Superior Stone Company, a wholly-owned subsidiary of the Company, is the
manager of and owns a 51% interest in Theodore Holding, LLC.
33
<PAGE> 1
EXHIBIT 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Martin Marietta Materials, Inc., of our report dated January 25, 1999,
included in the 1998 Annual Report to Shareholders of Martin Marietta Materials,
Inc. and subsidiaries.
Our audit also included the financial statement schedule of Martin Marietta
Materials, Inc. and subsidiaries listed in Item 14(a). This schedule is the
responsibility of the Corporation's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-83516) pertaining to the Martin Marietta Materials, Inc.
Omnibus Securities Award Plan, as amended; in the Registration Statement (Form
S-8 No. 333-15429) pertaining to the Martin Marietta Materials, Inc. Common
Stock Purchase Plan for Directors, Martin Marietta Materials, Inc. Performance
Sharing Plan and the Martin Marietta Materials, Inc. Savings and Investment Plan
for Hourly Employees; in the Registration Statement (Form S-3 No. 33-99082)
pertaining to the Martin Marietta Materials, Inc. shelf registration; and in the
Registration Statement (Form S-4 No. 333-71793) pertaining to Martin Marietta
Materials, Inc.'s registration of $200,000,000 of Notes of our report dated
January 25, 1999, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) of Martin Marietta Materials, Inc., for the year ended
December 31, 1998.
ERNST & YOUNG LLP
Raleigh, North Carolina
March 24, 1999
34
<PAGE> 1
EXHIBIT 23.02
CONSENT OF PRICEWATERHOUSECOOPERS LLP
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No.33-99082), to
the incorporation by reference in the Registration Statements on Form S-8 (No.
33-83516 and 333-15429), and to the incorporation by reference in the
Registration Statement on Form S-4 (filed on February 4, 1999) of Martin
Marietta Materials, Inc. of our report dated July 30, 1998 relating to the
consolidated financial statements of Redland Stone Products Company, which
appears in the Current Report on Form 8-K/A of Martin Marietta Materials, Inc.
dated February 15, 1999.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, PA
March 24, 1999
35
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, AND THE RELATED CONSOLIDATED
STATEMENT OF EARNINGS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 14,586
<SECURITIES> 0
<RECEIVABLES> 171,511
<ALLOWANCES> 4,430
<INVENTORY> 157,104
<CURRENT-ASSETS> 369,388
<PP&E> 1,502,512
<DEPRECIATION> 724,984
<TOTAL-ASSETS> 1,588,589
<CURRENT-LIABILITIES> 152,233
<BONDS> 602,113
0
0
<COMMON> 466
<OTHER-SE> 667,233
<TOTAL-LIABILITY-AND-EQUITY> 1,588,589
<SALES> 1,057,691
<TOTAL-REVENUES> 1,057,691
<CGS> 776,043
<TOTAL-COSTS> 861,137
<OTHER-EXPENSES> 8,575
<LOSS-PROVISION> 1,574
<INTEREST-EXPENSE> 23,759
<INCOME-PRETAX> 174,142
<INCOME-TAX> 58,529
<INCOME-CONTINUING> 115,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115,613
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.48
</TABLE>
