Martin Marietta Materials, Inc.
Table of Contents

 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
(Mark One)
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
For the quarterly period ended June 30, 2008
OR
x
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
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 Identification Number)
incorporation or organization)    
     
2710 Wycliff Road, Raleigh, NC   27607-3033
     
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code   919-781-4550
     
     
Former name:   None
     
    Former name, former address and former fiscal year, if changes since last report.
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 þ            No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
     
Large accelerated filer þ
  Accelerated filer o
Non-accelerated filer o
  Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o            No þ
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
     
Class   Outstanding as of August 1, 2008
     
Common Stock, $0.01 par value   41,375,200
 
 
Page 1 of 43

 


 

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
         
    Page
       
       
    3  
    4  
    5  
    6  
    7  
    18  
    37  
    38  
       
    39  
    39  
    39  
    40  
    41  
    42  
    43  
 Exhibit 31.01
 Exhibit 31.02
 Exhibit 32.01
 Exhibit 32.02
Page 2 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                         
    June 30,     December 31,     June 30,  
    2008     2007     2007  
    (Unaudited)     (Audited)     (Unaudited)  
    (Dollars in Thousands, Except Per Share Data)  
ASSETS
                       
Current Assets:
                       
Cash and cash equivalents
  $ 13,156     $ 20,038     $ 30,890  
Accounts receivable, net
    321,985       245,838       296,644  
Inventories, net
    297,371       286,885       297,800  
Current portion of notes receivable, net
    1,047       2,078       1,818  
Current deferred income tax benefits
    33,342       44,285       38,942  
Other current assets
    23,946       26,886       25,189  
 
                 
Total Current Assets
    690,847       626,010       691,283  
 
                 
 
                       
Property, plant and equipment
    3,282,172       2,978,361       2,846,337  
Allowances for depreciation, depletion and amortization
    (1,577,495 )     (1,544,808 )     (1,498,897 )
 
                 
Net property, plant and equipment
    1,704,677       1,433,553       1,347,440  
 
                       
Goodwill
    614,400       574,667       574,667  
Other intangibles, net
    14,821       9,426       10,307  
Noncurrent notes receivable
    7,609       8,457       8,812  
Other noncurrent assets
    39,228       31,692       35,218  
 
                 
Total Assets
  $ 3,071,582     $ 2,683,805     $ 2,667,727  
 
                 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Current Liabilities:
                       
Bank overdraft
  $ 12,168     $ 6,351     $ 4,071  
Accounts payable
    101,037       86,868       92,351  
Accrued salaries, benefits and payroll taxes
    16,528       21,262       19,153  
Pension and postretirement benefits
    7,769       9,120       5,265  
Accrued insurance and other taxes
    32,574       25,123       35,285  
Income taxes
    11,139             6,676  
Current maturities of long-term debt and commercial paper
    279,697       276,136       127,068  
Settlement for repurchases of common stock
          24,017       1,608  
Other current liabilities
    31,606       57,739       61,894  
 
                 
Total Current Liabilities
    492,518       506,616       353,371  
 
                       
Long-term debt
    1,153,032       848,186       1,051,527  
Pension, postretirement and postemployment benefits
    109,660       103,518       109,418  
Noncurrent deferred income taxes
    163,342       160,902       158,143  
Other noncurrent liabilities
    136,253       118,592       90,931  
 
                 
Total Liabilities
    2,054,805       1,737,814       1,763,390  
 
                 
 
                       
Shareholders’ Equity:
                       
Common stock, par value $0.01 per share
    413       412       417  
Preferred stock, par value $0.01 per share
                 
Additional paid-in capital
    67,893       50,955       72,195  
Accumulated other comprehensive loss
    (38,932 )     (37,032 )     (29,574 )
Retained earnings
    987,403       931,656       861,299  
 
                 
Total Shareholders’ Equity
    1,016,777       945,991       904,337  
 
                 
Total Liabilities and Shareholders’ Equity
  $ 3,071,582     $ 2,683,805     $ 2,667,727  
 
                 
See accompanying condensed notes to consolidated financial statements.
Page 3 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
    (In Thousands, Except Per Share Data)  
    (Unaudited)  
Net Sales
  $ 527,232     $ 530,162     $ 923,945     $ 940,914  
Freight and delivery revenues
    71,466       60,151       126,843       107,507  
 
                       
Total revenues
    598,698       590,313       1,050,788       1,048,421  
 
                       
 
                               
Cost of sales
    387,794       352,240       709,719       669,056  
Freight and delivery costs
    71,466       60,151       126,843       107,507  
 
                       
Total cost of revenues
    459,260       412,391       836,562       776,563  
 
                       
 
                               
Gross Profit
    139,438       177,922       214,226       271,858  
Selling, general & administrative expenses
    42,039       44,309       79,735       82,582  
Research and development
    134       186       312       389  
Other operating (income) and expenses, net
    (7,633 )     (2,828 )     (13,227 )     (5,318 )
 
                       
Earnings from Operations
    104,898       136,255       147,406       194,205  
 
                               
Interest expense
    19,301       16,702       35,138       27,902  
Other nonoperating (income) and expenses, net
    977       (1,154 )     102       (3,834 )
 
                       
 
                               
Earnings from continuing operations before income tax expense
    84,620       120,707       112,166       170,137  
Income tax expense
    26,306       38,320       32,988       55,022  
 
                       
Earnings from continuing operations
    58,314       82,387       79,178       115,115  
Gain on discontinued operations, net of related tax expense of $3,714, $458, $3,709 and $579, respectively
    5,490       565       5,491       827  
 
                       
Net Earnings
  $ 63,804     $ 82,952     $ 84,669     $ 115,942  
 
                       
 
                               
Net Earnings Per Common Share:
                               
Basic from continuing operations
  $ 1.41     $ 1.94     $ 1.92     $ 2.65  
Discontinued operations
    0.13       0.01       0.13       0.02  
 
                       
 
  $ 1.54     $ 1.95     $ 2.05     $ 2.67  
 
                       
 
                               
Diluted from continuing operations
  $ 1.39     $ 1.91     $ 1.89     $ 2.60  
Discontinued operations
    0.13       0.01       0.13       0.02  
 
                       
 
  $ 1.52     $ 1.92     $ 2.02     $ 2.62  
 
                       
 
                               
Cash Dividends Per Common Share
  $ 0.345     $ 0.275     $ 0.69     $ 0.55  
 
                       
 
                               
Reconciliation of denominators for basic and diluted earnings per share computations:
                               
Basic weighted average number of common shares
    41,333       42,458       41,328       43,498  
Effect of dilutive employee and director awards
    554       683       577       723  
 
                       
Diluted weighted average number of common shares and assumed conversions
    41,887       43,141       41,905       44,221  
 
                       
See accompanying condensed notes to consolidated financial statements.
Page 4 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    Six Months Ended  
    June 30,  
    2008     2007  
    (Dollars in Thousands)  
    (Unaudited)  
Net earnings
  $ 84,669     $ 115,942  
Adjustments to reconcile net earnings to cash provided by operating activities:
               
Depreciation, depletion and amortization
    81,697       73,407  
Stock-based compensation expense
    13,152       13,013  
Gains on divestitures and sales of assets
    (22,633 )     (3,258 )
Deferred income taxes
    14,440       2,612  
Excess tax benefits from stock-based compensation transactions
    (1,132 )     (17,659 )
Other items, net
    (907 )     (1,516 )
Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
               
Accounts receivable, net
    (76,146 )     (54,671 )
Inventories, net
    (4,446 )     (42,340 )
Accounts payable
    14,143       7,114  
Other assets and liabilities, net
    22,217       47,362  
 
           
 
               
Net cash provided by operating activities
    125,054       140,006  
 
           
 
               
Investing activities:
               
Additions to property, plant and equipment
    (159,408 )     (114,984 )
Acquisitions, net
    (218,389 )     (12,117 )
Proceeds from divestitures and sales of assets
    5,433       7,151  
Railcar construction advances
    (7,286 )      
Repayments of railcar construction advances
    7,286        
 
           
 
               
Net cash used for investing activities
    (372,364 )     (119,950 )
 
           
 
               
Financing activities:
               
Borrowings of long-term debt
    297,837       471,990  
Repayments of long-term debt and capital lease obligations
    (3,024 )     (452 )
Net borrowings (repayments) of commercial paper and line of credit
    3,000       (537 )
Termination of interest rate swap agreements
    (11,139 )      
Debt issuance costs
    (1,101 )     (807 )
Change in bank overdraft
    5,817       (4,319 )
Dividends paid
    (28,922 )     (24,343 )
Repurchases of common stock
    (24,017 )     (493,552 )
Issuances of common stock
    845       12,913  
Excess tax benefits from stock-based compensation transactions
    1,132       17,659  
 
           
 
               
Net cash provided by (used for) financing activities
    240,428       (21,448 )
 
           
 
               
Net decrease in cash and cash equivalents
    (6,882 )     (1,392 )
Cash and cash equivalents, beginning of period
    20,038       32,282  
 
           
 
               
Cash and cash equivalents, end of period
  $ 13,156     $ 30,890  
 
           
 
               
Noncash investing and financing activities:
               
Issuance of notes payable for acquisition of land
  $ 11,500     $ 3,252  
Repurchases of common stock to be settled
  $     $ 1,608  
 
               
Supplemental disclosures of cash flow information:
               
Cash paid for interest
  $ 34,530     $ 25,375  
Cash paid for income taxes
  $ 6,555     $ 1,906  
See accompanying condensed notes to consolidated financial statements.
Page 5 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
                                                 
                            Accumulated                
    Shares of             Additional     Other             Total  
    Common     Common     Paid-in     Comprehensive     Retained     Shareholders’  
(in thousands)   Stock     Stock     Capital (1)     Loss     Earnings     Equity  
 
Balance at December 31, 2007
    41,318     $ 412     $ 50,955     $ (37,032 )   $ 931,656     $ 945,991  
 
                                               
Net earnings
                            84,669       84,669  
Amortization of unrecognized actuarial losses, prior service costs and transition assets related to pension and postretirement benefits, net of tax effect of $673
                      1,031             1,031  
Foreign currency translation loss
                      (697 )           (697 )
Change in fair value of forward starting interest rate swap agreements, net of tax benefit of $1,463
                      (2,234 )           (2,234 )
 
                                             
Comprehensive earnings
                                            82,769  
 
                                               
Dividends declared
                            (28,922 )     (28,922 )
Issuances of common stock for stock award plans
    26       1       3,786                   3,787  
Stock-based compensation expense
                13,152                   13,152  
     
Balance at June 30, 2008
    41,344     $ 413     $ 67,893     $ (38,932 )   $ 987,403     $ 1,016,777  
     
(1) Additional paid-in-capital June 30, 2008 represents issuances of common stock, the pool of excess tax benefits and stock-based compensation expense.
See accompanying condensed notes to consolidated financial statements.
Page 6 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.  
Significant Accounting Policies
 
   
Basis of Presentation
 
   
The accompanying unaudited consolidated financial statements of Martin Marietta Materials, Inc. (the “Corporation”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and to Article 10 of Regulation S-X. The Corporation has continued to follow the accounting policies set forth in the audited consolidated financial statements and related notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 25, 2008. In the opinion of management, the interim financial information provided herein reflects all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods. The results of operations for the three and six months ended June 30, 2008 are not indicative of the results expected for other interim periods or the full year.
 
   
Comprehensive Earnings
 
   
Comprehensive earnings consist of net earnings, foreign currency translation adjustments, changes in the fair value of forward starting interest rate swap agreements and the amortization of unrecognized amounts related to pension and postretirement benefits. Comprehensive earnings for the three and six months ended June 30, 2008 were $65,725,000 and $82,769,000, respectively. For the three and six months ended June 30, 2007, comprehensive earnings were $88,601,000 and $122,419,000, respectively,
Page 7 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1.  
Significant Accounting Policies (continued)
 
   
Accounting Changes
 
   
Effective January 1, 2008, the Corporation partially adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“FAS 157”). FAS 157 does not require any new fair value measurements; rather, it establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework and expands disclosures about the use of fair value measurements. FAS 157 applies to all accounting pronouncements that require fair value measurements, except for the measurement of share-based payments. Additionally, in February 2008, the Corporation adopted Financial Accounting Standards Board Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2”). FSP 157-2 delays the effective date of FAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities until fiscal years beginning after November 15, 2008. At June 30, 2008, the categories of assets and liabilities to which the Corporation did not apply FAS 157 include: nonfinancial assets and liabilities initially measured at fair value in a business combination; reporting units measured at fair value in the first step of goodwill impairment testing; indefinite-lived intangible assets and nonfinancial long-lived assets measured at fair value for impairment assessment and asset retirement obligations.
 
   
Reclassifications
 
   
Certain 2007 amounts included on the consolidated balance sheet have been reclassed to conform to the 2008 presentation. The reclassifications had no impact on previously reported financial position.
 
2.  
Business Combinations and Divestitures
 
   
Business Combinations
 
   
On April 11, 2008, the Corporation entered into a swap transaction with Vulcan Materials Company (“Vulcan”), pursuant to which it acquired six quarry locations in North Georgia and Tennessee. The newly acquired locations significantly expand the Corporation’s presence in high-growth areas of Georgia and Tennessee, particularly south and west of Atlanta. The Corporation also acquired a land parcel previously leased from Vulcan at the Corporation’s Three Rivers Quarry near Paducah, Kentucky. For the year ended December 31, 2007, the Corporation’s newly acquired locations shipped nearly 4.5 million tons of aggregates and have aggregates reserves that exceed 300 million tons. The operating results of the acquired quarries have been included with those of the Corporation since the date of acquisition and are being reported through the Corporation’s Southeast Group in the financial statements.
Page 8 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2.  
Business Combinations and Divestitures (continued)
 
   
In addition to a $192,000,000 cash payment and normal closing adjustments related to working capital, the Corporation divested to Vulcan its only California quarry located in Oroville, an idle facility north of San Antonio, Texas, and land in Henderson, North Carolina, formerly leased to Vulcan. Furthermore, the Corporation recognized goodwill in the amount of $45,862,000. The fair values of the assets acquired from Vulcan were allocated as follows (dollars in thousands):
         
Inventories
  $ 6,559  
Mineral reserves
  $ 113,825  
Land
  $ 22,260  
Machinery and equipment
  $ 41,929  
Other intangibles
  $ 3,260  
   
Discontinued Operations
 
   
During 2008, the Corporation disposed of or permanently shut down certain operations, including its Oroville, California quarry, which was included in the West Group and divested as part of the Vulcan swap transaction. These divestitures represent discontinued operations, and, therefore, the results of their operations through the dates of disposal and any gain or loss on disposals are included in discontinued operations on the consolidated statements of earnings.
 
   
The discontinued operations included the following net sales, pretax loss or gain on operations, pretax gain on disposals, income tax expense and overall net earnings:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in Thousands)  
 
                               
Net sales
  $ 126     $ 4,643     $ 2,044     $ 8,423  
 
                       
 
                               
Pretax (loss) gain on operations
  $ (47 )   $ 386     $ 348     $ (192 )
Pretax gain on disposals
    9,251        637       8,852       1,598  
 
                       
Pretax gain
    9,204       1,023       9,200       1,406  
Income tax expense
    3,714       458       3,709        579  
 
                       
Net earnings
  $ 5,490     $ 565     $ 5,491     $ 827  
 
                       
Page 9 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3.  
Inventories
                         
    June 30,     December 31,     June 30,  
    2008     2007     2007  
    (Dollars in Thousands)  
 
                       
Finished products
  $ 255,853     $ 244,568     $ 250,937  
Products in process and raw materials
    15,817       18,642       20,461  
Supplies and expendable parts
    45,399       42,811       41,541  
 
                 
 
    317,069       306,021       312,939  
Less allowances
    (19,698 )     (19,136 )     (15,139 )
 
                 
Total
  $ 297,371     $ 286,885     $ 297,800  
 
                 
4.  
Intangible Assets
 
   
The following table shows changes in goodwill, all of which relate to the Aggregates business, by reportable segment and in total (dollars in thousands):
                                 
    Three Months Ended June 30, 2008  
            Southeast     West        
    Mideast Group     Group     Group     Total  
     
 
                               
Balance at beginning of period
  $ 119,766     $ 51,265     $ 407,416     $ 578,447  
Acquisitions
          45,862             45,862  
Divestitures
                (8,400 )     (8,400 )
Adjustments to purchase price allocations
    (1,509 )                 (1,509 )
     
Balance at end of period
  $ 118,257     $ 97,127     $ 399,016     $ 614,400  
     
 
                               
    Six Months Ended June 30, 2008  
            Southeast     West        
    Mideast Group     Group     Group     Total  
 
                               
Balance at beginning of period
  $ 115,986     $ 51,265     $ 407,416     $ 574,667  
Acquisitions
    3,780       45,862             49,642  
Divestitures
                (8,400 )     (8,400 )
Adjustments to purchase price allocations
    (1,509 )                 (1,509 )
     
Balance at end of period
  $ 118,257     $ 97,127     $ 399,016     $ 614,400  
     
Page 10 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4.  
Intangible Assets (continued)
 
   
During the six months ended June 30, 2008, the Corporation acquired $6,350,000 of other intangibles, consisting of the following amortizable intangible assets by segment:
                                 
    Aggregates     Specialty             Weighted-average  
    Business     Products     Total     amortization period  
     
    (Dollars in Thousands)          
 
                               
Noncompetition agreements
  $ 240     $ 285     $ 525     5.9 years
Customer relationships
    3,260             3,260     7.0 years
             
Total
  $ 3,500     $ 285     $ 3,785     6.8 years
             
   
The Corporation also acquired a $2,565,000 trade name related to the ElastoMag® product during 2008. The trade name, which is recorded within the Specialty Products segment, is deemed to have an indefinite life and will not be amortized.
5. Long-Term Debt
                         
    June 30,     December 31,     June 30,  
    2008     2007     2007  
    (Dollars in Thousands)  
 
                       
6.875% Notes, due 2011
  $ 249,876     $ 249,860     $ 249,844  
5.875% Notes, due 2008
    200,949       202,066       203,157  
6.9% Notes, due 2007
                124,999  
7% Debentures, due 2025
    124,340       124,331       124,321  
6.25% Senior Notes, due 2037
    247,808       247,795       247,782  
Floating Rate Senior Notes, due 2010
    224,519       224,388       224,256  
6.6% Senior Notes, due 2018
    297,868              
Commercial paper, interest rate of 3.10% at June 30, 2008
    75,000       72,000        
Acquisition notes, interest rates ranging from 2.11% to 8.00%
    651       662       684  
Other notes
    11,718       3,220       3,552  
 
                 
 
    1,432,729       1,124,322       1,178,595  
Less current maturities
    (279,697 )     (276,136 )     (127,068 )
 
                 
Total
  $ 1,153,032     $ 848,186     $ 1,051,527  
 
                 
   
On April 10, 2008, the Corporation amended its unsecured $250,000,000 Credit Agreement to add another class of loan commitments, which had the effect of increasing the borrowing base under the agreement by $75,000,000 (hereinafter, the “Credit Agreement”). Borrowings under the Credit Agreement are unsecured and may be used for general corporate purposes, including to support the Corporation’s commercial paper program. The Credit Agreement expires on June 30, 2012.
Page 11 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5.  
Long-Term Debt (continued)
 
   
On April 21, 2008, the Corporation completed the issuance of $300,000,000 of 6.6% Senior Notes due in 2018 (the “6.6% Senior Notes”). The 6.6% Senior Notes, which are unsecured, may be redeemed in whole or in part prior to their maturity at a make whole redemption price. Upon a change of control repurchase event and a below investment grade credit rating, the Corporation will be required to make an offer to repurchase all outstanding 6.6% Senior Notes at a price in cash equal to 101% of the principal amount of the 6.6% Senior Notes, plus any accrued and unpaid interest to, but not including, the purchase date.
 
   
In connection with the issuance of the 6.6% Senior Notes, on April 16, 2008, the Corporation unwound its two forward starting interest rate swap agreements with a total notional amount of $150,000,000 (the “Swap Agreements”). The Corporation made a cash payment of $11,139,000, which represented the fair value of the Swap Agreements on the date of termination. The accumulated other comprehensive loss at the date of termination will be recognized in earnings over the life of the 6.6% Senior Notes. For the quarter ended June 30, 2008, the Corporation recognized $165,000 of the accumulated other comprehensive loss as additional interest expense. At December 31, 2007 and June 30, 2007, the fair value of the Swap Agreements was a liability of $7,277,000 and an asset of $3,583,000, respectively. These fair values represented the estimated amount, using Level 2 observable market inputs for similar assets/liabilities, the Corporation expected to pay to terminate the Swap Agreements.
 
   
The carrying values of the Notes due in 2008 included $1,005,000, $2,187,000 and $3,341,000 at June 30, 2008, December 31, 2007 and June 30, 2007, respectively, for the unamortized value of terminated interest rate swaps.
 
   
Borrowings of $75,000,000 and $72,000,000 were outstanding under the commercial paper program at June 30, 2008 and December 31, 2007, respectively. No borrowings were outstanding at June 30, 2007.
 
   
The Corporation’s Credit Agreement contains a leverage ratio covenant that requires the Corporation’s ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), as defined, for the trailing twelve months (the “Ratio”) to not exceed 2.75 to 1.00 as of the end of any fiscal quarter. Furthermore, the covenant allows the Ratio to exclude debt incurred in connection with an acquisition for a period of 180 days, provided that the Ratio does not exceed 3.25 to 1.00. The Corporation was in compliance with the Ratio at June 30, 2008.
Page 12 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6.  
Income Taxes
                 
    Six Months Ended June 30,  
    2008     2007  
Estimated effective income tax rate:
               
Continuing operations
    29.4 %     32.3 %
 
           
Discontinued operations
    40.3 %     41.2 %
 
           
Overall
    30.2 %     32.4 %
 
           
   
The Corporation’s effective income tax rate reflects the effect of state income taxes and the impact of differences in book and tax accounting arising from the net permanent benefits associated with the depletion allowances for mineral reserves, the domestic production deduction and the tax effect of nondeductibility of goodwill related to asset sales. The effective income tax rates for discontinued operations reflect the tax effects of individual operations’ transactions and are not indicative of the Corporation’s overall effective income tax rate.
 
   
The decrease in the overall estimated effective tax rate for the six months ended June 30, 2008, as compared with the prior-year period, is primarily the result of discrete items related to effectively settling agreed upon issues from the Internal Revenue Service examination that covered the 2004 and 2005 tax years. Discrete items increased net earnings by $1,643,000, or $0.04 per diluted share, for the six months ended June 30, 2008.
 
   
The change in the year-to-date estimated overall effective income tax rate during the second quarter of 2008, when compared with the year-to-date effective tax rate as of March 31, 2008, decreased net earnings for the six months ended June 30, 2008 by $7,300,000, or $0.17 per diluted share. The first quarter 2008 effective tax rate was positively impacted by the settlement of the 2004 and 2005 tax examinations. The overall estimated effective tax rate for the six months ended June 30, 2008 is in line with management’s expectations for the full year 2008 tax rate of approximately 31.0%.
Page 13 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7.  
Pension and Postretirement Benefits
 
   
The following presents the estimated components of the recorded net periodic benefit cost for pension and postretirement benefits (dollars in thousands):
                                 
    Three Months Ended June 30,  
    Pension     Postretirement Benefits  
    2008     2007     2008     2007  
Service cost
  $ 2,744     $ 3,478     $ 148     $ 124  
Interest cost
    5,167       5,553        706        544  
Expected return on assets
    (5,384 )     (6,322 )            
Amortization of:
                               
Prior service cost (credit)
     164        191       (379 )     (251 )
Actuarial loss (gain)
    1,024       1,258       (18 )     (19 )
Settlement charge
    273                    
 
                       
Total net periodic benefit cost
  $ 3,988     $ 4,158     $ 457     $ 398  
 
                       
 
                               
    Six Months Ended June 30,  
    Pension     Postretirement Benefits  
    2008     2007     2008     2007  
Service cost
  $ 5,731     $ 6,182     $ 291     $ 320  
Interest cost
    10,793       9,870       1,386       1,401  
Expected return on assets
    (11,246 )     (11,237 )            
Amortization of:
                               
Prior service cost (credit)
     343        339       (744 )     (647 )
Actuarial loss (gain)
    2,140       2,237       (35 )     (48 )
Settlement charge
    273                    
 
                       
Total net periodic benefit cost
  $ 8,034     $ 7,391     $ 898     $ 1,026  
 
                       
8.  
Contingencies
 
   
In the opinion of management and counsel, it is unlikely that the outcome of litigation and other proceedings, including those pertaining to environmental matters, relating to the Corporation and its subsidiaries, will have a material adverse effect on the results of the Corporation’s operations, financial position or cash flows.
Page 14 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9.  
Business Segments
 
   
The Corporation conducts its aggregates operations through three reportable business segments: Mideast Group, Southeast Group and West Group. The operating results and assets of the quarries acquired in connection with the Vulcan transaction are being reported in the Southeast Group. The Corporation also has a Specialty Products segment that includes magnesia chemicals, dolomitic lime and targeted activity in structural composites.
 
   
The following tables display selected financial data for the Corporation’s reportable business segments. Corporate loss from operations primarily includes depreciation on capitalized interest, expenses for corporate administrative functions, unallocated corporate expenses and other nonrecurring and/or non-operational adjustments.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in Thousands)  
Total revenues:
                               
Mideast Group
  $    180,001     $    207,109     $ 304,583     $ 351,638  
Southeast Group
    149,981       136,045       275,973       262,636  
West Group
    218,565       203,684       372,242       348,289  
 
                       
Total Aggregates Business
    548,547       546,838       952,798       962,563  
Specialty Products
    50,151       43,475       97,990       85,858  
 
                       
Total
  $ 598,698     $ 590,313     $ 1,050,788     $ 1,048,421  
 
                       
 
                               
Net sales:
                               
Mideast Group
  $ 168,897     $ 194,092     $ 287,572     $ 331,366  
Southeast Group
    122,001       118,310       225,162       229,956  
West Group
    191,129       178,036       323,110       301,336  
 
                       
Total Aggregates Business
    482,027       490,438       835,844       862,658  
Specialty Products
    45,205       39,724       88,101       78,256  
 
                       
Total
  $ 527,232     $ 530,162     $ 923,945     $ 940,914  
 
                       
 
                               
Earnings (Loss) from operations:
                               
Mideast Group
  $ 61,427     $ 79,487     $ 93,534     $ 120,306  
Southeast Group
    13,436       27,662       22,926       48,845  
West Group
    32,106       31,487       33,535       29,956  
 
                       
Total Aggregates Business
    106,969       138,636       149,995       199,107  
Specialty Products
    9,744       8,114       18,821       15,492  
Corporate
    (11,815 )     (10,495 )     (21,410 )     (20,394 )
 
                       
Total
  $ 104,898     $ 136,255     $ 147,406     $ 194,205  
 
                       
Page 15 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9.  
Business Segments (continued)
 
   
Assets employed for the Southeast Group increased significantly since prior year as a result of assets acquired in connection with the Vulcan exchange transaction (see also Note 2).
                         
    June 30,     December 31,     June 30,  
    2008     2007     2007  
    (Dollars in Thousands)  
Assets employed:
                       
Mideast Group
  $ 873,355     $ 780,074     $ 788,127  
Southeast Group
    803,066       519,681       501,227  
West Group
    1,103,098       1,072,808       1,084,190  
 
                 
Total Aggregates Business
    2,779,519       2,372,563       2,373,544  
Specialty Products
    106,101       98,718       99,844  
Corporate
    185,962       212,524       194,339  
 
                 
Total
  $ 3,071,582     $ 2,683,805     $ 2,667,727  
 
                 
   
The asphalt, ready mixed concrete, road paving and other product lines are considered internal customers of the core aggregates business. Net sales by product line are as follows:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
    (Dollars in Thousands)  
Aggregates
  $ 454,722     $ 462,791     $ 786,099     $ 811,885  
Asphalt
    12,234       11,130       23,682       20,946  
Ready Mixed Concrete
    10,501       11,342       19,429       20,117  
Road Paving
    3,148       3,230       4,504       6,433  
Other
    1,422       1,945       2,130       3,277  
 
                       
Total Aggregates Business
    482,027       490,438       835,844       862,658  
Specialty Products
    45,205       39,724       88,101       78,256  
 
                       
Total
  $ 527,232     $ 530,162     $ 923,945     $ 940,914  
 
                       
Page 16 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10.  
Supplemental Cash Flow Information
 
   
The following table presents the components of the change in other assets and liabilities, net:
                 
    Six Months Ended June 30,  
    2008     2007  
    (Dollars in Thousands)  
 
               
Other current and noncurrent assets
  $ (5,745 )   $ (5,640 )
Notes receivable
    100       448  
Accrued salaries, benefits and payroll taxes
    (2,925 )     (5,857 )
Accrued insurance and other taxes
    7,451       2,988  
Accrued income taxes
    19,895       21,880  
Accrued pension, postretirement and postemployment benefits
    4,791       2,170  
Other current and noncurrent liabilities
    (1,350 )     31,373  
 
           
 
  $ 22,217     $ 47,362  
 
           
Page 17 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW  Martin Marietta Materials, Inc. (the “Corporation”), conducts its operations through four reportable business segments: Mideast Group, Southeast Group, West Group (collectively, the “Aggregates business”) and Specialty Products. The Corporation’s net sales and earnings are predominately derived from its Aggregates business, which processes and sells granite, limestone, and other aggregates products from a network of 291 quarries, distribution facilities and plants to customers in 31 states, Canada, the Bahamas and the Caribbean Islands. The Aggregates business’ products are used primarily by commercial customers principally in domestic construction of highways and other infrastructure projects and for commercial and residential buildings. The Specialty Products segment produces magnesia-based chemicals products used in industrial, agricultural and environmental applications; dolomitic lime sold primarily to customers in the steel industry; and structural composite products.
CRITICAL ACCOUNTING POLICIES  The Corporation outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 25, 2008. The following presents an update to the Property, Plant and Equipment critical accounting policy:
   
The Corporation begins capitalizing quarry development costs at a point when reserves are determined to be proven or probable, economically mineable and when demand supports investment in the market. Capitalization of these costs ceases when production commences. Quarry development costs are classified as land improvements.
 
   
There is diversity within the mining industry regarding the accounting treatment used to record pre-production stripping costs. At existing quarries, new pits may be developed to access additional reserves. Some companies within the industry expense pre-production stripping costs associated with new pits within a quarry. In making its determination as to the appropriateness of capitalizing or expensing pre-production stripping costs, management reviews the facts and circumstances of each situation when additional pits are developed within an existing quarry. If the additional pit operates in a separate and distinct area of a quarry, the costs are capitalized as quarry development costs and depreciated over the life of the uncovered reserves. Further, a separate asset retirement obligation is created for additional pits when the liability is incurred. Once a pit enters the production phase, all post-production stripping costs are expensed as incurred as periodic inventory production costs. During the quarter ended June 30, 2008, the Corporation capitalized $1 million of quarry development costs for a new pit being created at its Three Rivers quarry in Smithland, Kentucky.
Page 18 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
RESULTS OF OPERATIONS
Except as indicated, the following comparative analysis in the Results of Operations section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects results from continuing operations and is based on net sales and cost of sales.
Gross margin as a percentage of net sales and operating margin as a percentage of net sales represent non-GAAP measures. The Corporation presents these ratios calculated based on net sales, as it is consistent with the basis by which management reviews the Corporation’s operating results. Further, management believes it is consistent with the basis by which investors analyze the Corporation’s operating results given that freight and delivery revenues and costs represent pass-throughs and have no profit mark-up. Gross margin and operating margin calculated as percentages of total revenues represent the most directly comparable financial measures calculated in accordance with generally accepted accounting principles (“GAAP”). The following tables present the calculations of gross margin and operating margin for the three and six months ended June 30, 2008 and 2007 in accordance with GAAP and reconciliations of the ratios as percentages of total revenues to percentages of net sales (dollars in thousands):
Gross Margin in Accordance with GAAP
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
 
                               
Gross profit
  $ 139,438     $ 177,922     $ 214,226     $ 271,858  
 
                       
 
                               
Total revenues
  $ 598,698     $ 590,313     $ 1,050,788     $ 1,048,421  
 
                       
 
                               
Gross margin
    23.3 %     30.1 %     20.4 %     25.9 %
 
                       
Page 19 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Gross Margin Excluding Freight and Delivery Revenues
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
 
                               
Gross profit
  $ 139,438     $ 177,922     $ 214,226     $ 271,858  
 
                       
 
                               
Total revenues
  $ 598,698     $ 590,313     $ 1,050,788     $ 1,048,421  
Less: Freight and delivery revenues
    (71,466 )     (60,151 )     (126,843 )     (107,507 )
 
                       
Net sales
  $ 527,232     $ 530,162     $ 923,945     $ 940,914  
 
                       
 
                               
Gross margin excluding freight and delivery revenues
    26.4 %     33.6 %     23.2 %     28.9 %
 
                       
 
                               
Operating Margin in Accordance with GAAP
                               
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
 
                               
Earnings from operations
  $ 104,898     $ 136,255     $ 147,406     $ 194,205  
 
                       
 
                               
Total revenues
  $ 598,698     $ 590,313     $ 1,050,788     $ 1,048,421  
 
                       
 
                               
Operating margin
    17.5 %     23.1 %     14.0 %     18.5 %
 
                       
 
                               
Operating Margin Excluding Freight and Delivery Revenues
                               
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2008     2007     2008     2007  
 
                               
Earnings from operations
  $ 104,898     $ 136,255     $ 147,406     $ 194,205  
 
                       
 
                               
Total revenues
  $ 598,698     $ 590,313     $ 1,050,788     $ 1,048,421  
Less: Freight and delivery revenues
    (71,466 )     (60,151 )     (126,843 )     (107,507 )
 
                       
Net sales
  $ 527,232     $ 530,162     $ 923,945     $ 940,914  
 
                       
 
                               
Operating margin excluding freight and delivery revenues
    19.9 %     25.7 %     16.0 %     20.6 %
 
                       
Page 20 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Quarter Ended June 30
Notable items for the quarter ended June 30, 2008 included:
 
Earnings per diluted share of $1.52 compared with $1.92 for the prior-year quarter
 
Cost of petroleum-based products up $18 million, which reduced earnings per diluted share by $0.26
 
Heritage aggregates product line pricing up 6.3%, volume down 9.3%
 
Record Specialty Products’ earnings from operations up 20% from the prior-year quarter
 
Net sales of $527.2 million, down 1% compared with the prior-year quarter
 
Selling, general and administrative expenses down $2.3 million and 40 basis points as a percentage of net sales compared with the prior-year quarter
 
Acquisition and successful integration of six quarries from Vulcan Materials Company
 
Significant new transportation funding in North Carolina
 
Issuance of $300 million of Senior Notes
Page 21 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
The following table presents net sales, gross profit, selling, general and administrative expenses and earnings (loss) from operations data for the Corporation and its reportable segments for the three months ended June 30, 2008 and 2007. In each case, the data is stated as a percentage of net sales of the Corporation or the relevant segment, as the case may be.
Earnings from operations include research and development expense and other operating income and expenses, net. Research and development expense for the Corporation was $0.1 million and $0.2 million for the quarters ended June 30, 2008 and 2007, respectively. Consolidated other operating income and expenses, net, was income of $7.6 million and $2.8 million for the quarters ended June 30, 2008 and 2007, respectively.
                                 
    Three Months Ended June 30,  
    2008     2007  
            % of             % of  
    Amount     Net Sales     Amount     Net Sales  
    (Dollars in Thousands)  
Net sales:
                               
Mideast Group
  $ 168,897             $ 194,092          
Southeast Group
    122,001               118,310          
West Group
    191,129               178,036          
 
                           
Total Aggregates Business
    482,027       100.0       490,438       100.0  
Specialty Products
    45,205       100.0       39,724       100.0  
 
                       
Total
  $ 527,232       100.0     $ 530,162       100.0  
 
                       
 
                               
Gross profit:
                               
Mideast Group
  $ 66,554             $ 90,434          
Southeast Group
    19,459               33,496          
West Group
    40,833               41,463          
 
                           
Total Aggregates Business
    126,846       26.3       165,393       33.7  
Specialty Products
    12,398       27.4       10,947       27.6  
Corporate
     194             1,582        
 
                       
Total
  $ 139,438       26.4     $ 177,922       33.6  
 
                       
 
                               
Selling, general & administrative expenses:
                               
Mideast Group
  $ 11,787             $ 11,795          
Southeast Group
    6,677               6,545          
West Group
    11,179               11,528          
 
                           
Total Aggregates Business
    29,643       6.1       29,868       6.1  
Specialty Products
    2,537       5.6       2,653       6.7  
Corporate
    9,859             11,788        
 
                       
Total
  $ 42,039       8.0     $ 44,309       8.4  
 
                       
Page 22 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
                                 
    Three Months Ended June 30,  
    2008     2007  
            % of             % of  
    Amount     Net Sales     Amount     Net Sales  
    (Dollars in Thousands)  
Earnings (Loss) from operations:
                               
Mideast Group
  $ 61,427             $ 79,487          
Southeast Group
    13,436               27,662          
West Group
    32,106               31,487          
 
                           
Total Aggregates Business
    106,969       22.2       138,636       28.3  
Specialty Products
    9,744       21.6       8,114       20.4  
Corporate
    (11,815 )           (10,495 )      
 
                       
Total
  $ 104,898       19.9     $ 136,255       25.7  
 
                       
The economic environment of the second quarter of 2008 was one of the most challenging in the aggregates industry’s history. The Corporation faced diesel fuel and natural gas costs that escalated nearly 60%, a ninth consecutive quarter of declining aggregates product line volume, and its resulting impact on operating leverage as production volumes were aligned with sales expectations. Nonetheless, the Corporation’s management team and employees did an excellent job of matching operating levels with demand and aggressively addressed controllable costs.
Net sales for the Aggregates business for the 2008 second quarter were $482.0 million, a 1.7% decline compared with 2007 second-quarter sales of $490.4 million. Heritage aggregates product line pricing increased 6.3%. Heritage aggregates product line volumes decreased 9.3% in the second quarter.
The West Group generated net sales of $191.1 million, an increase of 7.4% over the prior-year quarter. The West Group’s results were driven by a 4.4% increase in heritage aggregates product line volume resulting from the comparative strength of the infrastructure and commercial construction markets in Texas, Oklahoma and Iowa. Shipments in Iowa increased over 9% during the quarter despite severe flooding in much of the state; however, lower production levels and higher operating costs as a result of the flooding had a negative impact on profitability compared with expectations and the prior-year period. Infrastructure demand in other key states, including North Carolina and Georgia, remains challenging to forecast as rising costs of construction materials have constrained state highway budgets as well as municipal spending. Demand dropped significantly in the Mideast Group, as the usually resilient North Carolina and South Carolina markets experience the effects of residential construction declines in addition to weakening infrastructure expenditures. Several states are taking active measures to address their infrastructure funding needs; however, it is difficult to predict the impact of these measures on volume levels for the remainder of 2008.
Page 23 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
The following tables present volume and pricing data and shipments data for the aggregates product line. Heritage aggregates operations exclude volume and pricing data for acquisitions that were not included in prior-year operations for the comparable period and divestitures.
                 
    Three Months Ended  
    June 30, 2008  
    Volume     Pricing  
Volume/Pricing Variance (1)
               
Heritage Aggregates Product Line (2):
               
Mideast Group
    (22.3 %)     12.0 %
Southeast Group
    (9.9 %)     6.5 %
West Group
    4.4 %     3.9 %
Heritage Aggregates Operations
    (9.3 %)     6.3 %
Aggregates Product Line (3)
    (8.5 %)     6.4 %
                 
    Three Months Ended  
    June 30,  
    2008     2007  
    (tons in thousands)  
Shipments
               
Heritage Aggregates Product Line (2):
               
Mideast Group
    14,994       19,302  
Southeast Group
    10,144       11,260  
West Group
    19,716       18,892  
 
           
Heritage Aggregates Operations
    44,854       49,454  
Acquisitions
     930        
Divestitures(4)
    15       588  
 
           
Aggregates Product Line (3)
    45,799       50,042  
 
           
(1)  
Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.
(2)  
Heritage Aggregates Product Line excludes volume and pricing data for acquisitions that have not been included in prior-year operations for the comparable period and divestitures.
(3)  
Aggregates Product Line includes all acquisitions from the date of acquisition and divestitures through the date of disposal.
(4)  
Divestitures include the tons related to divested aggregates product line operations up to the date of divestiture.
The Aggregates business is significantly affected by seasonal changes and other weather-related conditions. Aggregates production and shipment levels coincide with general construction activity levels, most of which occurs in the spring, summer and fall. Thus, production and shipment levels vary by quarter. Operations concentrated in the northern United States generally experience more severe winter weather conditions than operations in the Southeast and Southwest. Excessive rainfall, and conversely excessive drought, can also jeopardize shipments, production and profitability. Because of the potentially significant impact of weather on the Corporation’s operations, second quarter results are not indicative of expected performance for other interim periods or the full year.
Page 24 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
The Specialty Products segment, which includes magnesia chemicals, dolomitic lime and targeted activity in structural composites, continued to perform exceptionally well. The United States’ steel market has remained strong, leading to increased demand for dolomitic lime. The Corporation has experienced increased demand for magnesia-based chemicals products used in a number of environmental applications as well as for its flame retardant products. The Specialty Products business delivered record second-quarter net sales of $45.2 million, an increase of 13.8% compared with the prior-year quarter, and record earnings from operations of $9.7 million, an increase of 20% compared with the prior-year quarter. The business’ operating margin excluding freight and delivery revenues increased 120 basis points to 21.6% for the quarter.
The rapid and extreme increases in the cost of petroleum-based products affected both costs and sales. Liquid asphalt, used in the production of asphalt paving products, increased approximately 135% over the prior year with average prices approaching $700 per ton. The Corporation’s customers cannot react quickly enough to these escalating costs and, when possible, have made the choice to defer work in anticipation of future potential cost reductions. Cost control initiatives in place throughout the Corporation served to limit the increase in consolidated cost of sales, despite the nearly 60% increase in diesel fuel and natural gas costs compared with the prior-year quarter. The rise in the cost of petroleum-based products alone resulted in additional production costs of $18 million, or $0.26 per diluted share, for the quarter. Compounding the sharply-escalating energy costs, the Corporation incurred expenses of $24 million, or $0.35 per diluted share, to control aggregates production and reduce inventory levels.
Selling, general and administrative expenses for the quarter ended June 30, 2008 were $42.0 million versus $44.3 million in the 2007 period, a decrease of $2.3 million. The Corporation’s focus and execution on cost control decreased selling, general and administrative expenses as a percentage of net sales to 8.0% from 8.4% for the prior-year quarter.
Among other items, other operating income and expenses, net, includes gains and losses on the sale of assets; gains and losses related to certain accounts receivable; rental, royalty and services income; and the accretion and depreciation expenses related to Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations. For the second quarter, consolidated other operating income and expenses, net, was income of $7.6 million in 2008 compared with $2.8 million in 2007, primarily as a result of a $7.2 million gain on the disposals of an idle facility north of San Antonio, Texas (West Group), and land in Henderson, North Carolina (Mideast Group), in connection with the Vulcan Materials Company (“Vulcan”) exchange transaction (see also page 30).
Consolidated interest expense was $19.3 million for the second quarter 2008 as compared with $16.7 million for the prior-year quarter. The increase primarily resulted from interest for the 6.6% Senior Notes issued in April 2008, as well as other short-term borrowings.
Page 25 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
In addition to other offsetting amounts, other nonoperating income and expenses, net, are comprised generally of interest income, net equity earnings from nonconsolidated investments and eliminations of minority interests for consolidated non-wholly owned subsidiaries. Consolidated other nonoperating income and expenses, net, for the quarter ended June 30, was expense of $1.0 million in 2008 compared with income of $1.2 million in 2007, primarily as a result of higher earnings from consolidated subsidiaries which increased the expense for the elimination of minority interests in 2008. Additionally, earnings on nonconsolidated investments were lower as compared with 2007.
Six Months Ended June 30
Notable items for the six months ended June 30, 2008 included:
 
Earnings per diluted share of $2.02 compared with $2.62 for the prior-year period
 
Net sales of $923.9 million, down 2% compared with the prior-year period
 
Heritage aggregates product line pricing up 5.1%, volume down 8.9%
 
Specialty Products earnings from operations up 21.5% from prior-year period
 
Acquisition and integration of six quarry acquisitions from Vulcan Materials Company, plus two other small acquisitions
 
Issuance of $300 million of Senior Notes
The following table presents net sales, gross profit, selling, general and administrative expenses and earnings (loss) from operations data for the Corporation and its reportable segments for the six months ended June 30, 2008 and 2007. In each case, the data is stated as a percentage of net sales of the Corporation or the relevant segment, as the case may be.
Earnings from operations include research and development expense and other operating income and expenses, net. Research and development expense for the Corporation was $0.3 million and $0.4 million for the six months ended June 30, 2008 and 2007, respectively. Consolidated other operating income and expenses, net, was income of $13.2 million and $5.3 million for the six months ended June 30, 2008 and 2007, respectively.
Page 26 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
                                 
    Six Months Ended June 30,  
    2008     2007  
            % of             % of  
    Amount     Net Sales     Amount     Net Sales  
    (Dollars in Thousands)  
Net sales:
                               
Mideast Group
  $ 287,572             $ 331,366          
Southeast Group
    225,162               229,956          
West Group
    323,110               301,336          
 
                           
Total Aggregates Business
    835,844       100.0       862,658       100.0  
Specialty Products
    88,101       100.0       78,256       100.0  
 
                       
Total
  $ 923,945       100.0     $ 940,914       100.0  
 
                       
 
                               
Gross profit:
                               
Mideast Group
  $ 103,951             $ 141,792          
Southeast Group
    35,344               60,634          
West Group
    52,584               49,928          
 
                           
Total Aggregates Business
    191,879       23.0       252,354       29.3  
Specialty Products
    24,146       27.4       21,133       27.0  
Corporate
    (1,799 )           (1,629 )      
 
                       
Total
  $ 214,226       23.2     $ 271,858       28.9  
 
                       
 
                               
Selling, general & administrative expenses:
                               
Mideast Group
  $ 23,105             $ 23,325          
Southeast Group
    13,186               12,812          
West Group
    22,473               22,947          
 
                           
Total Aggregates Business
    58,764       7.0       59,084       6.8  
Specialty Products
    5,055       5.7       5,341       6.8  
Corporate
    15,916             18,157        
 
                       
Total
  $ 79,735       8.6     $ 82,582       8.8  
 
                       
 
                               
Earnings (Loss) from operations:
                               
Mideast Group
  $ 93,534             $ 120,306          
Southeast Group
    22,926               48,845          
West Group
    33,535               29,956          
 
                           
Total Aggregates Business
    149,995       17.9       199,107       23.1  
Specialty Products
    18,821       21.4       15,492       19.8  
Corporate
    (21,410 )           (20,394 )      
 
                       
Total
  $ 147,406       16.0     $ 194,205       20.6  
 
                       
Page 27 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Net sales for the Aggregates business for the six months ended June 30 were $835.8 million in 2008, a 3.1% decline versus 2007 net sales of $862.7 million. Aggregates pricing at heritage locations was up 5.1%, while volume decreased 8.9%. Inclusive of acquisitions and divestitures, aggregates pricing for the six months ended June 30, 2008 increased 5.2% and aggregates product line volume decreased 8.6%.
The following tables present volume and pricing data and shipments data for the aggregates product line. Heritage aggregates operations exclude volume and pricing data for acquisitions that were not included in prior-year operations for the comparable period and divestitures.
                 
    Six Months Ended  
    June 30, 2008  
    Volume     Pricing  
Volume/Pricing Variance (1)
               
Heritage Aggregates Product Line (2):
               
Mideast Group
    (22.8 %)     12.3 %
Southeast Group
    (10.6 %)     5.6 %
West Group
    6.2 %     2.1 %
Heritage Aggregates Operations
    (8.9 %)     5.1 %
Aggregates Product Line (3)
    (8.6 %)     5.2 %
                 
    Six Months Ended  
    June 30,  
    2008     2007  
    (tons in thousands)  
Shipments
               
Heritage Aggregates Product Line (2):
               
Mideast Group
    24,734       32,025  
Southeast Group
    19,212       21,481  
West Group
    33,731       31,746  
 
           
Heritage Aggregates Operations
    77,677       85,252  
Acquisitions
     930        
Divestitures(4)
    259       1,070  
 
           
Aggregates Product Line (3)
    78,866       86,322  
 
           
(1)  
Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.
(2)  
Heritage Aggregates Product Line excludes volume and pricing data for acquisitions that have not been included in prior-year operations for the comparable period and divestitures.
(3)  
Aggregates Product Line includes all acquisitions from the date of acquisition and divestitures through the date of disposal.
(4)  
Divestitures include the tons related to divested aggregates product line operations up to the date of divestiture.
Page 28 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Specialty Products’ net sales were $88.1 million for the first six months of 2008 compared with $78.3 million for the prior-year period. Earnings from operations for the six months ended June 30, 2008 were $18.8 million compared with $15.5 million in the year-earlier period. Increased sales of magnesia chemical products and dolomitic lime contributed to these results.
Selling, general and administrative expenses for the six months ended June 30, 2008 were $79.7 million versus $82.6 million in the 2007 period. Selling, general and administrative expenses decreased 3.4% as the focus on cost control extended to all aspects of the business.
For the six months ended June 30, consolidated other operating income and expenses, net, was income of $13.2 million in 2008 compared with $5.3 million in 2007, primarily as a result of a $7.2 million gain on the disposals of an idle facility north of San Antonio, Texas (West Group), and land in Henderson, North Carolina (North Carolina), in connection with the Vulcan exchange transaction (see also page 30).
Consolidated interest expense was $35.1 million for the six months ended June 30, 2008 as compared with $27.9 million for the prior-year period. The increase primarily resulted from interest for the 6.6% Senior Notes issued in April 2008, as well as other short-term borrowings.
The change in the year-to-date estimated overall effective income tax rate during the second quarter of 2008, when compared with the year-to-date effective tax rate as of March 31, 2008, decreased net earnings for the six months ended June 30, 2008 by $7,300,000, or $0.17 per diluted share. The first quarter 2008 effective tax rate was positively impacted by the settlement of the 2004 and 2005 tax examinations. The overall estimated effective tax rate for the six months ended June 30, 2008 is in line with management’s expectations for the full year 2008 tax rate of approximately 31.0%.
LIQUIDITY AND CAPITAL RESOURCES  Net cash provided by operating activities during the six months ended June 30, 2008 was $125.1 million compared with $140.0 million in the comparable period of 2007. Operating cash flow is generally from net earnings, before deducting depreciation, depletion and amortization, offset by working capital requirements. Net cash provided by operating activities for the first six months of 2008 as compared with the year-earlier period reflects lower net earnings before depreciation, depletion and amortization and a higher increase in accounts receivable, partially offset by a decline in the rate of inventory build as the Corporation managed production and inventory levels and decreased tax benefits from stock option exercise activity.
Page 29 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Depreciation, depletion and amortization was as follows (dollars in millions):
                 
    Six Months Ended  
    June 30,  
    2008     2007  
Depreciation
  $ 78.3     $ 69.8  
Depletion
    1.8       2.1  
Amortization
    1.6       1.5  
 
           
 
  $ 81.7     $ 73.4  
 
           
The seasonal nature of the construction aggregates business impacts quarterly operating cash flow when compared with the year. Full year 2007 net cash provided by operating activities was $395.6 million, compared with $140.0 million for the first six months of 2007.
First six months capital expenditures, exclusive of acquisitions, were $159.4 million in 2008 and $115.0 million in 2007. Capital expenditures during the first six months of 2008 included work on several major plant expansion and efficiency projects. Comparable full-year capital expenditures were $264.9 million in 2007. Full-year capital spending is expected to approximate $240 million for 2008, including capital spending in connection with the Hunt Martin joint venture and exclusive of acquisitions. The Aggregates business expects its new plant in Augusta, Georgia, will begin operations in the fourth quarter of 2008 versus the prior forecast of second quarter 2009. The earlier completion of this project, which increases capacity from 2 million tons to 6 million tons annually, is expected to increase the Corporation’s market share in high-growth markets in Georgia and Florida.
During the first six months of 2008 and 2007, the Corporation paid $218.4 million and $12.1 million, respectively, for acquisitions. On April 11, 2008, the Corporation entered into a swap transaction with Vulcan, pursuant to which it acquired six quarry locations in North Georgia and Tennessee. In addition to a $192.0 million cash payment plus normal closing adjustments for working capital, the Corporation divested to Vulcan its only California quarry located in Oroville, an idle facility north of San Antonio, Texas, and land in Henderson, North Carolina, formerly leased to Vulcan. As part of the transaction, the Corporation also acquired a land parcel previously leased from Vulcan at its Three Rivers Quarry near Paducah, Kentucky. During 2008, the Corporation also acquired certain assets of the Specialty Magnesia Division of Morton International, Inc. relating to the ElastoMag® product and a granite quarry near Asheboro, North Carolina that contains approximately 40 million tons of reserves.
Page 30 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
The Corporation can purchase its common stock through open-market purchases pursuant to authority granted by its Board of Directors. The Corporation did not repurchase any shares of common stock during the six months ended June 30, 2008. However, $24.0 million in cash was used during January 2008 to settle common stock repurchases made as of December 31, 2007. During the six months ended June 30, 2007, the Corporation repurchased 3,585,000 shares at an aggregate cost of $495.2 million. At June 30, 2008, 5,042,000 shares of common stock were remaining under the Corporation’s repurchase authorization.
The Corporation’s five-year revolving credit agreement (the “Credit Agreement”) contains a leverage ratio covenant that requires the Corporation’s ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), as defined, for the trailing twelve months (the “Ratio”) to not exceed 2.75 to 1.00 as of the end of any fiscal quarter. Furthermore, the covenant allows the Ratio to exclude debt incurred in connection with an acquisition for a period of 180 days, provided that the Ratio does not exceed 3.25 to 1.00. The Ratio is calculated as total long-term debt divided by consolidated EBITDA, as defined, for the trailing twelve months. Consolidated EBITDA is generally defined as earnings before interest expense, income tax expense, and depreciation, depletion and amortization expense for continuing operations. Additionally, stock-based compensation expense is added back and interest income is deducted in the calculation of consolidated EBITDA. Certain other nonrecurring items and noncash items, if they occur, can affect the calculation of consolidated EBITDA. At June 30, 2008, the Corporation’s ratio of consolidated debt to consolidated EBITDA, as defined, for the trailing twelve month EBITDA was 2.55 and was calculated as follows (dollars in thousands):
         
    Twelve Month Period  
    July 1, 2007 to  
    June 30, 2008  
 
       
Earnings from continuing operations
  $ 224,649  
Add back:
       
Interest expense
    68,128  
Income tax expense
    94,039  
Depreciation, depletion and amortization expense
    156,634  
Stock-based compensation expense
    19,826  
Deduct:
       
Interest income
    (1,260 )
 
     
Consolidated EBITDA, as defined
  $ 562,016  
 
     
Consolidated debt at June 30, 2008
  $ 1,432,729  
 
     
Consolidated debt to consolidated EBITDA, as defined, at June 30, 2008 for the trailing twelve month EBITDA
    2.55  
 
     
Page 31 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
The management team and Board of Directors have focused on establishing prudent leverage targets that provide for value creation through strong operational performance, continued investment in internal growth opportunities, financial flexibility to support opportunistic and strategic acquisitions and a return of cash to shareholders through sustainable dividends and share repurchase programs while maintaining a solid investment grade rating. Given these parameters, in the ordinary course of business and absent any future debt incurred in connection with an acquisition, the Corporation expects to manage its leverage within a range of 2.0 to 2.5 times consolidated debt to consolidated earnings before interest, taxes, depreciation, depletion and amortization (EBITDA), as defined by the underlying credit agreement. At June 30, 2008, the Corporation’s ratio of consolidated debt to consolidated EBITDA of 2.55 was outside management’s targeted range, primarily as a result of the financing for the Vulcan transaction. The Corporation plans to use available free cash flow to pay down outstanding debt balances and move within its targeted range by December 31, 2008.
On April 10, 2008, the Corporation amended its unsecured $250 million Credit Agreement to add another class of loan commitments, which had the effect of increasing the borrowing base under the agreement by $75 million. Borrowings under the Credit Agreement are unsecured and may be used for general corporate purposes, including to support the Corporation’s commercial paper program. The Credit Agreement expires on June 30, 2012.
On April 21, 2008, the Corporation completed the issuance of $300 million of 6.6% Senior Notes due in 2018 (the “6.6% Senior Notes”). The 6.6% Senior Notes, which are unsecured, may be redeemed in whole or in part prior to their maturity at a make whole redemption price. Upon a change of control repurchase event and a below investment grade credit rating, the Corporation will be required to make an offer to repurchase all outstanding 6.6% Senior Notes at a price in cash equal to 101% of the principal amount of the 6.6% Senior Notes, plus any accrued and unpaid interest to, but not including, the purchase date.
In connection with the issuance of $300 million of 6.6% Senior Notes due in 2018, on April 16, 2008, the Corporation unwound its two forward starting interest rate swap agreements with a total notional amount of $150 million (the “Swap Agreements”). The Corporation made a cash payment of $11.1 million, which represented the fair value of the Swap Agreements on the date of termination. The accumulated other comprehensive loss at the date of termination will be recognized in earnings over the life of the new Notes.
Page 32 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Based on prior performance and current expectations, the Corporation’s management believes that cash flows from internally generated funds and its access to capital markets are expected to continue to be sufficient to provide the capital resources necessary to fund the operating needs of its existing businesses, cover debt service requirements, and allow for payment of dividends. However, the Corporation is exposed to risk from tightening credit markets, through the interest cost related to its $225 million Floating Rate Senior Notes due in 2010 and the availability and interest cost related to its commercial paper program which is rated A-2 by Standard and Poor’s and P-2 by Moody’s. Commercial paper of $75 million was outstanding at June 30, 2008.
The Corporation may be required to obtain additional levels of financing in order to fund certain strategic acquisitions, if any such opportunities arise. Currently, the Corporation’s senior unsecured debt is rated BBB+ by Standard & Poor’s and Baa1 by Moody’s. The Corporation’s commercial paper obligations are rated A-2 by Standard & Poor’s and P-2 by Moody’s. While management believes its credit ratings will remain at an investment-grade level, no assurance can be given that these ratings will remain at those levels.
Contractual Obligations
At June 30, 2008, the Corporation’s contractual obligations related to its 6.6% Senior Notes issued in April 2008 were as follows:
                                         
    Total     < 1 yr     1-3 yrs.     3-5 yrs.     > 5 yrs.  
     
Long-term debt
  $ 300,000     $     $     $     $ 300,000  
Interest (off balance sheet)
    197,663       23,588       39,600       39,600       94,875  
     
Total
  $ 497,663     $ 23,588     $ 39,600     $ 39,600     $ 394,875  
     
ACCOUNTING CHANGES  As discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2008, the Corporation partially adopted FAS 157.
TRENDS AND RISKS  The Corporation outlined the risks associated with its business in its Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 25, 2008. Management continues to evaluate its exposure to all operating risks on an ongoing basis.
During second quarter 2008, the North Carolina legislature passed a budget that provided funding for the construction of four toll road projects for a total of $3.2 billion. The first of these projects is scheduled for letting in the third quarter of 2008 with completion in 2011 and is valued at approximately $1 billion and will consume about 2 million tons of aggregates. Two additional projects will begin in 2009 and the remaining one is scheduled for 2010. These three projects are estimated to consume 4.5 million tons of aggregates. Of the total 6.5 million tons for the four projects, the Aggregates business should be fully competitive on about 85%.
Page 33 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
OUTLOOK 2008  The Corporation’s 2008 outlook has turned decidedly more cautious in the past few months as the shock of high oil prices has affected both demand for its products and its costs. A challenging economic environment, energy inflation, credit market uncertainty and lagging infrastructure demand make forecasting increasingly difficult. Accordingly, management is adjusting downward its range for 2008 net earnings per diluted share to $5.00 to $5.65 from $6.25 to $7.00. Even in this difficult environment, management’s outlook for 2008 pricing for its Aggregates business remains positive. Accordingly, management reaffirms its 6.0% to 8.0% range for the rate of heritage aggregates price increases in 2008. Over the balance of the year, management expects infrastructure volumes in certain of the Corporation’s key states to be affected more by funding limitations than underlying demand. In addition, the sharp increase in diesel fuel prices may continue to affect infrastructure volume as customers do not have funding mechanisms to react quickly to the increases currently being experienced in liquid asphalt and other petroleum-based raw materials. However, assuming that recent downward trends in oil and commodity pricing continue, this could be a catalyst in turning demand in a positive direction. Residential construction continues to be dismal, but management still expects that large industrial commercial projects will be a plus for second-half 2008 results. As a result, the Corporation is lowering its range for 2008 heritage aggregates volumes to be down 3% to down 6%, both exclusive of acquisitions. The lime and magnesia chemicals businesses are fully expected to deliver record levels of net sales and earnings, thereby generating $36 million to $38 million in pretax earnings from Specialty Products.
The 2008 estimated earnings range includes management’s assessment of the likelihood of certain risk factors that will affect performance within the range. The most significant risk to 2008 earnings, whether within or outside current earnings expectations, continues to be the performance of the United States economy and its effect on construction activity.
Risks to the earnings range are primarily volume-related and include a greater-than-expected drop in demand as a result of the continued decline in residential construction, a decline in commercial construction, delays in infrastructure projects, or some combination thereof. Further, increased highway construction funding pressures as a result of either federal or state issues can affect profitability. Currently, North Carolina, Georgia, Texas, and South Carolina are experiencing state-level funding pressures, and these states may disproportionately affect profitability. The level of aggregates demand in the Corporation’s end-use markets, production levels and the management of production costs will affect the operating leverage of the Aggregates business and, therefore, profitability. Production costs in the aggregates business are also sensitive to energy prices, the costs of repair and supply parts, and the start-up expenses for large-scale plant projects. The continued rising cost of diesel and other fuels increases production costs either directly through consumption or indirectly through the increased cost of energy-related consumables, namely steel, explosives, tires and conveyor belts. Sustained periods of diesel fuel cost at the current level will continue to have a negative impact on profitability. The availability of transportation in the Corporation’s long-haul network, particularly the availability of barges on the
Page 34 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Mississippi River system and the availability of rail cars and locomotive power to move trains, affects the Corporation’s ability to efficiently transport material into certain markets, most notably Texas and the Gulf Coast region. The Aggregates business is also subject to weather-related risks that can significantly affect production schedules and profitability. Hurricane activity in the Atlantic Ocean and Gulf Coast generally is most active during the third and fourth quarters. Opportunities to reach the upper end of the earnings range depend on the aggregates product line demand exceeding expectations.
Risks to earnings outside of the range include a change in volume beyond current expectations as a result of economic events outside of the Corporation’s control. In addition to the impact of residential and commercial construction, the Corporation is exposed to risk in its earnings expectations from tightening credit markets and the availability of and interest cost related to its commercial paper program, which is rated A-2 by Standards & Poor’s and P-2 by Moody’s. Commercial paper of $75 million was outstanding at June 30, 2008.
OTHER MATTERS  If you are interested in Martin Marietta Materials, Inc. stock, management recommends that, at a minimum, you read the Corporation’s current Annual Report and Forms 10-K, 10-Q and 8-K reports to the SEC over the past year. The Corporation’s recent proxy statement for the annual meeting of shareholders also contains important information. These and other materials that have been filed with the SEC are accessible through the Corporation’s web site at www.martinmarietta.com and are also available at the SEC’s web site at www.sec.gov. You may also write or call the Corporation’s Corporate Secretary, who will provide copies of such reports.
Investors are cautioned that all statements in this Quarterly Report that relate to the future involve risks and uncertainties, and are based on assumptions that the Corporation believes in good faith are reasonable but which may be materially different from actual results. Forward-looking statements give the investor our expectations or forecasts of future events. You can identify these statements by the fact that they do not relate only to historical or current facts. They may use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words of similar meaning in connection with future events or future operating or financial performance. Any or all of our forward-looking statements here and in other publications may turn out to be wrong.
Page 35 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter and Six Months Ended June 30, 2008
(Continued)
Factors that the Corporation currently believes could cause actual results to differ materially from the forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to, the level and timing of federal and state transportation funding, particularly in North Carolina and Georgia, two of the Corporation’s largest and most profitable states, and in South Carolina, the Corporation’s fifth largest state as measured by 2007 Aggregates business’ net sales; levels of construction spending in the markets the Corporation serves; the severity and duration of a continued decline in the residential construction market and the impact on commercial construction; unfavorable weather conditions, including hurricane activity; the ability to recognize quantifiable savings from internal expansion projects; the ability to successfully integrate acquisitions quickly and in a cost-effective manner; the volatility of fuel costs, most notably diesel fuel, liquid asphalt and natural gas; continued increases in the cost of repair and supply parts; logistical issues and costs, notably barge availability on the Mississippi River system and the availability of railcars and locomotive power to move trains to supply the Corporation’s Texas and Gulf Coast markets; continued strength in the steel industry markets served by the Corporation’s dolomitic lime products; and other risk factors listed from time to time found in the Corporation’s filings with the Securities and Exchange Commission. Other factors besides those listed here may also adversely affect the Corporation and may be material to the Corporation. The Corporation assumes no obligation to update any forward-looking statements.
INVESTOR ACCESS TO COMPANY FILINGS  Shareholders may obtain, without charge, a copy of Martin Marietta Materials’ Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2007, by writing to:
Martin Marietta Materials, Inc.
Attn: Corporate Secretary
2710 Wycliff Road
Raleigh, North Carolina 27607-3033
Additionally, Martin Marietta Materials’ Annual Report, press releases and filings with the Securities and Exchange Commission, including Forms 10-K, 10-Q, 8-K and 11-K, can generally be accessed via the Corporation’s web site. Filings with the Securities and Exchange Commission accessed via the web site are available through a link with the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. Accordingly, access to such filings is available upon EDGAR placing the related document in its database. Investor relations contact information is as follows:
Telephone: (919) 783-4540
Web site address: www.martinmarietta.com
Page 36 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Corporation’s operations are highly dependent upon the interest rate-sensitive construction and steelmaking industries. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs.
The current credit environment has negatively affected the economy and management has considered the potential impact to the Corporation’s business. Demand for aggregates products, particularly in the commercial and residential construction markets, could continue to decline if companies and consumers are unable to obtain financing for construction projects or if the economic slowdown causes delays or cancellations to capital projects. Additionally, the Corporation may experience difficulty placing its A-2/P-2 commercial paper.
Demand in the residential construction market is affected by interest rates. Since December 31, 2007, the Federal Reserve Board cut the federal funds rate by 225 basis points to 2.0% in April, 2008. In addition to other factors that contributed to the rate cut, the Federal Open Market Committee stated that it saw a deepening of the housing contraction. The residential construction market accounted for approximately 12% of the Corporation’s aggregates product line shipments in 2007.
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 any temporary cash investments, including money market funds and overnight investments in Eurodollars; any outstanding commercial paper obligations; Floating Rate Senior Notes; defined benefit pension plans; and petroleum-based product costs.
Commercial Paper Obligations. The Corporation has a $325 million commercial paper program in which borrowings bear interest at a variable rate based on LIBOR. At June 30, 2008, commercial paper borrowings of $75 million were outstanding. As commercial paper borrowings bear interest at a variable rate, the Corporation has interest rate risk. The effect of a hypothetical 100-basis-point increase in interest rates on commercial paper borrowings of $75 million would increase interest expense by $0.8 million on an annual basis.
Floating Rate Senior Notes. The Corporation has $225 million of Floating Rate Senior Notes that bear interest at a rate equal to the three-month LIBOR plus 0.15%. As the Floating Rate Senior Notes bear interest at a variable rate, the Corporation has interest rate risk. The effect of a hypothetical 100 basis point increase in interest rates on borrowings of $225 million would increase interest expense by $2.3 million on an annual basis.
Page 37 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
Pension Expense. The Corporation’s results of operations are affected by its pension expense. Assumptions that affect this expense include the discount rate and the expected long-term rate of return on assets. Therefore, the Corporation has interest rate risk associated with these factors. The impact of hypothetical changes in these assumptions on the Corporation’s annual pension expense is discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the Securities and Exchange Commission on February 25, 2008.
Petroleum-Based Product Costs. Petroleum-based product costs, including diesel fuel, natural gas and liquid asphalt, represent significant production costs for the Corporation. Increases in these costs generally are tied to energy sector inflation. For the six months ended June 30, 2008, increases in these costs lowered net earnings by $0.39 per diluted share when compared with 2007.
Aggregate Risk for Interest Rates and Petroleum-Based Product Sector Inflation. The pension expense for 2008 is calculated based on assumptions selected at December 31, 2007. Therefore, interest rate risk in 2008 is limited to the potential effect related to outstanding commercial paper and the Corporation’s Floating Rate Senior Notes. Assuming outstanding commercial paper of $75 million and Floating Rate Senior Notes of $225 million, the impact of a hypothetical 100 basis point increase in interest rates would increase interest expense and decrease pretax earnings by $3.0 million. Additionally, increases in petroleum-based product costs have already had a significant impact on year-to-date 2008 pretax earnings.
Item 4. Controls and Procedures
As of June 30, 2008, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2008. There have been no significant changes in the Corporation’s internal controls or in other factors that could significantly affect the internal controls subsequent to June 30, 2008.
Page 38 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Part I. Item 3. Legal Proceedings of the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the year ended December 31, 2007.
Item 1A. Risk Factors.
Reference is made to Part I. Item 1A. Risk Factors and Forward-Looking Statements of the Martin Marietta Materials, Inc. Annual Report on Form 10-K for the year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES
                                 
                    Total Number of Shares   Maximum Number of
                    Purchased as Part of   Shares that May Yet be
    Total Number of   Average Price   Publicly Announced   Purchased Under the
Period   Shares Purchased   Paid per Share   Plans or Programs   Plans or Programs
 
                               
April 1, 2008 – April 30, 2008
        $             5,041,871  
May 1, 2008 – May 31, 2008
        $             5,041,871  
June 1, 2008 – June 30, 2008
        $             5,041,871  
 
                       
Total
        $             5,041,871  
The Corporation’s initial stock repurchase program, which authorized the repurchase of 2.5 million shares of common stock, was announced in a press release dated May 6, 1994, and has been updated as appropriate. The program does not have an expiration date.
Page 39 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
PART II — OTHER INFORMATION
(Continued)
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on May 28, 2008, the shareholders of Martin Marietta Materials, Inc.:
(a)  
Elected Sue W. Cole, Michael J. Quillen and Stephen P. Zelnak, Jr. to the Board of Directors of the Corporation to terms expiring at the Annual Meeting of Shareholders in the year 2011. The following table sets forth the votes for each director.
                 
    Votes Cast For     Withheld  
Sue W. Cole
    34,788,877       35,581  
Michael J. Quillen
    34,781,082       43,376  
Stephen P. Zelnak, Jr.
    34,739,738       84,720  
(b)  
Ratified the selection of Ernst & Young LLP as independent auditors for the year ending December 31, 2008. The voting results for this ratification were 34,718,168 — For; 80,186 — Against; and 26,105 — Abstained.
Page 40 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
PART II — OTHER INFORMATION
(Continued)
Item 6. Exhibits.
     
Exhibit    
   No.      Document
 
   
31.01
  Certification dated August 7, 2008 of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.02
  Certification dated August 7, 2008 of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.01
  Written Statement dated August 7, 2008 of Chief Executive Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.02
  Written Statement dated August 7, 2008 of Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 41 of 43

 


Table of Contents

SIGNATURES
Pursuant to the requirements 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.                          (Registrant)
 
       
Date: August 7, 2008
  By:   /s/ Anne H. Lloyd
 
       
 
      Anne H. Lloyd
Senior Vice President and
     Chief Financial Officer
Page 42 of 43

 


Table of Contents

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
FORM 10-Q
For the Quarter Ended June 30, 2008
EXHIBIT INDEX
     
Exhibit No.   Document
 
   
31.01
  Certification dated August 7, 2008 of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
31.02
  Certification dated August 7, 2008 of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
   
32.01
  Written Statement dated August 7, 2008 of Chief Executive Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
   
32.02
  Written Statement dated August 7, 2008 of Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002