Rocky road lies ahead for aggregates maker.

• Author: Kinney, David
• Position: Money Matters - Martin Marietta Materials Inc.

For the nation's second-largest producer of construction aggregates--the crushed stone, sand and gravel used to make concrete--the third quarter of 2002 was the pits. Raleigh-based Martin Marietta Materials Inc. (NYSE: MLM) blamed bad weather--11 tropical storms--and weak demand for earnings sliding to 80 cents a share, down 16.7% from a year earlier.

Though revenue for the quarter was off only 3%--and up 1% for the first nine months of the year--the problem is margins: Martin Marietta is stuck between its rocks and a hard place. The company, which operates more than 340 quarries and distribution centers in 31 states, the Bahamas and Nova Scotia, needs high volume to offset high fixed costs. But with demand down, it has slowed production, which means it can't get full operating efficiencies. "However, we continue to make significant investment in these initiatives at key strategic locations that we believe will have a positive impact on operations as demand increases," CEO Stephen P. Zelnak Jr. said when announcing the third-quarter results.

Considering the high cost of hauling rock, location is key to this business, and Martin Marietta continues to be an acquirer in a rapidly consolidating industry. It can afford to be. "Emphasis on strong cash flow has allowed us to continue to execute our planned pay down of debt to a...