MARTIN MARIETTA MATERIALS INC quarterly report, Q3 FY2012

Martin Marietta Materials, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Martin Marietta Materials operates Aggregates businesses in the Mideast, Southeast, and West regions and a Specialty Products segment serving chemicals and dolomitic lime markets. Aggregates products are sold primarily into infrastructure, residential, nonresidential, energy, railroad, and related construction markets. The filing covers the quarter and nine months ended September 30, 2012; results are unaudited.

The quarter benefited materially from the acquired Denver, Colorado operations, which contributed approximately $92 million of quarterly net sales. Discontinued operations relate to divested or closed Aggregates operations.

Financial Results and Key Metrics

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Net sales	$539.1 million	$445.0 million	$1.381 billion	$1.145 billion
Total revenues	$593.9 million	$502.4 million	$1.534 billion	$1.293 billion
Gross profit	$123.6 million	$111.9 million	$249.5 million	$232.1 million
Earnings from operations	$91.1 million	$80.0 million	$115.0 million	$140.3 million
Net earnings attributable to Martin Marietta	$62.9 million	$49.2 million	$62.9 million	$67.5 million
Diluted earnings per share	$1.36	$1.07	$1.36	$1.46

Q3 net sales increased 21.2%, while diluted EPS increased 27%. Nine-month net sales increased 20.6%, but reported diluted EPS declined because of $35.1 million of business-development costs.
Q3 GAAP gross margin was 20.8%, versus 22.3% in the prior-year quarter. Excluding freight and delivery revenues, gross margin was 22.9%, versus 25.1%. Excluding the acquired Colorado operations, Q3 gross margin on the same basis was 25.6%.
Q3 operating margin was 15.3% of total revenues, versus 15.9%; excluding freight and delivery revenues, it was 16.9%, versus 18.0%. Nine-month operating margin was 7.5%, versus 10.9%.
Heritage Aggregates pricing increased 4.1% in Q3, while volume declined 3.8%. For the nine months, pricing increased 3.0% and volume increased 2.2%.
Specialty Products generated Q3 net sales of $49.4 million and record operating earnings of $17.0 million, or 34.4% of net sales. Nine-month net sales were $151.6 million and operating earnings were $52.7 million.
Q3 SG&A declined to 6.0% of net sales from 7.4%. Nine-month SG&A was 7.3% of net sales, versus 8.1%.
The nine-month effective tax rate for continuing operations was 15.9%, versus 23.6%. Excluding discrete tax items, management indicated an estimated rate of approximately 23%; the reported rate benefited from a $3.6 million valuation-allowance reversal and other tax matters.

Cash Flow, Balance Sheet, Debt, and Liquidity

Nine-month operating cash flow was $122.0 million, compared with $179.9 million in 2011. Excluding business-development expenses, operating cash flow was $160.0 million.
Capital expenditures were $105.9 million through September 30, including approximately $32 million for a new Woodville, Ohio dolomitic lime kiln. Full-year 2012 capital spending was forecast at approximately $155 million.
Cash and cash equivalents were $35.4 million at September 30, versus $26.0 million at December 31, 2011 and $56.8 million at September 30, 2011.
Total debt was $1.099 billion, including $1.092 billion of long-term debt, compared with $1.060 billion at December 31, 2011. Debt fair value was $1.157 billion at September 30, 2012.
The company had $250 million of unused Revolving Facility capacity, subject to covenant compliance, and no available borrowings under its $100 million accounts-receivable credit facility. The Credit Agreement expires March 31, 2015; the accounts-receivable facility terminates April 20, 2013.
The trailing-twelve-month debt-to-defined-EBITDA ratio was 3.58x, compared with a 3.75x temporary covenant limit applicable at September 30, 2012. The company was in compliance. An October 17, 2012 amendment maintained the 3.75x limit through June 30, 2013, after which the limit returns to 3.50x.
Variable-rate borrowings totaled approximately $445 million. A hypothetical 100-basis-point increase in rates would increase annual interest expense by approximately $4.5 million. A 10% change in energy prices was estimated to affect annual pretax earnings by approximately $16.8 million.

Material Changes, Outlook, and Unusual Items

Q3 performance reflected pricing growth, productivity improvements, strong Denver-market activity, and record Specialty Products earnings. These benefits were partly offset by lower heritage Aggregates volumes, higher energy and nonproduction costs, and the lower margins of vertically integrated Colorado operations.
Nine-month operating earnings included $35.1 million of business-development costs, reducing reported diluted EPS by approximately $0.46. Adjusted diluted EPS excluding those costs was $1.82.
The new Woodville kiln became functional November 1, 2012 and was expected to generate incremental annual net sales of approximately $22 million to $25 million at margins comparable with existing operations.
Management’s full-year 2012 outlook called for heritage Aggregates shipments to increase 1% to 2%, pricing to increase 2% to 4%, Specialty Products operating earnings of approximately $68 million to $70 million, interest expense to decline approximately $5 million from 2011, an effective tax rate of approximately 23% excluding discrete items, and capital expenditures of approximately $155 million.
Preliminary 2013 expectations included mid-single-digit infrastructure volume growth, high-single-digit nonresidential growth, double-digit residential volume growth, and flat ChemRock/Rail shipments. Further 2013 guidance was to be provided with the year-end earnings release.
Material contingencies include an EPA enforcement matter involving Clean Air Act New Source Review compliance at the Woodville, Ohio plant. The company believes it is substantially compliant but cannot estimate potential penalties or equipment upgrades. Management stated that litigation and other proceedings were not expected to have a material adverse effect based on currently available facts.
The company guarantees certain affiliate borrowings, including a $24.0 million revolving line and a $6.2 million amortizing loan.
The company repurchased $20.0 million par value of 6.25% Senior Notes due 2037 at 90.75, financed partly with $18.2 million of Revolving Facility borrowings. No common shares were repurchased.

Principal Risks

Construction demand and volumes depend on the U.S. economy, federal and state infrastructure funding, fiscal-cliff developments, housing activity, commercial construction, energy-sector drilling, and rail and coal traffic.
Pricing and profitability are exposed to diesel, natural gas, asphalt, transportation, labor, repair, and supply costs.
Weather, including winter conditions, hurricanes, drought, and excessive rainfall, can materially affect production, shipments, and profitability; the Denver acquisition increases winter-weather exposure.
Leverage-covenant compliance, refinancing needs, credit ratings, variable interest rates, and access to capital markets remain important liquidity considerations. One rating agency reduced the company’s rating to one level below investment grade, although the composite rating remained investment grade.
Other risks include acquisition integration, tax-law changes, potential environmental requirements, customer concentration in construction markets, and possible goodwill impairment.

Investor Verification Checklist

Verify the calculation and sustainability of adjusted EPS of $1.82 versus reported nine-month diluted EPS of $1.36, including the nature and recurrence of the $35.1 million business-development costs.
Assess whether the 3.58x leverage ratio provides sufficient headroom as the covenant limit returns to 3.50x in September 2013.
Review the maturity, renewal, and refinancing status of the accounts-receivable credit facility and other debt.
Validate the contribution, integration progress, and normalized margins of the Denver operations, including their seasonal working-capital requirements.
Monitor heritage Aggregates volumes, pricing, energy costs, infrastructure awards, and 2013 end-use-market trends.
Evaluate the Woodville kiln’s start-up, expected $22 million to $25 million annual sales contribution, and any EPA compliance developments.
Reconcile the unusually low reported tax rate with the expected approximately 23% normalized rate and monitor the potentially changing $15.8 million of unrecognized tax benefits.