Business Context and Reporting Period
Martin Marietta Materials, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. The company operates aggregates businesses in the Mideast, Southeast, and West regions, plus a Specialty Products segment producing magnesia-based chemicals and dolomitic lime. Aggregates products primarily serve infrastructure, commercial, residential, energy, and railroad construction markets.
Financial Highlights
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Total revenues | $509.3 million | $488.0 million | $1.355 billion | $1.328 billion |
| Net sales | $443.7 million | $428.3 million | $1.182 billion | $1.169 billion |
| Gross profit | $113.8 million | $117.7 million | $251.1 million | $278.0 million |
| Earnings from operations | $83.8 million | $89.2 million | $161.6 million | $173.1 million |
| Net earnings attributable to Martin Marietta | $52.0 million | $55.5 million | $82.2 million | $88.6 million |
| Diluted earnings per share | $1.13 | $1.23 | $1.78 | $1.99 |
| Operating margin excluding freight | 18.9% | 20.8% | 13.7% | 14.8% |
| Cash flow from operations | Not separately provided | Not separately provided | $202.6 million | $234.6 million |
- Q3 net sales increased 3.6%, while nine-month net sales increased 1.1%.
- Q3 heritage aggregates volume increased 6.3%, but pricing declined 3.1%. Nine-month volume increased 2.8%, while pricing declined 3.4%.
- Specialty Products delivered record third-quarter operating earnings of $12.0 million. Nine-month Specialty Products sales increased to $131.9 million from $106.0 million, and operating earnings increased to $40.1 million from $26.1 million.
- Accounts receivable increased to $249.6 million at September 30, 2010 from $162.8 million at December 31, 2009, contributing to lower operating cash flow.
- Cash and cash equivalents were $60.5 million at September 30, 2010, compared with $263.6 million at December 31, 2009.
- Total debt was $1.031 billion, including $245.4 million of current maturities and $785.7 million of long-term debt. Debt declined from $1.250 billion at December 31, 2009.
- The company had $323 million of unused capacity under its revolving Credit Agreement and $100 million available under its accounts receivable facility, subject to covenant compliance.
- Capital expenditures were $110.0 million and acquisitions used $28.1 million during the first nine months. Dividends paid were $55.2 million.
Material Changes Versus the Prior Comparable Period
- Profitability declined despite higher sales. Q3 gross profit fell 3.4%, operating earnings fell 6.0%, and diluted EPS fell 8.1%. For the first nine months, gross profit declined 9.7%, operating earnings declined 6.6%, and diluted EPS declined 10.6%.
- Aggregates operating earnings decreased to $74.1 million in Q3 from $81.1 million and to $134.8 million for nine months from $168.1 million. Pricing pressure, higher production costs, and weather-related disruption affected results.
- Aggregates revenue for the first nine months declined 1.2% to $1.050 billion, while Specialty Products revenue increased 24.4%.
- Energy costs increased Q3 aggregates production costs by $4.5 million, reducing diluted EPS by approximately $0.06. Direct aggregates production costs increased 8.7%.
- SG&A expense declined $1.7 million in Q3 and $8.5 million for the first nine months. Management expects full-year 2010 SG&A to be no more than 8.8% of net sales.
- Interest expense declined to $17.1 million in Q3 from $18.2 million and to $51.5 million for nine months from $55.4 million, primarily because of lower borrowings.
- In April 2010, the company repaid $217.6 million of Floating Rate Senior Notes using cash and short-term borrowings. The company expects to refinance $242.1 million of 6.875% Notes due April 2011.
Guidance, Outlook, Risks, and Unusual Items
- For full-year 2010, management expected aggregates volume growth of 4% to 6%, aggregates pricing down 3% to 4%, and slightly higher production cost per ton. Specialty Products pretax earnings were expected to be $46 million to $48 million, and interest expense approximately $70 million.
- Management forecast infrastructure volume growth of 4% to 6%, nonresidential growth of 6% to 7%, residential growth of 3% to 4%, and ChemRock/Rail growth of 2% to 3%.
- Management had not issued 2011 guidance. It cited federal and state infrastructure funding, construction activity, energy-sector demand, natural-gas prices, and lease timing as key outlook variables.
- The company expects continued working-capital use, particularly accounts receivable, as revenues grow. Fourth-quarter cash payments under certain retirement plans were expected to total $11.2 million.
- The debt-to-defined-EBITDA ratio was 2.88x at September 30, 2010, below the 3.50x covenant limit. A covenant default could permit lenders to terminate facilities and accelerate outstanding balances.
- Risks include economic weakness, declines in construction demand or aggregates pricing, delays or reductions in federal and state transportation funding, weather disruption, fuel and other input-cost inflation, transportation constraints, credit-market conditions, tax-law changes, and acquisition integration risk.
- The company settled Greenwood, Missouri legal proceedings for approximately $7.0 million and reversed excess reserves, increasing nine-month net earnings by $2.75 million, or $0.06 per diluted share.
- The nine-month effective tax rate included tax settlements, audit developments, a valuation allowance for unused credits, the Affordable Care Act’s effect on Medicare Part D deductions, and other tax true-ups. Management expected the full-year effective tax rate to be approximately 26%.
- Management stated that pending litigation and environmental proceedings were unlikely to have a material adverse effect. During the quarter, MSHA reported 54 significant-and-substantial citations, two Section 104(b) orders, three unwarrantable-failure citations or orders, and $23,556 of proposed assessments; there were no fatalities.
Most Important Facts for Investors to Verify
- Whether aggregates pricing pressure moderates as infrastructure, energy, commercial, and residential markets stabilize.
- Progress toward refinancing the $242.1 million of notes due April 2011 and continued compliance with the 3.50x leverage covenant.
- Whether receivables and other working-capital needs continue to reduce operating cash flow.
- Actual fuel, energy, transportation, and production-cost trends relative to management’s 2010 assumptions.
- Federal and state infrastructure funding, including the continuation of stimulus and highway programs.
- Execution and returns from the Port Canaveral acquisition and the South Carolina acquisition completed in October 2010.
- Changes in tax exposures, including $22.2 million of unrecognized tax benefits at September 30, 2010, and the potential change in approximately $10.2 million during the following twelve months.