Martin Marietta Materials, Inc. — Q2 2012 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the quarter and six months ended June 30, 2012. Martin Marietta operates through three Aggregates segments—Mideast, Southeast, and West—and a Specialty Products segment. Aggregates products are sold primarily into infrastructure, nonresidential, residential, energy, railroad, and other construction markets. The filing includes the Denver, Colorado operations acquired in December 2011.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Six Months 2012 | Six Months 2011 |
|---|---|---|---|---|
| Total revenues | $545.7 million | $462.4 million | $939.7 million | $790.3 million |
| Net sales | $491.2 million | $409.6 million | $841.8 million | $700.2 million |
| Gross profit | $102.1 million | $97.5 million | $125.9 million | $120.2 million |
| Earnings from operations | $59.3 million | $64.7 million | $23.9 million | $60.3 million |
| Net earnings attributable to Martin Marietta | $36.8 million | $35.8 million | $18 thousand | $18.4 million |
| Diluted EPS | $0.80 | $0.78 | Approximately $0.00 | $0.39 |
| Net cash from operating activities | Not separately provided for quarter | Not separately provided for quarter | $27.7 million | $56.7 million |
Q2 GAAP gross margin was 18.7% of total revenues versus 21.1% in the prior-year quarter. Gross margin excluding freight and delivery revenues was 20.8% versus 23.8%. Operating margin was 10.9% versus 14.0%; excluding freight and delivery revenues, operating margin was 12.1% versus 15.8%.
Q2 earnings included $9.2 million of business development costs related to the proposed Vulcan Materials combination. Excluding these costs, operating earnings were $68.5 million and adjusted diluted EPS was $0.92. For the six months, business development costs totaled $35.1 million, reducing adjusted diluted EPS by $0.46 and adjusted operating cash flow by $24.9 million.
- At June 30, 2012, cash and cash equivalents were $41.4 million; total current assets were $760.3 million and current liabilities were $199.1 million.
- Total debt was $1.144 billion, including $1.137 billion of long-term debt. The debt-to-defined-EBITDA ratio was 3.63x at June 30, 2012.
- Unused borrowing capacity under the revolving facility was $202.5 million, subject to the leverage covenant. No borrowing capacity was available under the accounts receivable facility.
- Capital expenditures were $66.3 million for the first six months. The company paid $36.9 million in dividends, or $0.80 per common share.
- Heritage aggregates volume increased 2.8% and pricing increased 2.4% in Q2. For the six months, volume increased 5.5% and pricing increased 2.6%.
Material Changes Versus the Prior Comparable Period
- Q2 net sales increased 19.9%, driven primarily by the Denver acquisition, higher heritage aggregates volumes and pricing, and growth in nonresidential and residential markets.
- Six-month net sales increased 20.2%. West Group Q2 net sales increased to $257.3 million from $174.7 million, while Southeast Group net sales declined to $73.7 million from $78.0 million.
- Q2 operating earnings declined on a reported basis because of $9.2 million of business development costs, although operating earnings excluding those costs increased from $64.7 million to $68.5 million.
- Six-month operating earnings declined sharply because of $35.1 million of business development costs. Excluding those costs, operating earnings were $59.1 million versus $60.3 million in 2011.
- Margins were pressured by inventory reductions, higher production and nonproduction costs, internal freight, resale materials, and increased exposure to vertically integrated operations. Six-month diesel costs averaged $3.14 per gallon versus $2.95 in 2011.
- Specialty Products Q2 net sales increased 1.7% to $50.5 million, while operating earnings declined to $17.5 million from $19.3 million because of higher raw material, contract service, and repair costs.
- Operating cash flow declined because of seasonal working capital needs, approximately $39 million of cash used by the Denver operations, and higher costs in excess of billings related to road paving.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year 2012 heritage aggregates shipments to increase 4% to 5% and pricing to increase 2% to 4%. Infrastructure volume is expected to be flat to slightly down in 2012, while nonresidential volume is expected to grow by double digits.
- Specialty Products earnings are expected to be approximately $68 million to $70 million. The Denver acquisition is expected to be neutral to full-year EBITDA and accretive in 2013.
- Full-year capital expenditures are forecast at approximately $155 million, including the remaining spending on a $53 million dolomitic lime kiln project. The kiln is expected to be substantially completed in the fourth quarter and generate annual net sales of approximately $22 million to $25 million.
- Management expects interest expense to remain relatively flat with 2011, SG&A excluding Denver and systems-upgrade costs to decline slightly, and the effective tax rate to approximate 23% excluding discrete events.
- The credit agreement leverage covenant was temporarily increased to 3.95x at June 30, 2012, stepping down to 3.75x at September 30 and returning to 3.50x at December 31, 2012. The reported 3.63x ratio was within the June covenant but leaves limited headroom.
- The company terminated its Vulcan exchange offer and proxy solicitation after Delaware court action. The Supreme Court affirmed the decision, and the company incurred substantial related business development costs.
- Environmental proceedings involve Clean Air Act notices concerning the Woodville, Ohio lime facility. Potential penalties or equipment-upgrade costs could not be reasonably estimated, although management did not expect a material adverse effect on the consolidated business.
- Key risks include U.S. economic weakness, construction and infrastructure funding, energy and diesel costs, weather, transportation capacity, residential and nonresidential construction trends, steel utilization, natural gas prices, credit ratings, and compliance with debt covenants.
- On July 12, 2012, one credit-rating agency lowered the company to one level below investment grade; management stated that its composite rating remained investment grade.
Important Facts for Investors to Verify
- Whether aggregates volume and pricing targets of 4%–5% and 2%–4%, respectively, were achieved for full-year 2012.
- The company’s ability to reduce leverage before the covenant threshold returns to 3.50x at year-end.
- The sustainability of reported earnings after excluding Vulcan-related business development costs and other unusual items.
- Cash generation after seasonal working capital requirements, Denver integration spending, and approximately $155 million of planned capital expenditures.
- Progress and expected returns from the Denver operations and the Woodville lime kiln project.
- Developments in the Woodville environmental proceeding, Vulcan-related litigation or costs, and the company’s credit ratings.
- Actual construction activity, infrastructure funding, energy-sector demand, diesel costs, weather conditions, and Specialty Products demand drivers.