Martin Marietta Materials, Inc. — 2013 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013, filed August 5, 2013. Martin Marietta is principally a construction-aggregates producer, with vertically integrated asphalt, ready-mixed concrete and road-paving operations, plus Specialty Products manufacturing magnesia-based chemicals and dolomitic lime. Operations served customers through 301 quarries, distribution facilities and plants in 33 states, Canada, the Bahamas and the Caribbean.
Effective January 1, 2013, the Aggregates business was reorganized into the Mid-America, Southeast and West Groups. Prior-year segment information was reclassified accordingly.
Financial performance and key metrics
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Total revenues | $562.7 million | $545.7 million | $947.7 million | $939.7 million |
| Net sales | $508.7 million | $491.2 million | $853.8 million | $841.7 million |
| Gross profit | $106.8 million | $102.1 million | $119.4 million | $125.9 million |
| Earnings from operations | $69.4 million | $59.2 million | $45.9 million | $23.9 million |
| Net earnings attributable to Martin Marietta | $41.3 million | $36.8 million | $13.5 million | $0.02 million |
| Diluted EPS | $0.89 | $0.80 | $0.29 | $0.00 |
| Operating margin | 12.3% | 10.9% | 4.8% | 2.5% |
| Gross margin excluding freight and delivery revenues | 21.0% | 20.8% | 14.0% | 15.0% |
Six-month operating cash flow was $48.5 million versus $27.7 million in the prior-year period. Capital expenditures were $50.0 million, and management expected approximately $155.0 million of 2013 capital spending. Cash and cash equivalents were $43.7 million at June 30, 2013, compared with $25.4 million at December 31, 2012.
Total debt was $1.093 billion, including $1.087 billion classified as long-term debt. The company had $297 million of unused Revolving Facility capacity, subject to covenant compliance. The trailing-twelve-month debt-to-defined-EBITDA ratio was 3.17x, versus a temporarily permitted maximum of 3.75x at June 30, 2013; the maximum was scheduled to return to 3.50x for the September 30, 2013 calculation date. Quarterly cash dividends remained $0.40 per share.
Material changes versus the prior comparable period
- Second-quarter net sales increased 3.6%, while six-month net sales increased 1.4%.
- Second-quarter net earnings attributable to Martin Marietta increased 12.4%, and operating earnings increased $10.2 million. The 2012 quarter included $9.2 million of business-development costs related to an unconsummated combination.
- Six-month operating earnings increased $21.9 million, primarily because the 2012 period included $35.1 million of business-development costs. The 2013 period also reflected lower gross profit from aggregates operations and higher SG&A.
- Aggregates pricing increased 1.7% in the quarter and 3.3% year-to-date, but aggregates volumes declined 1.6% and 4.6%, respectively. Excessive rainfall and lower government spending were principal volume pressures.
- Specialty Products achieved record second-quarter net sales of $56.6 million; six-month sales rose 9.4% to $111.8 million. Specialty Products operating earnings were $18.7 million in the quarter and $35.8 million year-to-date.
- Six-month gross margin excluding freight declined to 14.0% from 15.0%, reflecting lower aggregates volumes and reduced operating leverage. Unplanned Southeast Group shiploader/reclaimer repairs reduced gross profit by approximately $1.1 million in the quarter and $1.7 million year-to-date.
- SG&A increased to 7.4% of quarterly net sales and 8.8% year-to-date, partly due to an information-systems upgrade.
Guidance, outlook, risks and unusual items
- Management expected full-year aggregates shipments to increase 1% to 3% and aggregates pricing to increase 2% to 4%. Infrastructure volumes were expected to decline in the mid-single digits, while residential volumes were expected to grow at a double-digit rate.
- Expected vertically integrated net sales were $350 million to $375 million, with gross profit of $20 million to $22 million. Specialty Products net sales were expected at $220 million to $230 million, with gross profit of $81 million to $85 million.
- Management expected an effective tax rate of approximately 26%, excluding discrete events, relatively flat interest expense and $155 million of capital expenditures.
- Key risks include weather, U.S. economic conditions, construction and infrastructure spending, federal and state transportation funding, energy and fuel costs, steel utilization, transportation availability, interest rates, credit ratings, acquisitions and debt-covenant compliance.
- A 100-basis-point increase in rates on $440.0 million of variable-rate borrowings would increase annual interest expense by approximately $4.4 million. A 10% change in energy prices was estimated to affect annual pretax earnings by approximately $18.8 million.
- The $150 million Trade Receivable Facility was established in April 2013 and matures April 19, 2014. It replaced the $100 million AR Credit Facility, which expired April 20, 2013. The Trade Receivable Facility contains cross-default provisions.
- On July 1, 2013, after quarter-end, the company acquired three Atlanta-area aggregates quarries for $62.0 million, adding more than 800 million tons of reserves.
- The company disclosed an ongoing USEPA enforcement matter concerning Clean Air Act New Source Review compliance at its Woodville, Ohio dolomitic lime plant. Potential penalties or equipment upgrades could not yet be reasonably estimated.
- Unrecognized tax benefits were $18.3 million at June 30, 2013; up to $10.3 million could decrease during the following twelve months, principally in connection with Canadian and U.S. advance-pricing-agreement matters.
Important facts for investors to verify
- Whether aggregates volumes recover sufficiently to meet the 1%–3% full-year shipment outlook despite weather and infrastructure delays.
- Progress on infrastructure funding and project lettings, particularly in Texas, North Carolina, Georgia, Iowa and Colorado.
- Compliance with the debt covenant as the permitted leverage ratio returns to 3.50x and the Trade Receivable Facility approaches its April 2014 maturity.
- Integration, financing and performance of the July 2013 Atlanta quarry acquisition.
- Actual energy costs, steel utilization and Specialty Products capacity and customer conditions.
- Resolution and potential financial impact of the Woodville, Ohio environmental matter and the advance-pricing-agreement tax matters.