Martin Marietta Materials, Inc. — Q1 2012 Form 10-Q Summary
Business Context and Reporting Period
Quarter ended March 31, 2012; financial statements are unaudited. Martin Marietta operates aggregates businesses through the Mideast, Southeast, and West Groups and a Specialty Products segment. Aggregates are sold primarily into infrastructure, nonresidential and residential construction markets; Specialty Products includes magnesia-based chemicals and dolomitic lime.
Key Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $350.5 million | $290.6 million | +20.6% |
| Total revenues | $394.0 million | $327.9 million | +20.1% |
| Gross profit | $23.8 million | $22.7 million | +$1.2 million |
| Gross margin excluding freight | 6.8% | 7.8% | Down 100 basis points |
| Loss from operations | $(35.3) million | $(4.4) million | Significantly worse |
| Loss from continuing operations | $(37.1) million | $(16.2) million | Significantly worse |
| Net loss attributable to Martin Marietta | $(36.7) million | $(17.4) million | Significantly worse |
| Loss per diluted share | $(0.81) | $(0.39) | $(0.42) |
| Net cash from operating activities | $(4.3) million | $21.3 million | Down $25.6 million |
Business development costs related to the proposed Vulcan Materials combination were $25.9 million, or $0.34 per diluted share after tax. Newly acquired Denver-area operations generated a $12.5 million pretax seasonal loss, or $0.17 per diluted share after tax. Excluding these items, adjusted loss per diluted share was $0.30.
- Cash and cash equivalents at March 31, 2012 were $45.0 million, compared with $26.0 million at December 31, 2011 and $176.8 million at March 31, 2011.
- Total debt was $1.135 billion, including $1.127 billion of long-term debt. Debt increased from $1.060 billion at December 31, 2011 but declined from $1.169 billion at March 31, 2011.
- Unused Revolving Facility capacity was approximately $213 million, subject to the leverage covenant; no borrowing availability remained under the AR Credit Facility.
- Trailing-twelve-month consolidated debt to defined EBITDA was 3.53x versus a temporarily amended maximum of 3.95x at March 31 and June 30, 2012.
- Capital expenditures were $37.5 million. Full-year capital expenditures were forecast at approximately $155 million, including the remaining spending on a $53 million dolomitic lime kiln project.
- The quarterly common dividend remained $0.40 per share; $18.4 million of dividends were paid during the quarter.
Material Changes Versus the Prior Comparable Period
- Heritage aggregates volume increased 9.6% and pricing increased 2.8%; total aggregates product-line volume increased 7.3% and pricing increased 1.1% after including acquisitions and divestitures.
- Aggregates growth was led by the West Group, while the Denver acquisition added seasonal losses and lower average selling prices.
- Specialty Products achieved record first-quarter net sales of $51.7 million and operating earnings of $18.2 million, compared with $49.1 million and $15.1 million, respectively, in Q1 2011.
- Aggregates gross profit declined despite higher volume because of acquired-location losses, higher nonproduction costs, and increased energy costs. Average diesel cost increased to $3.24 per gallon from $2.81.
- Interest expense decreased to $13.5 million from $18.2 million because of a greater mix of lower-rate variable-rate debt.
- On January 23, 2012, 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.
- Operating cash flow turned negative, primarily because of the net loss, business development spending, seasonal working capital needs, and approximately $22 million of cash used by the Denver operations.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management was increasingly optimistic about the remainder of 2012. It raised expected full-year heritage aggregates volume growth to 4%–5% and pricing growth to 2%–4%. Infrastructure volume was expected to be flat to slightly down, nonresidential volume to grow at a double-digit rate, residential improvement to accelerate, and ChemRock/Rail shipments to remain relatively flat.
- Specialty Products operating earnings were expected to be approximately $68 million–$70 million.
- Interest expense was expected to remain approximately flat with 2011; the effective tax rate was expected to be approximately 22%, excluding discrete events.
- The Denver asset exchange was expected to be neutral to full-year EBITDA and accretive in 2013 as the operations were integrated.
- The proposed Vulcan combination remained a significant unusual item and source of financial, legal and execution risk. After quarter-end, the Delaware Court of Chancery enjoined the company for four months from pursuing specified acquisition-related activities; management announced plans to appeal and seek a stay.
- The leverage covenant maximum temporarily steps down from 3.95x to 3.75x at September 30, 2012 and returns to 3.50x at December 31, 2012. A covenant default could permit lenders to terminate facilities and accelerate outstanding balances.
- Key operating risks include construction-market weakness, uncertainty over federal highway funding, state budget pressures, weather, diesel and natural-gas prices, transportation availability, steel-sector demand, integration of the Denver operations, interest rates, tax changes, and potential credit-rating pressure.
- A hypothetical 1% increase in rates on $480 million of variable-rate borrowings would increase annual interest expense by approximately $4.8 million. A 10% change in energy prices would affect annual pretax earnings by approximately $16.8 million.
- The company stated that cash, expected internal cash flows, financing availability and capital-market access should be sufficient for anticipated operating needs, debt service, capital expenditures, acquisitions and dividends for the foreseeable future.
Important Facts for Investors to Verify
- Reconcile reported loss per share of $0.81 with the $0.34 business-development charge and $0.17 Denver acquisition impact, and assess the sustainability of the $0.30 adjusted loss.
- Monitor the 3.53x leverage ratio against the amended covenant thresholds and the return to a 3.50x limit at year-end.
- Evaluate cash generation, seasonal working-capital requirements, remaining Revolving Facility capacity and the April 20, 2013 AR Credit Facility termination date.
- Assess whether the projected 4%–5% heritage volume growth and 2%–4% pricing growth are supported by infrastructure, nonresidential and residential demand.
- Track Denver integration, cost reductions, seasonal performance and the expectation of 2013 accretion.
- Review the Delaware litigation, appeal and stay status and the potential financing, dilution, leverage and integration consequences of the Vulcan proposal.
- Confirm completion and economics of the $53 million dolomitic lime kiln project and the expected $22 million–$25 million of annual net sales.