MLM

Business Context and Reporting Period

Company: Martin Marietta Materials, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Corporation operates through four reportable segments: Mideast Group, Southeast Group, West Group (collectively the Aggregates business), and Specialty Products. The Aggregates business processes and sells granite, limestone, and other aggregates from 289 quarries and distribution facilities. Specialty Products includes magnesia chemicals and dolomitic lime.

Key Financial Metrics (Six Months Ended June 30, 2009)

Note: Figures are in millions unless otherwise noted. Debt includes current maturities.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 20% year-over-year, driven by a 23% decline in heritage aggregates volume due to the recession and adverse weather (record rainfall in key states). Heritage aggregates pricing increased 3.6%.
• Cost Reductions: Consolidated cost of sales declined 22.6% ($87.4 million), primarily due to a 45% ($27 million) reduction in energy costs, specifically a 58% drop in diesel fuel costs.
• Margin Performance: Gross margin excluding freight and delivery revenues improved to 21.6% (up 170 basis points from prior year) despite volume weakness, aided by pricing strength and lower costs.
• Acquisitions: On June 12, 2009, the company acquired three quarry locations and the remaining 49% interest in a joint venture from CEMEX, Inc. for $65 million.
• Capital Structure: The company issued 3.1 million shares of common stock in March 2009, raising $233 million in net proceeds. It also secured a $130 million Term Loan and a $100 million AR Credit Facility to refinance debt maturing in April 2010.

Guidance, Outlook, and Risks

2009 Guidance: Management forecasts net earnings per diluted share in the range of $2.70 to $3.30. This assumes:

• Aggregates volumes down 15% to 18% compared to 2008.
• Aggregates price increases of 3.5% to 5% compared to 2008.
• Specialty Products contributing $28 million to $30 million in pretax earnings.
• Favorable energy prices contributing $35 million to $50 million to operating profitability.

Outlook: Management expects the remainder of 2009 to remain challenging. While residential construction may have bottomed, commercial construction remains weak. Infrastructure demand is expected to pick up in the second half of 2009 as federal stimulus projects move into the construction phase.

Risks and Contingencies:

• Economic Sensitivity: Performance is heavily dependent on the U.S. economy and construction activity. Delays in federal stimulus projects pose a significant risk.
• Weather: Hurricane activity and drought can significantly impact production and profitability.
• Energy Costs: Earnings are sensitive to diesel and natural gas prices. The guidance assumes favorable energy costs; a return to 2008 levels would negatively impact profitability.
• Debt Covenants: The company is subject to a leverage ratio covenant (Debt/EBITDA not to exceed 3.25:1). As of June 30, 2009, the ratio was 2.82:1.

Key Facts for Investor Verification

• Liquidity Position: Verify the sustainability of the $133.4 million cash balance and the $323 million unused borrowing capacity under the Credit Agreement.
• Debt Maturities: Confirm the status of refinancing for the $225 million Floating Rate Senior Notes due in April 2010, which are now covered by the new Term Loan and AR Credit Facility.
• Stimulus Impact: Monitor the actual commencement of federal stimulus infrastructure projects, as management expects only 25% to begin in the second half of 2009.
• Volume Trends: Track whether the 23% volume decline stabilizes or worsens, as this is the primary driver of the earnings variance.
• Energy Price Volatility: Watch for fluctuations in diesel prices, as a 10% change in petroleum-based product prices could impact pretax earnings by approximately $20.7 million annually.