Business Context and Reporting Period
Martin Marietta Materials, Inc. filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2010. The company operates Aggregates businesses through the Mideast, Southeast, and West Groups, plus a Specialty Products segment. Aggregates products primarily serve infrastructure, commercial, residential, oilfield, and other construction markets; Specialty Products includes magnesia-based chemicals and dolomitic lime.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|---|---|
| Total revenues | $504.6 million | $465.4 million | $845.6 million | $839.9 million |
| Net sales | $442.8 million | $410.7 million | $738.3 million | $740.5 million |
| Gross profit | $117.7 million | $111.7 million | $137.3 million | $160.3 million |
| Earnings from operations | $90.6 million | $72.9 million | $77.8 million | $83.9 million |
| Net earnings attributable to Martin Marietta | $54.4 million | $38.9 million | $30.2 million | $33.1 million |
| Diluted earnings per share | $1.18 | $0.86 | $0.65 | $0.75 |
| Operating margin excluding freight and delivery | 20.5% | 17.8% | 10.5% | 11.3% |
| Gross margin excluding freight and delivery | 26.6% | 27.2% | 18.6% | 21.6% |
Six-month net cash provided by operating activities was $86.3 million, compared with $116.7 million in the prior-year period. Capital expenditures were $68.6 million, acquisition spending was $28.1 million, and dividends paid were $36.8 million. Cash and cash equivalents declined to $32.1 million at June 30, 2010 from $263.6 million at December 31, 2009, primarily reflecting debt repayments, investing activity, dividends, and working-capital usage.
Total debt was $1.056 billion at June 30, 2010, including $244.1 million of current maturities and $811.9 million of long-term debt. The company had $323 million of unused capacity under its revolving Credit Agreement and $75 million available under its accounts receivable facility, subject to covenant compliance. Its debt-to-defined-EBITDA ratio was 2.84 times versus a maximum covenant ratio of 3.50 times.
Material Changes Versus Prior Comparable Period
- Second-quarter net sales increased 7.8%, while total revenues increased 8.4%; six-month net sales decreased 0.3%.
- Second-quarter diluted EPS increased to $1.18 from $0.86, supported by higher volume, lower SG&A, lower interest expense, and a favorable legal-reserve adjustment.
- Six-month diluted EPS declined to $0.65 from $0.75, as Aggregates pricing pressure and cost increases more than offset Specialty Products growth.
- Second-quarter heritage Aggregates volume increased 8.6%, but pricing declined 3.8%. Six-month heritage volume declined 0.3% and pricing declined 3.6%.
- Specialty Products second-quarter net sales increased 44% to $47.9 million, and operating earnings increased to $16.8 million from $7.8 million. Its operating margin excluding freight and delivery reached a record 35.1%.
- Aggregates six-month net sales declined 3.8% to $648.7 million, while Specialty Products six-month net sales increased 35% to $89.6 million.
- In April 2010, the company repaid $217.6 million of Floating Rate Senior Notes using cash and short-term borrowings, reducing total debt from $1.282 billion at June 30, 2009.
- Accounts receivable increased by $94.9 million during the first six months, reducing operating cash flow; management expects increased working-capital use as revenues grow.
Guidance, Outlook, Risks, and Unusual Items
Management raised its 2010 Aggregates volume outlook to growth of 4% to 6%, expects pricing to decline 1% to 3%, and expects production cost per ton to remain flat. End-market expectations include infrastructure volume growth of 8% to 12%, residential growth of 12% to 15%, nonresidential volume down 12% to 15%, and ChemRock/Rail growth of 10%. Specialty Products pretax earnings guidance was $46 million to $48 million, interest expense guidance was approximately $70 million, and full-year capital expenditures were expected to be approximately $135 million, excluding acquisitions.
Management cited improving infrastructure demand, increased American Recovery and Reinvestment Act project activity, oilfield-related demand, cost controls, and expected economic stabilization. However, results remain seasonal and sensitive to weather; second-quarter performance is not necessarily indicative of full-year results.
- Aggregates pricing remains under pressure from competition, geographic mix, and excess contractor capacity.
- Key risks include weaker U.S. economic or construction activity, delays or reductions in federal and state infrastructure funding, state budget constraints, energy and diesel-cost increases, transportation constraints, adverse weather, and weakness in commercial, residential, or steel-related markets.
- A $7.0 million legal settlement related to the Greenwood, Missouri operation was resolved for less than the recorded reserve, increasing second-quarter net earnings by $2.75 million, or $0.06 per diluted share.
- The Patient Protection and Affordable Care Act increased the estimated effective tax rate; management estimated a full-year rate of approximately 28%. A second-quarter tax-rate change reduced six-month net earnings by $5.4 million, or $0.12 per diluted share.
- Discontinued Aggregates operations produced a six-month net gain of $0.1 million versus $0.5 million in the prior-year period.
- On July 14, 2010, the company agreed to guarantee an affiliate’s $20.0 million revolving credit facility and $12.4 million of equipment-lease obligations. The affiliate agreed to reimburse and indemnify the company, with a subordinate lien provided as collateral.
- Unrecognized tax benefits totaled $33.7 million at June 30, 2010; approximately $10.8 million could change during the following twelve months due to the expected expiration of a statute of limitations.
- Management stated that disclosure controls were effective and that no material changes affected internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Aggregates volume growth and infrastructure spending offset continued pricing declines and energy-cost pressure.
- The timing and refinancing terms for the $242.1 million of notes maturing in April 2011.
- Future accounts-receivable growth, seasonal working-capital needs, and resulting cash balances.
- Compliance with the 3.50-times debt-to-EBITDA covenant and continued access to unused credit facilities.
- Actual 2010 capital expenditures, acquisitions, Specialty Products earnings, and the approximately 28% effective tax-rate outlook.
- The impact of federal and state transportation funding, including ARRA and post-2010 highway funding decisions.
- Exposure to diesel and other energy costs, transportation availability, weather, construction-market demand, and customer credit risk.