MARTIN MARIETTA MATERIALS INC quarterly report, Q2 FY2011

Martin Marietta Materials, Inc. — 2011 Second-Quarter Form 10-Q

Reporting period: Quarter and six months ended June 30, 2011; filed August 8, 2011. The company operates Aggregates segments in the Mideast, Southeast and West, plus Specialty Products. Results are seasonal and affected by construction activity and weather.

Financial performance

MetricQ2 2011Q2 2010Six months 2011Six months 2010
Net sales$426.7 million$442.8 million$733.0 million$738.3 million
Total revenues$493.0 million$504.6 million$849.5 million$845.6 million
Gross profit$96.5 million$117.7 million$117.6 million$137.3 million
Earnings from operations$63.0 million$90.7 million$56.9 million$77.8 million
Net earnings attributable to Martin Marietta$35.8 million$54.4 million$18.4 million$30.2 million
Diluted earnings per share$0.78$1.18$0.39$0.65
Operating margin, excluding freight14.8%20.5%7.8%10.5%
Gross margin, excluding freight22.6%26.6%16.0%18.6%

Cash flow and liquidity: Six-month operating cash flow was $56.7 million versus $86.3 million in 2010. Capital expenditures were $58.7 million, acquisitions used $49.9 million, and dividends paid were $36.8 million. Cash and cash equivalents were $26.1 million at June 30, 2011, down from $70.3 million at December 31, 2010.

Debt: Total debt was $1.086 billion, including $979.0 million of long-term debt. The company had $250 million outstanding under a new term loan, $60 million under its revolving facility and $100 million under its accounts receivable facility. Trailing-twelve-month debt to defined EBITDA was 3.09x versus a 3.5x covenant limit. Revolving-facility unused capacity was $288 million; the accounts receivable facility had no additional availability.

Material changes versus the prior comparable period

  • Q2 net sales decreased 3.6%, operating earnings decreased 30.5%, and diluted EPS decreased 33.9% year over year.
  • Six-month net sales decreased 0.7%, while operating earnings declined 26.9% and diluted EPS declined 40.0%.
  • Aggregates heritage volumes declined 9.3% in Q2 and 6.2% year to date, while pricing increased 2.6% and 1.8%, respectively. Infrastructure shipments declined 11% in Q2.
  • Severe rainfall, Mississippi River flooding, reduced infrastructure spending and the winding down of stimulus projects constrained shipments. Aggregates operating earnings fell to $47.1 million in Q2 from $80.0 million.
  • Specialty Products reached quarterly records: Q2 net sales of $49.6 million and operating earnings of $19.3 million; six-month net sales were $98.7 million and operating earnings were $34.4 million.
  • Energy costs increased materially: average diesel cost was $3.08 per gallon versus $2.12 in the prior-year quarter. Heritage aggregates direct production costs nevertheless declined 2.5%.
  • Other operating income declined because the prior-year period included a benefit from settling Greenwood, Missouri litigation below the established reserve.
  • The company acquired aggregates, asphalt and ready-mixed concrete operations in western San Antonio, Texas, adding more than 200 million tons of limestone reserves. It also purchased the remaining 1% interest in an existing limited liability company for $10.4 million.
  • The company refinanced $242.1 million of notes due April 1, 2011 with variable-rate borrowings and entered into new senior unsecured credit facilities.

Guidance, outlook and risks

  • Management forecast full-year 2011 aggregates volume ranging from flat to down 3%, with aggregates pricing up 2% to 4% and production cost per ton flat to slightly lower.
  • Specialty Products pretax earnings were expected to be $54 million to $56 million for 2011. Interest expense was expected to be approximately $60 million, the effective tax rate approximately 26%, and capital expenditures approximately $155 million.
  • Management expected infrastructure shipments to decline in the mid-single digits, nonresidential shipments to be flat to slightly higher, and residential activity to improve, but noted that weather-delayed shipments might not be recovered.
  • Principal risks include U.S. construction weakness, uncertain federal and state transportation funding, residential and commercial construction declines, fuel and other input-cost inflation, transportation constraints, adverse weather, interest-rate exposure, acquisition integration and compliance with debt covenants.
  • A hypothetical 100-basis-point increase in interest rates on $410 million of variable-rate borrowings would increase annual interest expense by approximately $4.1 million. A 10% change in energy costs would affect annual pretax earnings by approximately $15.6 million.
  • Management stated that cash, projected operating cash flow and financing availability should be sufficient for operating needs, debt service, capital expenditures, acquisitions and dividends. Litigation was not expected to have a material adverse effect, although the company had 48 matters pending before the Federal Mine Safety and Health Review Commission.

Important facts for investors to verify

  • Whether aggregates volumes recover within management’s flat-to-down-3% full-year outlook and whether planned pricing increases offset volume and energy-cost pressure.
  • Actual compliance with the 3.5x leverage covenant, particularly after the San Antonio acquisition and under weaker construction conditions.
  • Refinancing or repayment plans for the $100 million accounts receivable facility maturing April 20, 2012 and the $60 million revolving-facility borrowing.
  • Progress and final cost of the $53 million dolomitic lime kiln project and the approximately $155 million 2011 capital-expenditure program.
  • Exposure to federal and state infrastructure funding, especially in North Carolina, Texas, Georgia, Iowa and Louisiana, which together represented approximately 55% of 2010 Aggregates net sales.
  • Resolution of MSHA matters, including approximately $0.5 million of outstanding assessments at June 30, 2011; the filing text states that no material adverse legal outcome was expected.
  • The filing’s non-GAAP margins, which exclude freight and delivery revenues and costs, should be reconciled with GAAP margins when comparing performance.