Martin Marietta Materials, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011; filed November 7, 2011. Results are unaudited. The company operates Aggregates segments in the Mideast, Southeast, and West, plus Specialty Products. Aggregates serve infrastructure, commercial, residential, industrial, railroad, and related markets across 31 states and selected international markets.
Financial Performance and Position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $464.0 million | $443.7 million | $1.197 billion | $1.182 billion |
| Gross profit | $111.5 million | $113.8 million | $229.1 million | $251.1 million |
| Earnings from operations | $79.0 million | $83.9 million | $135.9 million | $161.7 million |
| Net earnings attributable to Martin Marietta | $49.2 million | $52.0 million | $67.5 million | $82.2 million |
| Diluted EPS from continuing operations | $1.07 | $1.13 | $1.46 | $1.78 |
- Margins: Q3 GAAP gross margin was 20.8%, versus 22.3% in the prior-year quarter; nine-month gross margin was 16.5%, versus 18.5%. Excluding freight and delivery revenues, gross margin was 24.0% for Q3 and 19.1% for nine months, down from 25.6% and 21.2%, respectively.
- Operating margin: GAAP operating margin was 14.8% in Q3 and 9.8% for nine months, compared with 16.5% and 11.9% in the comparable periods. Excluding freight and delivery revenues, operating margin was 17.0% in Q3 and 11.4% for nine months.
- Cash flow: Nine-month cash provided by operating activities was $179.9 million, down from $202.6 million. Capital expenditures were $93.5 million, acquisitions used $49.9 million, dividends paid were $55.2 million, and ending cash was $56.8 million.
- Liquidity and debt: Total debt was $1.045 billion at September 30, 2011, including $1.038 billion classified as long-term. The company had $328 million of unused revolving-facility capacity and no available borrowing capacity under its accounts-receivable facility. Debt-to-defined-EBITDA was 3.07x versus a 3.5x covenant limit.
- Balance sheet: Total assets were $3.159 billion and total equity was $1.486 billion. Accounts receivable were $259.8 million and inventories were $337.7 million.
- Dividends: Cash dividends were $0.40 per common share for the quarter and $1.20 per share for the first nine months.
Material Changes Versus Prior Comparable Period
- Q3 net sales increased 4.6%, but net earnings attributable to Martin Marietta declined 5.5% and diluted EPS declined from $1.13 to $1.07. Nine-month net sales increased 1.3%, while diluted EPS declined from $1.78 to $1.46.
- Aggregates Q3 net sales increased to $413.6 million from $401.4 million. Heritage aggregates volume declined 2.2%, while pricing increased 2.8%. For nine months, heritage volume declined 4.7% and pricing increased 2.1%.
- Aggregates profitability weakened because of lower volume, higher diesel and other energy costs, higher liquid-asphalt costs, and other cost increases. Diesel averaged $3.00 per gallon versus $2.05 in the prior-year quarter and reduced Q3 diluted EPS by approximately $0.08.
- Specialty Products was a major offset, with Q3 net sales of $50.3 million and operating earnings of $15.6 million, increases of 19% and approximately 44%, respectively. Nine-month sales were $149.1 million and operating earnings were $50.0 million.
- Q3 SG&A increased $2.3 million, primarily because of a $2.8 million nonrecurring early-retirement benefit. Excluding that benefit, adjusted Q3 diluted EPS was $1.11 and adjusted SG&A was 6.6% of net sales.
- Interest expense declined to $13.4 million in Q3 and $45.3 million for nine months, primarily because refinancing increased the proportion of lower-cost variable-rate debt.
- The company acquired aggregates, ready-mixed concrete, and asphalt operations in western San Antonio, Texas, adding more than 200 million tons of limestone reserves. Goodwill increased by $12.5 million in connection with the acquisition.
- In May 2011, the company acquired the remaining 1% interest in an existing limited liability company for $10.4 million.
- The company refinanced $242.1 million of 6.875% notes maturing April 1, 2011 using a $250 million term loan and $100 million of accounts-receivable-facility borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Management revised 2011 aggregates shipment guidance to a 2% to 4% decline, while reaffirming expected aggregates pricing growth of 2% to 4%.
- Management expected approximately $60 million of 2011 Specialty Products pretax earnings, approximately $60 million of interest expense, a 26% effective tax rate, and approximately $155 million of capital expenditures.
- A $53 million dolomitic-lime kiln project began in May 2011 and was expected to be substantially complete by late 2012. The 2011 outlook included the first $25 million of project spending.
- Management expected infrastructure shipments to decline in the mid-single digits in 2011 and nonresidential shipments to decline slightly. Residential shipments were expected to improve at a rate comparable with 2010.
- Long-term federal infrastructure funding remained uncertain. The company cited risks from construction-market weakness, state and federal budget pressures, energy and diesel costs, weather, transportation availability, interest rates, credit-market access, acquisition integration, and potential debt-covenant breaches.
- On October 12, 2011, the company announced a proposed asset exchange with Lafarge involving Denver-area aggregates, concrete, asphalt, and paving assets in exchange for Mississippi River-area properties and cash. Closing was subject to regulatory approval and expected within approximately 60 days.
- Effective-tax-rate changes during Q3 increased nine-month net earnings by $3.6 million, or $0.08 per diluted share, due to favorable tax settlements and refunds. The prior-year period benefited from a $2.8 million legal-settlement impact.
- Legal proceedings were considered unlikely by management and counsel to have a material adverse effect. Mine-safety disclosures reported 33 significant-and-substantial citations, one imminent-danger order, $35,898 of proposed assessments, and approximately $0.6 million of assessments outstanding at September 30, 2011. No fatalities were reported.
- A hypothetical 100-basis-point increase in rates on $370 million of variable-rate borrowings would increase annual interest expense by approximately $3.7 million. A 10% change in energy costs would affect annual pretax earnings by approximately $15.6 million.
Investor Verification Points
- Verify whether aggregates pricing can offset continued volume weakness and energy, asphalt, and freight-cost inflation.
- Monitor the 3.07x leverage ratio against the 3.5x covenant, the April 20, 2012 maturity of the $100 million accounts-receivable facility, and refinancing execution.
- Assess the timing, regulatory approval, financing, and strategic benefits of the Lafarge asset exchange.
- Evaluate the San Antonio acquisition’s integration, reserves, volume contribution, and effect on leverage and profitability.
- Reconcile reported EPS with the $0.04 per-share nonrecurring early-retirement benefit and the $0.08 per-share tax benefit.
- Track federal and state infrastructure funding, residential and nonresidential construction demand, weather, diesel prices, and transportation capacity.
- Confirm the status and resolution of MSHA citations and the 55 matters pending before the Federal Mine Safety and Health Review Commission.