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
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six 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 freight | 14.8% | 20.5% | 7.8% | 10.5% |
| Gross margin, excluding freight | 22.6% | 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.