Business Context and Reporting Period
Company: Martin Marietta Materials, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 for construction and infrastructure projects. The Specialty Products segment produces magnesia-based chemicals and dolomitic lime.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Sales | $428,615 | $1,169,627 |
| Total Revenues | $488,311 | $1,328,737 |
| Gross Profit | $117,750 | $277,936 |
| Earnings from Operations | $89,215 | $173,042 |
| Net Earnings (Consolidated) | $56,868 | $91,079 |
| Net Earnings Attributable to Company | $55,514 | $88,612 |
| Diluted EPS (Continuing Ops) | $1.23 | $1.98 |
| Cash and Cash Equivalents | $193,835 | $193,835 |
| Net Cash Provided by Operating Activities | N/A | $234,598 |
| Total Debt (Long-term + Current) | $1,264,898 | $1,264,898 |
Margins (Excluding Freight & Delivery):
- Gross Margin (3 Months): 27.5%
- Operating Margin (3 Months): 20.8%
- Gross Margin (9 Months): 23.8%
- Operating Margin (9 Months): 14.8%
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 18.5% in the third quarter and 19.0% for the nine months ended September 30, 2009, compared to the prior year. This was driven by a 22.1% volume decline in heritage aggregates, partially offset by a 1.3% price increase in the quarter (2.8% for the nine months).
- Profitability: Earnings from operations decreased 22.4% in the quarter and 34.2% for the nine months. However, Specialty Products reported record quarterly earnings, and the Aggregates Midwest Division achieved record quarterly gross profit despite volume declines.
- Cost Reductions: Energy costs decreased by $24.5 million (40%) in the quarter compared to the prior year. Selling, general, and administrative expenses decreased by $4.8 million in the quarter and $10.6 million for the nine months.
- 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. These assets are reported in the West Group.
- Capital Structure: The company issued 3.05 million shares of common stock in March 2009, raising net proceeds of $232.5 million. It also entered into a $130 million Term Loan and a $100 million AR Credit Facility.
Guidance, Outlook, and Risks
2009 Guidance Revision: Management revised the full-year 2009 diluted earnings per share guidance to a range of $2.20 to $2.45. This outlook assumes aggregates volumes down 21% to 23% compared to 2008, with price increases of 2% to 3%.
Outlook:
- Stimulus Impact: Management expects only about 15% of federal stimulus projects to reach the construction phase in 2009, with the bulk of activity shifting to 2010.
- Market Conditions: Commercial construction remains weak, particularly in office and retail. Residential construction is expected to remain flat in 2009 but may see moderate growth in 2010. Infrastructure demand is pressured by state budget deficits.
- Energy Costs: Favorable energy prices are expected to contribute $35 million to $50 million to 2009 operating profitability.
Risks and Contingencies:
- Legal Proceedings: The company is involved in legal proceedings related to its Greenwood, Missouri operation. While management believes its position is strong, a future charge could have a material adverse effect.
- Debt Covenants: The company is subject to a leverage ratio covenant (Debt/EBITDA not to exceed 3.25:1). As of September 30, 2009, the ratio was 2.95. A violation could allow lenders to declare debt immediately due.
- Market Risks: Significant exposure to interest rate fluctuations on floating-rate debt and volatility in petroleum-based product costs (diesel, natural gas).
Investor Verification Checklist
- Volume Recovery: Verify if the anticipated 2010 volume rebound from federal stimulus and infrastructure projects materializes as projected.
- Debt Maturity: Monitor the refinancing of the $217.4 million Floating Rate Senior Notes due in April 2010 and the impact of rising interest rates on the Term Loan and AR Credit Facility.
- State Funding: Track the fiscal health of key operating states (North Carolina, Texas, Georgia) and their ability to fund infrastructure projects, which represent a significant portion of revenue.
- Energy Costs: Confirm that diesel and energy costs remain at favorable levels to support the projected $35-$50 million profitability contribution.
- Legal Exposure: Review updates on the Greenwood, Missouri legal proceedings to assess potential liability.