Martin Marietta Materials released the financial results for the second quarter and the six months that ended June 30
Martin Marietta Materials released the financial results for the second quarter and the six months that ended June 30. The company saw aggregate shipment grow for the first time in four years.
Martin Marietta Materials President and CEO Ward Nye said, "We are extremely pleased with our second quarter results in which we showed significant improvement despite the continuing challenging economic environment. Of particular note is the performance of our heritage aggregates volume, which increased approximately 9%, making this the first quarter in four years with growth in heritage aggregates shipments. Overall, however, the most encouraging sign is that this volume growth was widespread across each of our end-use markets and geographic segments.
"As an end use, infrastructure continues to represent over 55% of our business and, as such, played a significant role in our second-quarter results. During the second quarter of 2010, we experienced an 11% increase in aggregates volume in the infrastructure market over the comparable second quarter of 2009. As expected, many of our key states began spending funds from the American Recovery and Reinvestment Act in earnest during the quarter, and aggregates volumes consumed on stimulus projects increased 200% compared with the prior-year quarter. Even more notably, the infrastructure end-use market, excluding shipments to stimulus-funded projects, had volume growth of 6% due to state spending on delayed road maintenance projects. Further, volume growth of 10% in our nonresidential end-use market was driven by an increase in oilfield activity, as aggregates are essential to build oilfield roads and drilling pads. The nonresidential construction market, excluding shipments to the oilfield industry, had volume growth of 3.5%, partially as a result of contractors and project owners taking advantage of historically low construction prices. Residential and ChemRock/Rail had volume increases of 8% and 6%, respectively.
"Our Mideast Group and West Group each generated double-digit volume increases--nearly 11% and 10%, respectively, in heritage aggregates product line shipments. Growth in the Mideast Group was fueled by stimulus-funded jobs, as 40% of its increased volume was attributable to shipments to these projects. More specifically, our Indiana markets benefited significantly from this volume growth, reporting a 45% increase in heritage aggregates shipments for the second quarter 2010. The West Group benefited from both stimulus-funded projects and the increased shipments to the oilfield industry.
"Overall heritage aggregates product line pricing decreased 3.8% compared with the prior-year quarter. Consistent with recent trends, pricing varied significantly by market and ranged from an increase of 12% to a decrease of 14%. Competitive forces remain a challenge, particularly in markets that enjoyed strong residential and nonresidential construction activity during the previous economic cycle. These markets now often have an oversupply of contractors who have tended to bid aggressively on stimulus-related projects, thereby reducing the competitiveness of our long-term customers. We expect this pressure will ease as residential and nonresidential construction markets continue to either recover or reach levels of sustained stability. In addition to the competitive pressures, geographic mix is also an important factor relative to overall aggregates pricing. Our top markets, in terms of volume recovery, for the second quarter 2010--Indiana, Arkansas and North Texas--each have average selling prices less than the overall company average.
"Still, the incremental operating margin achieved in these markets underscores our view that volume recovery, combined with our lean operating cost structure, will lead to record incremental margins even as we experience pricing pressures. For example, the Mideast Group reported an incremental operating margin, excluding freight and delivery revenues, of 78% for the second quarter of 2010, driven in large part by the volume recovery in the Indiana markets. We expect this type of performance to repeat in multiple markets across the company as volume rebounds.
"Our specialty products business once again achieved record performance and contributed significantly to our second-quarter results. The business expanded its net sales by $14.6 million, or 44%, compared with the prior-year quarter and its operating margin (excluding freight and delivery revenues) by 1,160 basis points to 35.1% for the quarter. Specialty products had volume growth in all major product lines and continued its focus on cost control programs. Earnings from operations of $16.8 million increased $9 million when compared with the prior-year quarter and surpassed the record for earnings from operations established in the first quarter of 2010.
"Our strong results continue to reflect our ability to control operating costs, as well as selling, general and administrative expenses, and our operating team also remains focused on safety, productivity and customer service. Direct production costs in our aggregates business increased $14.6 million, or 6.6%, driven in large part by $5.8 million of increased energy costs. Selling, general and administrative expenses declined $3.2 million compared with the prior-year quarter, primarily attributable to a decrease in stock-based compensation expense. Our objective is to hold SG&A expenses flat with 2009, excluding required payments under certain retirement plans, which will occur in the second half of the year.
"During the second quarter of 2010, we settled legal proceedings related to our Greenwood, Mo., operation for $7 million. In connection with the settlement, we reversed a previously established reserve, thereby increasing earnings from operations of the West Group by $5 million. For the second quarter 2010, we reported consolidated earnings from operations of $90.6 million compared with consolidated earnings from operations of $72.9 million in the second quarter 2009. The overall effective tax rate for the quarter was 24% compared with 28% for the second quarter 2009. We expect the overall effective tax rate for the full year 2010 to be approximately 28%.
"We have remained highly attentive to our balance sheet, liquidity and cash flow generation. We ended the quarter with $32.1 million in cash and cash equivalents, available borrowings of $323 million on our revolving credit agreement and available borrowings of $75 million on our secured accounts receivable credit facility.
"Capital investment in organic growth prior to the current recession has positioned our operations for strong performance in an economic recovery. Our base of highly efficient, cost-effective operating assets allows us to safely and appropriately reduce maintenance capital investment and provides opportunities to allocate capital in a manner that maximizes our long-term shareholder value. Capital expenditures were $68.6 million for the six months ended June 30, 2010, compared with $74.8 million for the comparable prior-year period. Capital expenditures are forecast at $135 million for 2010, a reduction of $25 million from our previous guidance.
"Cash provided by operating activities for the six months ended June 30, 2010, was $86.3 million as compared with $116.7 million for the comparable period in 2009. Due to increased sales in the second quarter of 2010, we had a $94.9 million build in accounts receivable during the current period. We expect this trend to continue through the balance of the year. Cash used in the build of accounts receivable was partially offset by $12.9 million generated by our inventory-management initiatives through the first six months of 2010.
"In April 2010, we settled our obligation related to the floating-rate senior notes through the use of cash and short-term financing, reducing total debt by $143 million. At June 30, 2010, we had total outstanding debt of $1.056 billion, of which $244.1 million is classified as current including $242 million of notes due April 2011.
"At June 30, 2010, our ratio of consolidated debt to consolidated earnings before interest expense, tax expense, and depreciation, depletion and amortization expense, as defined, for the trailing 12-months was 2.84 times.
"Our outlook for the corporation in 2010 has improved based on improving stability and expected growth in overall aggregates demand through the remainder of the year. Evidence of that stability was reflected in our second-quarter aggregates shipments. We expect volumes sold to the infrastructure construction market to continue to increase as recipients of ARRA funds initiate projects to which monies have been obligated. For the full year, we expect: infrastructure construction volume to be up 8% to 12%; nonresidential construction volume to decline 12% to 15%, improved from our earlier forecast; residential construction volume to be up 12% to 15%; and growth of 10% for our ChemRock/Rail products.
"Considering all these factors, we are revising our full-year volume guidance upward. We expect aggregates volume growth of 4% to 6%, aggregates pricing to range from down 1% to down 3% and aggregates production cost per ton to remain flat in 2010 compared with the prior year. This combination should lead to increased aggregates sales and improved gross margin and profitability in 2010. Energy costs, primarily diesel fuel consumed by off-road mobile quarry equipment, are likely to increase slightly compared to 2009. We expect the specialty products segment to contribute $46 million to $48 million in pretax earnings for 2010. Interest expense should be approximately $70 million in 2010. Consistent with results for the first six months of 2010, we expect an increased use of cash for working capital, most notably accounts receivable, as revenues grow.
"Although it is too early to issue guidance for 2011, we have begun to frame our initial view. Stability in federal funding for infrastructure is a critical issue moving into 2011 and we are currently operating under a Congressional continuing resolution that extended the Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users through Dec. 31, 2010. Early in 2010, we were hopeful that a significantly increased highway bill would be passed by the lame-duck Congress after elections in November. Such a process had historic precedent in both the 1980s and 1990s when the existing highway bills were reauthorized, each at notably higher funding levels, which were financed by increased user fees. However, a recent report issued by the Congressional Budget Office stated that the existing Highway Trust Fund could maintain the current level of spending for two years. Thus, we now believe the CBO report will serve to make reauthorization a less pressing issue for politicians already reluctant to increase spending. Accordingly, we believe working under some form of a Congressional continuing resolution of SAFETEA-LU for 2011 is likely. We still expect to see approximately 30% in ARRA infrastructure funds spent in 2011 together with an extended federal highway bill that will keep spending at constant funding levels. We also expect to see improvement in the residential construction market and we expect nonresidential construction to trough in 2010, with modest 2011 volume recovery."