Aggregates Stability Reduces Martin Marietta Loss by 28%

RALEIGH, N.C. (May 3, 2011) -- Martin Marietta Materials Inc. (NYSE:MLM) today announced results for the first quarter ended March 31, 2011.

"Our first-quarter financial results confirmed our expectations, reflecting a 240-basis-point improvement in our consolidated operating margin (excluding freight and delivery revenues) over the prior-year quarter," said Ward Nye, president and CEO of Martin Marietta Materials. "I am especially pleased our Aggregates business experienced greater levels of stability during the quarter. In particular, aggregates product line pricing, supported partly by 2010 volume growth, increased for the first time in more than a year. We believe this pattern of stability will continue."

Notable points for the quarter (comparisons are with the prior-year quarter)

  • Net sales increased to $306.2 million compared with $295.6 million
  • Loss per diluted share of $0.39 compared with loss per diluted share of $0.54
  • Increased diesel costs negatively affected earnings by $0.05 per diluted share
  • Heritage aggregates product line pricing up 0.4%
  • Heritage aggregates product line volume down 1.2%
  • Specialty Products record first-quarter earnings from operations of $15.1 million
  • Selling, general and administrative (SG&A) expenses down 190 basis points as a percentage of net sales

Comment

"Since heavy-construction activity slows during the winter months, our first-quarter results seldom reflect annual performance," Nye continued. "That said, milder weather in some of our markets early in the quarter led to monthly aggregates shipment growth over the prior-year periods. In contrast to 2010, weather patterns deteriorated in the critical last two weeks of March, slowing momentum gained early in the quarter. We believe these weather-related delays in shipments were a primary factor leading to an overall quarterly decrease of 1% in our heritage aggregates volume. However, despite a volume decrease for the quarter and the negative impact of rising diesel prices, we achieved an incremental operating margin (excluding freight and delivery revenues) for our Aggregates business, in line with our expectations.

"Infrastructure as our largest end-use market, comprises approximately half of our quarterly aggregates shipments. Uncertainty stemming from the absence of a long-term federal highway bill has negatively affected the infrastructure construction market. For the quarter, infrastructure shipments declined 3% compared with the prior-year quarter.

"The residential end-use market volume grew 15% compared with the prior-year quarter, reflecting increased multi-family construction activity. Our ChemRock/Rail end-use market experienced a 2% volume increase compared with the prior-year quarter. The commercial component of the nonresidential end-use market, particularly in our San Antonio District, reflected increased shipments during the quarter. While we continue to expect strong volumes to the energy sector for the full year, shipments to this industry declined from the prior-year quarter, which led to an overall 3% reduction in nonresidential shipments.

"Compared with the prior-year quarter, changes in aggregates pricing varied by geographic region. In the first quarter of 2011, more of our markets reported pricing increases than in the past two years. For example, quarterly heritage aggregates pricing for the Southeast Group increased 5.8%, with price increases in the Florida market compensating for a price decrease in the Alabama market. Pricing in the West Group was negatively affected by product mix, particularly in the Southwest market. Other markets in the West, including North Texas and Iowa, had pricing increases.

"Our Specialty Products business benefitted from strong demand, primarily in the magnesia chemicals product line, where volume records were achieved for several product lines. The Specialty Products business reported record quarterly net sales of $49.1 million, an 18% increase over the prior-year quarter. Record first-quarter earnings from operations of $15.1 million grew 35% compared with the prior-year quarter, reflecting increased product demand and our continued cost control efforts. Thus, while we expect strong performance from this business segment for the remainder of the year, prospective prior-year comparisons will be versus record 2010 quarterly performance.

"Our continuous commitment to cost control is evident in our SG&A expenses, down $4.3 million, or 190 basis points as a percentage of net sales, primarily due to lower personnel and pension costs. Consolidated direct production costs increased 7%, primarily due to a 14% increase in noncontrollable energy costs. Higher energy prices also increased embedded freight costs for the quarter, as transportation providers passed on their rising energy costs.

"For the first quarter 2011, we reported a loss from operations of $6.1 million, a significant improvement compared with a loss from operations of $12.9 million for the first quarter 2010.

"The overall effective tax rate for the quarter was 27% compared with 17% for the first quarter 2010. The 2010 effective tax rate includes the effect of a $2.8 million charge resulting from the Patient Protection and Affordable Care Act (the "Act").

Liquidity and Capital Resources

"We continue the attentive management of our balance sheet, liquidity and cash flow generation. Cash from operating activities for the first quarter was $21.3 million compared with $27.1 million for 2010, primarily due to the timing of federal income tax refunds. Working capital management remains a priority and to that end, days sales outstanding was 45 days, essentially flat with 2010 and the change in net working capital improved nearly $9 million in the first quarter compared with 2010.

"During the first quarter, we invested $30.7 million of capital in organic growth projects. In May 2011, we will begin the construction of a $53 million dolomitic lime kiln at our Specialty Products location in Woodville, Ohio. This project is expected to be completed by the end of 2012.

"On March 31, 2011, we entered into a new $600 million credit agreement that provides a $350 million four-year unsecured revolving facility ("Revolving Facility") and a $250 million senior unsecured term loan ("Term Loan Facility"). At closing, we borrowed $250 million under the Term Loan Facility and on April 1, 2011, we borrowed $100 million on our accounts receivable credit facility. These borrowings were used to repay amounts outstanding under our previous term loan as of March 31, 2011, and also $242 million of Notes that matured on April 1, 2011. The new credit agreement retained the leverage ratio covenant that limits our ratio of consolidated debt to consolidated earnings before interest expense, tax expense, and depreciation, depletion and amortization expense (EBITDA), as defined, for the trailing twelve-months to 3.5 times. However, if no amounts are outstanding under both the new revolving facility and our accounts receivable securitization facility, consolidated debt may be reduced by our cash and cash equivalents in excess of $50 million, such reduction not to exceed $200 million, for purposes of the covenant calculation. At March 31, 2011, our ratio of consolidated debt to consolidated EBITDA, as defined, for the trailing twelve-months was 2.73 times. We are pleased that Standard & Poor's recently reaffirmed our credit rating and upgraded our outlook from negative to stable.

2011 Outlook

"A variety of factors make it difficult to form a complete perspective for 2011. A noteworthy consideration will be the rate at which states spend available Stimulus funds for infrastructure projects. We are operating under a Congressional continuing resolution that extends the Safe, Accountable, Flexible and Efficient Transportation Equity Act — A Legacy for Users (SAFETEA-LU) through September 30, 2011. Although there is bipartisan Congressional agreement that infrastructure is a key and essential governmental priority, there is heightened sensitivity with respect to all government spending due to the national deficit. Without interim clarity, a definitive outlook is uncertain. We believe there are several options for federal infrastructure funding, including additional continuing resolutions that maintain current funding through the next presidential election or a new federal highway bill with flat or reduced funding and which may be shorter than the typical six-year term. While operating under a continuing resolution is more likely for 2011, we believe Congress understands that fully funded, reauthorized infrastructure legislation at the Federal level serves as an efficient means of jobs creation and investment in America's economic growth.

"Given this uncertainty, our 2011 outlook assumes there will be additional continuing resolutions that maintain current federal funding levels. We also expect that state spending on infrastructure should remain relatively constant and 30% of ARRA infrastructure funds will be spent this year. We expect the infrastructure end-use market to be flat to slightly down; we anticipate a modest volume recovery in the commercial component of our nonresidential end-use market. Considering the notable aggregates shipments to the energy sector in 2010, we expect the rate of growth in the heavy industrial component of our nonresidential end-use market to moderate in 2011. Natural gas prices and the timing of lease commitments for oil and natural gas companies will be significant factors for energy-sector activity. Additionally, given current oil prices, there is a possibility of increased wind farm construction activity. Overall, we expect nonresidential end-use shipments in 2011 to increase in the mid-single digit range. We have noticed early signs of potential recovery in the multi-family component of the residential construction market and we expect the rate of improvement in this end-use market to increase over 2010. Finally, our ChemRock/Rail shipments should be stable compared with 2010 shipments. Cumulatively, we expect flat to a 3% improvement in overall aggregates volume in 2011.

"Stability in our aggregates shipments will likely lead to sustainable price increases. However, such increases may not be uniform throughout our enterprise. Overall, we expect full-year 2011 aggregates pricing will range from flat to a 2% increase. Additionally, rising energy costs may provide an impetus for certain mid-year price increases.

"Aggregates production cost per ton in 2011 is expected to range from flat to a slight decrease compared with 2010, despite rising energy costs. The Specialty Products segment should contribute $50 million to $52 million in pretax earnings for 2011, as economic recovery drives industrial demand for magnesia-based chemicals products and continued demand for environmental applications is driven by the United States' focus on green technology and innovation.

"Selling, general and administrative expenses should be lower in 2011, primarily due to lower pension expense. Interest expense should be approximately $60 million in 2011, or $8 million less than 2010, resulting from our refinancing of $242 million of our 6.875% Senior Notes with variable-rate borrowings under our outstanding credit facilities. Our effective tax rate is expected to be 26%. Capital expenditures are forecast at $175 million for 2011, including the first $25 million of the $53 million project in Specialty Products and nearly $50 million for selective high-quality growth projects."

Risks to Outlook

The 2011 estimated outlook includes management's assessment of the likelihood of certain risk factors that will affect performance. The most significant risk to 2011 performance will be, as previously noted, the United States economy and its impact on construction activity.

Other risks related to the Corporation's future performance include, but are not limited to: both price and volume and include a recurrence of widespread decline in aggregates pricing; a greater-than-expected decline in infrastructure construction as a result of continued delays in traditional federal, ARRA, state and/or local infrastructure projects and continued lack of clarity regarding the timing and amount of the federal highway bill; a decline in nonresidential construction; a slowdown in the residential construction recovery; or some combination thereof. Further, increased highway construction funding pressures resulting from either federal or state issues can affect profitability. Currently, nearly all states are experiencing some funding-level pressures driven by lower tax revenues. If these pressures reduce transportation budgets more than in the past, construction spending could be negatively affected. North Carolina and Texas are among the states experiencing these general pressures, although recent statistics indicate that tax revenues are increasing; these states disproportionately affect our revenue and profitability.

The Corporation's principal business serves customers in construction aggregates-related markets. This concentration could increase the risk of potential losses on customer receivables; however, payment bonds normally posted on public projects, together with lien rights on private projects, help to mitigate the risk of uncollectible receivables. The level of aggregates demand in the Corporation's end-use markets, production levels and the management of production costs will affect the operating leverage of the Aggregates business and, therefore, profitability. Production costs in the Aggregates business are also sensitive to energy prices, both directly and indirectly. Diesel and other fuels change production costs directly through consumption or indirectly in the increased cost of energy-related consumables, such as, steel, explosives, tires and conveyor belts. Fluctuating diesel pricing also affects transportation costs, primarily through fuel surcharges in the Corporation's long-haul distribution network.

Transportation in the Corporation's long-haul network, particularly barge availability on the Mississippi River system as well as rail cars and locomotive power to move trains, affects the Corporation's ability to efficiently transport material into certain markets, most notably Texas, Florida and the Gulf Coast. The Aggregates business is also subject to weather-related risks that can significantly affect production schedules and profitability. The first and fourth quarters are most adversely affected by winter weather.

Risks to the 2011 outlook include shipment declines as a result of economic events beyond the Corporation's control. In addition to the impact on nonresidential and residential construction, the Corporation is exposed to risk in its estimated outlook from credit markets and the availability of and interest cost related to its debt.

Consolidated Financial Highlights

Net sales for the quarter were $306.2 million, a 3.6% increase versus the $295.6 million recorded in the first quarter of 2010. The loss from operations for the first quarter of 2011 was $6.1 million compared with $12.9 million in 2010. Net loss attributable to Martin Marietta Materials was $17.4 million, or $0.39 per diluted share, versus 2010 first-quarter net loss attributable to Martin Marietta Materials of $24.2 million, or $0.54 per diluted share.

Business Financial Highlights

Net sales for the Aggregates business during the first quarter of 2011 were $257.1 million compared with 2010 first quarter net sales of $253.8 million. Aggregates pricing at heritage locations was up 0.4%, while volume declined 1.2%. The loss from operations for the 2011 first quarter was $16.5 million versus $19.3 million in the year-earlier period.

Specialty Products' first-quarter net sales of $49.1 million increased 17.8% from prior-year net sales of $41.8 million. Earnings from operations for the first quarter were $15.1 million compared with $11.2 million in the year-earlier period.

Martin Marietta Materials Inc. is the nation's second largest producer of construction aggregates and a producer of magnesia-based chemicals and dolomitic lime. For more information about Martin Marietta Materials Inc., refer to the Corporation's website at www.martinmarietta.com.

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