Martin Marietta Materials, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the same period in 2017. Martin Marietta supplies aggregates, cement, ready-mixed concrete, asphalt and paving services through its Mid-America, Southeast and West groups, and operates a Magnesia Specialties business. The company served customers through 282 quarries, mines and distribution yards in 30 states, Canada, the Bahamas and the Caribbean.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $802.0 million | $843.9 million | Down 5.0% |
| Gross profit | $110.4 million | $147.1 million | Down 24.9% |
| Gross margin | 13.8% | 17.4% | Down 360 bps |
| Earnings from operations | $39.1 million | $77.2 million | Down 49.4% |
| Operating margin | 4.9% | 9.1% | Down 420 bps |
| Net earnings attributable to Martin Marietta | $10.0 million | $42.3 million | Down 76.3% |
| Diluted EPS | $0.16 | $0.67 | Down $0.51 |
| Consolidated EBITDA | $123.3 million | $147.7 million | Down 16.5% |
| Cash flow from operations | $105.0 million | $73.9 million | Up 42.2% |
Cash and cash equivalents were $1.422 billion at March 31, 2018, compared with $55.4 million a year earlier. Total debt was $3.028 billion, including $300.0 million of current maturities; long-term debt was $2.728 billion. The company had a $700 million revolving facility and a $300 million trade receivable facility, and reported a 1.62x trailing-twelve-month debt-to-consolidated EBITDA ratio versus a 3.50x covenant limit. Cash used for investing activities was $93.6 million, including $96.3 million of capital expenditures. Dividends paid were $27.9 million, and the quarterly dividend was $0.44 per share.
Material changes versus the prior comparable period
- Building Materials revenue declined to $732.7 million from $775.3 million, while Magnesia Specialties revenue increased modestly to $69.3 million from $68.6 million.
- Aggregates shipments declined 7.9%, primarily because the prior-year quarter benefited from unusually favorable weather; transportation logistics issues also affected 2018 volumes. Average aggregates pricing increased 2.3%.
- Building Materials operating earnings fell to $43.2 million from $84.7 million. The West Group declined to $35.0 million from $61.2 million, and the Southeast Group declined to $2.0 million from $10.1 million.
- Magnesia Specialties operating earnings increased to $21.2 million from $19.9 million, supported by lower contract-services and maintenance costs.
- Cement outage costs increased to $7.3 million from $4.4 million. SG&A increased to 8.7% of revenue from 8.2%.
- Interest expense increased to $35.1 million from $20.9 million, primarily reflecting the substantially higher debt balance. Other nonoperating income increased to $8.5 million from $0.5 million, including higher interest income and equity investment income.
- The effective tax rate was 19.7% versus 25.6% in Q1 2017. The 2018 rate included a $1.325 million favorable stock-compensation-related item and a $1.097 million unfavorable provisional transition-tax item under the Tax Cuts and Jobs Act.
Guidance, outlook, risks and unusual items
Management reaffirmed full-year 2018 guidance for the legacy business. Heritage aggregates average selling prices are expected to increase 3% to 5%; infrastructure shipments are expected to increase in the mid-single digits, nonresidential shipments in the low- to mid-single digits, residential shipments in the high-single digits, and ChemRock/Rail shipments to remain stable.
Management expects growth across infrastructure, nonresidential and residential construction markets, but results are seasonal and highly sensitive to weather. Q1 infrastructure shipments declined 11% because precipitation and cold temperatures delayed construction. Key risks include construction demand and funding, weather, labor and transportation constraints, fuel and other input costs, interest rates, commodity pricing, environmental regulation, customer concentration, production disruptions, tax-law changes, and the ability to achieve acquisition synergies while maintaining debt covenants.
On April 16, 2018, the company repaid $300 million of 6.60% Senior Notes with cash. On April 17, it increased the trade receivable facility limit to $400 million. On April 27, it completed the $1.625 billion cash acquisition of Bluegrass Materials Company, acquiring 23 active sites across six states. The company expects approximately $15 million of annual synergies within 12 months, but purchase accounting was not complete as of May 8, 2018. The transaction required divestiture of the Forsyth quarry and planned divestiture of Bluegrass’s Beaver Creek quarry under an agreement with the Department of Justice.
The company adopted the new revenue-recognition standard with an immaterial financial statement impact and adopted the cash-flow classification standard retrospectively. The new lease standard, effective January 1, 2019, is expected to materially affect the balance sheet, although the impact had not been quantified.
Most important facts for investors to verify
- Whether weather normalization and infrastructure funding translate into the guided shipment growth and whether pricing increases offset cost inflation.
- The final purchase-price allocation, goodwill and other intangible amounts, financing impact, divestitures and realized synergies from the Bluegrass acquisition.
- Post-acquisition leverage, liquidity, borrowing capacity and compliance with the 3.50x debt-to-EBITDA covenant.
- The refinancing or repayment plan for the $300 million trade receivable facility maturity scheduled for September 26, 2018, as amended facility terms should be reviewed.
- Capital expenditures, expected full-year spending of approximately $450 million to $500 million, and cash generation after the acquisition.
- Final tax accounting under the 2017 Tax Cuts and Jobs Act and any resulting 2018 measurement-period adjustments.
- The balance-sheet effect of the 2019 lease standard and exposure to fuel, energy, labor, rail and transportation costs.