MARTIN MARIETTA MATERIALS INC quarterly report, Q2 FY2017

Martin Marietta Materials, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Martin Marietta Materials is a leading supplier of aggregates, cement, ready mixed concrete, asphalt and paving products, serving infrastructure, nonresidential and residential construction markets. It also operates a Magnesia Specialties business producing magnesia-based chemicals and dolomitic lime. The company operates more than 270 quarries and distribution facilities across 26 states, Nova Scotia and the Bahamas.

This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods. Reportable segments are Mid-America, Southeast, West and Magnesia Specialties. The company reorganized its segment reporting effective January 1, 2017, and prior-year information was reclassified accordingly.

Financial Performance and Key Metrics

Metric	Three Months Ended June 30, 2017	Three Months Ended June 30, 2016	Six Months Ended June 30, 2017	Six Months Ended June 30, 2016
Total revenues	$1.064 billion	$977.3 million	$1.907 billion	$1.766 billion
Net sales	$996.3 million	$915.4 million	$1.788 billion	$1.649 billion
Gross profit	$274.1 million	$247.4 million	$421.2 million	$392.7 million
Earnings from operations	$212.9 million	$190.8 million	$290.0 million	$276.9 million
Net earnings attributable to Martin Marietta	$142.3 million	$122.1 million	$184.6 million	$167.0 million
Diluted earnings per share	$2.25	$1.90	$2.91	$2.60
Consolidated EBITDA	$292.3 million	$266.5 million	$440.0 million	$419.1 million

Second-quarter net sales increased 8.8%, operating earnings increased 11.5%, diluted EPS increased 18.4% and EBITDA increased 9.7% year over year.
Six-month net sales increased 8.4%, gross profit increased 7.3%, diluted EPS increased 11.9% and EBITDA increased approximately 5%.
Second-quarter GAAP gross margin was 25.8%, compared with 25.3% in the prior-year quarter. Excluding freight and delivery revenues, gross margin was 27.5%, up from 27.0%.
Six-month GAAP gross margin was 22.1%, compared with 22.2%. Excluding freight and delivery revenues, gross margin was 23.6%, compared with 23.8%.
Second-quarter operating margin was 20.0%, compared with 19.5%; excluding freight and delivery revenues, it was 21.4%, compared with 20.8%.
Six-month operating margin was 15.2%, compared with 15.7%; excluding freight and delivery revenues, it was 16.2%, compared with 16.8%.
Cash dividends were $0.42 per common share in the second quarter and $0.84 per share for the six months, compared with $0.40 and $0.80, respectively, in 2016.

Revenue and Segment Trends

Second-quarter Building Materials net sales increased to $931.7 million from $856.6 million. Magnesia Specialties net sales increased to $64.6 million from $58.9 million.
Second-quarter segment revenues increased to $290.9 million in Mid-America, $92.3 million in Southeast and $610.2 million in West, compared with $278.7 million, $87.6 million and $547.4 million, respectively.
Building Materials second-quarter earnings from operations increased to $212.2 million from $191.8 million. Magnesia Specialties operating earnings increased to $21.1 million from $19.3 million.
Second-quarter product-line net sales increased year over year for aggregates, cement, ready mixed concrete and asphalt and paving. Pricing increased 3.8% for aggregates, 5.2% for cement, 1.5% for ready mixed concrete and 11.1% for asphalt.
Aggregates shipments increased 2.0% in the quarter and 1.0% for the six months. Ready mixed concrete volumes increased 11.5% in the quarter and 13.2% for the six months.

Cash Flow, Liquidity and Debt

Six-month cash provided by operating activities was $229.6 million, compared with $209.8 million in 2016.
Capital expenditures were $216.1 million, compared with $210.6 million in the prior-year period. Full-year capital spending was expected to approximate $450 million to $500 million.
Cash used in investing activities was $186.2 million, compared with $325.6 million in 2016, primarily reflecting lower acquisition spending.
Cash used in financing activities was $56.7 million. The company repurchased $100.0 million of common stock during the six months, paid $53.1 million in dividends and had no share repurchases during the second quarter.
Cash and cash equivalents were $36.7 million at June 30, 2017, compared with $50.0 million at December 31, 2016 and $28.6 million at June 30, 2016.
Total debt was $1.782 billion at June 30, 2017, compared with $1.686 billion at December 31, 2016 and $1.779 billion at June 30, 2016. Long-term debt was $1.642 billion.
In May 2017, the company issued $300 million of floating-rate senior notes due 2020 and $300 million of 3.450% senior notes due 2027.
Unused borrowing capacity under the Revolving Facility and Trade Receivable Facility was $857.5 million at June 30, 2017, subject to the leverage covenant. The company was in compliance with the covenant; reported trailing-twelve-month debt-to-EBITDA was 1.78x versus a 3.50x covenant limit.
The $300 million Trade Receivable Facility was scheduled to mature September 27, 2017, and management intended to renew it. The company also intended to refinance the 6.6% senior notes due April 2018 on a long-term basis.

Material Changes Versus the Prior Comparable Period

Revenue and profitability improved despite significant rainfall, particularly in the eastern United States. Southeast aggregates shipments declined 3.2% because rain-affected shipping days were 3.5 times the three-year average.
Pricing growth and higher volumes increased gross profit, partially offset by higher production costs. Aggregates cost increases reduced second-quarter gross profit by $23.1 million and six-month gross profit by $47.4 million.
Second-quarter SG&A increased to 6.9% of net sales from 6.5%, primarily due to higher performance-based incentive compensation. Six-month SG&A increased to 7.7% from 7.2%.
Other operating income included a $13.5 million real-estate sale gain and $6.1 million of expense related to the pending retirement of the chief financial officer, including accelerated recognition of stock-award expense.
The effective six-month income tax rate was 26.5%. Adoption of ASU 2016-09 produced a favorable 210-basis-point impact from excess tax benefits related to stock compensation; the prior-year 30.4% rate was not directly comparable.
The company early adopted ASU 2017-07, reclassifying certain pension and postretirement costs from operating expenses to nonoperating expense. It also adopted ASU 2016-09, which changed the presentation and tax treatment of stock-based compensation cash flows.

Outlook, Risks and Unusual Items

Management expected continued public-sector growth in 2017, supported by FAST Act projects, TIFIA funding and state and local infrastructure initiatives.
Nonresidential construction was expected to increase modestly, while residential construction was expected to continue growing in key markets.
On June 26, 2017, the company announced an agreement to acquire Bluegrass Materials Company for $1.625 billion in cash, subject to regulatory approvals and customary closing conditions. Closing was expected in the fourth quarter of 2017.
Management expected cash on hand, operating cash flow and financing availability to support operations, debt service, capital expenditures, dividends and the planned acquisition.
Key risks include weather, construction spending, infrastructure funding, interest rates, fuel and energy costs, commodity pricing, equipment and transportation availability, environmental regulation, acquisition integration, leverage covenant compliance, credit ratings, pension assumptions and changes in tax law.
A hypothetical 100-basis-point increase in interest rates on $440.0 million of variable-rate borrowings would increase annual interest expense by approximately $4.4 million. A hypothetical 10% change in energy prices would change 2017 energy expense by approximately $23.1 million.
Management stated that litigation and environmental proceedings were not expected to have a material adverse effect based on currently available facts.

Important Facts for Investors to Verify

Completion, financing and integration of the $1.625 billion Bluegrass acquisition, including regulatory approvals and final purchase-price adjustments.
Renewal or replacement of the Trade Receivable Facility and refinancing of the senior notes due in 2018.
Actual full-year capital expenditures relative to the $450 million to $500 million expectation.
Sustainability of pricing growth and margin performance amid higher production, fuel, maintenance and incentive-compensation costs.
Impact of weather, infrastructure funding, energy-related construction activity and residential and nonresidential demand on volumes.
Compliance with the 3.50x debt-to-EBITDA covenant after the Bluegrass acquisition and any related financing.
Implementation effects of the revenue-recognition standard expected to be adopted January 1, 2018, and the lease standard expected to have a material balance-sheet effect when adopted in 2019.