Martin Marietta Materials, Inc. — First-Quarter 2015 Form 10-Q Summary
Business Context and Reporting Period
Martin Marietta Materials is a construction-materials supplier focused on aggregates, asphalt, ready mixed concrete, road paving, cement, and magnesia-based products. The company operates more than 400 quarries, distribution facilities, and plants across 32 states, Canada, the Bahamas, and the Caribbean. The report covers the three months ended March 31, 2015, with comparative results for the three months ended March 31, 2014.
Results include the cement and other operations acquired through the July 1, 2014 acquisition of Texas Industries, Inc. (TXI). TXI contributed $224.1 million of revenue and $9.3 million of operating earnings in the quarter.
Financial Performance and Position
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $631.9 million | $379.7 million | Up 66% |
| Total revenues | $691.3 million | $428.6 million | Up 61% |
| Gross profit | $74.3 million | $25.8 million | Up $48.4 million |
| Earnings from operations | $25.6 million | $(15.9) million | Improved $41.5 million |
| Net earnings attributable to Martin Marietta | $6.1 million | $(21.6) million | Returned to profitability |
| Diluted earnings per share | $0.07 | $(0.47) | Improved $0.54 |
| Operating margin | 3.7% | (3.7)% | Improved 7.4 percentage points |
| Gross margin excluding freight and delivery revenues | 11.8% | 6.8% | Improved 5.0 percentage points |
| Cash provided by operating activities | $35.1 million | $6.6 million | Up $28.5 million |
Aggregates product-line volume increased 17.1% and pricing increased 11.4%. Heritage aggregates volume increased 7.0% on a comparable basis, while heritage pricing increased 10.5%. Consolidated SG&A expense was $49.5 million, or 7.8% of net sales, compared with 9.0% in the prior-year quarter.
Segment revenue and operating earnings included $526.1 million and $8.7 million, respectively, from the Aggregates business; $102.1 million and $12.2 million from Cement; and $63.2 million and $17.8 million from Magnesia Specialties. The Cement segment generated $96.6 million of net sales and $19.0 million of gross profit.
At March 31, 2015, cash and cash equivalents were $56.4 million, compared with $108.7 million at December 31, 2014 and $35.8 million at March 31, 2014. Total debt was $1.581 billion, including $14.4 million of current maturities; long-term debt was $1.567 billion. Total equity was $4.342 billion and total assets were $7.418 billion.
Operating cash flow was partly offset by $56.1 million of capital expenditures, $10.6 million of acquisitions, $28.4 million of dividends, and $4.7 million of long-term debt repayments. Cash decreased by $52.3 million during the quarter. The company paid $11.4 million of interest and $18.7 million of income taxes.
Material Changes Versus the Prior Comparable Period
- The July 2014 TXI acquisition materially increased reported revenue, assets, debt, depreciation, amortization, and interest expense; the prior-year quarter did not include TXI operations.
- Operating results improved substantially because of higher aggregates volumes and pricing, acquisition contributions, cement operations, lower fuel costs, and operating leverage.
- Gross profit increased by $48.4 million. Management attributed the improvement primarily to heritage aggregates pricing and volume, acquired aggregates operations, Cement, and Magnesia Specialties, partly offset by higher corporate costs.
- Interest expense increased to $19.3 million from $12.2 million, primarily reflecting acquisition-related debt.
- The effective tax rate was a benefit of 15.2%, compared with a 26.7% expense rate in the prior-year quarter. Excluding discrete items, management estimated the rate at approximately 31%.
- Acquisition-related expenses declined to $1.6 million from $9.5 million. The company expected approximately $1.6 million per quarter for the next several quarters.
- Severe late-winter weather and rainfall in Texas deferred an estimated 1.4 million tons of aggregates shipments to later periods.
Guidance, Outlook, Risks, and Unusual Items
Management expected 2015 aggregates product-line shipments to increase 10% to 12%, with heritage shipments up 4% to 7%, and pricing up 7% to 9%. Expected aggregates-related downstream net sales were $875 million to $925 million, with gross profit of $65 million to $70 million.
Other 2015 guidance included Cement net sales of $475 million to $500 million and gross profit of $120 million to $130 million; Magnesia Specialties net sales of $240 million to $250 million and gross profit of $85 million to $90 million; SG&A below 6.0% of net sales; interest expense of $75 million to $80 million; an effective tax rate of approximately 31%, excluding discrete items; consolidated EBITDA of $835 million to $875 million; cash taxes of approximately $52 million; and capital expenditures of approximately $320 million.
Management expected $5.4 million of planned cement kiln shutdown costs in the first quarter and additional shutdown costs of approximately $2 million, $11 million, and $10 million in the second, third, and fourth quarters, respectively.
Liquidity was supported by approximately $600 million of unused borrowing capacity under the Revolving Facility and Trade Receivable Facility, subject to covenant compliance. The trailing-twelve-month debt-to-consolidated-EBITDA ratio was 2.43x at March 31, 2015, below the 3.50x covenant limit. The company stated that cash, operating cash flow, financing resources, and capital-market access should be sufficient for operating needs, debt service, capital expenditures, acquisitions, and dividends.
Key risks include federal and state highway funding uncertainty, construction-cycle weakness, energy-related activity and low oil prices, adverse weather, fuel and energy costs, cement supply and pricing volatility, transportation and railcar availability, equipment failures, environmental and regulatory requirements, acquisition integration and realization of TXI synergies, credit-rating pressure, variable interest rates, and compliance with debt covenants. A hypothetical 100-basis-point increase in variable borrowing rates would increase annual interest expense by approximately $2.3 million; a hypothetical 10% change in energy prices would change annual energy expense by approximately $27.9 million.
The TXI purchase-accounting measurement period remained open at March 31, 2015. Certain Crestmore land was classified as held for sale. Management concluded that disclosure controls were effective, but its internal-control assessment excluded newly acquired TXI ready mixed concrete and cement operations representing 17% of consolidated assets.
Important Facts for Investors to Verify
- Separate the effects of the TXI acquisition from organic changes in volume, pricing, margins, debt, and cash flow.
- Assess whether the estimated 1.4 million tons of weather-delayed shipments were recovered during the remainder of 2015.
- Compare actual 2015 aggregates volumes, pricing, downstream sales, Cement results, EBITDA, capital expenditures, and cash taxes with management’s stated guidance.
- Monitor the 2.43x leverage ratio, covenant headroom, available borrowing capacity, debt maturities, and refinancing requirements.
- Evaluate whether planned TXI synergies and integration benefits offset acquisition-related expenses and higher depreciation, amortization, and interest costs.
- Review the impact of federal highway funding decisions, oil-price-related construction activity, weather, energy prices, and transportation constraints.
- Confirm the final purchase-accounting adjustments for TXI and any resulting changes to goodwill, deferred taxes, operating permits, and segment assets.