Business Context and Reporting Period
Martin Marietta Materials, Inc. is a natural-resource-based building-materials company supplying aggregates, cement, ready-mixed concrete, asphalt and paving services through more than 300 locations across 30 states, Canada, the Bahamas and the Caribbean. The company also operates Magnesia Specialties. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are primarily with the corresponding 2017 periods.
Financial Performance and Position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenues | $1.202 billion | $1.064 billion | $2.004 billion | $1.907 billion |
| Gross profit | $315.9 million | $274.1 million | $426.3 million | $421.2 million |
| Earnings from operations | $264.0 million | $212.9 million | $303.0 million | $290.0 million |
| Net earnings attributable to Martin Marietta | $185.4 million | $142.3 million | $195.4 million | $184.6 million |
| Diluted EPS | $2.92 | $2.25 | $3.08 | $2.91 |
| EBITDA | $356.7 million | $292.3 million | $479.9 million | $440.0 million |
- Q2 revenue increased 13.1%, operating earnings increased 24.0%, and attributable net earnings increased 30.3%. Six-month revenue increased 5.1%, operating earnings 4.5%, and attributable net earnings 5.8%.
- Q2 gross margin was approximately 26.3% versus 25.8%; operating margin was approximately 22.0% versus 20.0%; net margin was approximately 15.4% versus 13.4%. Six-month gross margin was approximately 21.3% versus 22.1%, and operating margin was approximately 15.1% versus 15.2%.
- Q2 Building Materials revenue was $1.129 billion, led by aggregates, cement and ready-mixed concrete. Aggregates product revenue increased 15.1%, reflecting 11.3% volume growth and 3.5% pricing growth, including acquired operations.
- Six-month cash provided by operating activities was $238.0 million versus $229.3 million. Capital expenditures were $188.3 million; full-year capital spending was expected to approximate $450 million to $500 million.
- Cash and cash equivalents were $33.8 million at June 30, 2018, down from $1.446 billion at December 31, 2017, primarily after the Bluegrass acquisition and debt activity. Accounts receivable were $675.6 million and inventories were $650.9 million.
- Total debt was $3.219 billion, including $320.0 million classified as current debt and $2.899 billion of long-term debt. The company had $607.7 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility and reported a covenant debt-to-EBITDA ratio of 2.75x versus a 3.50x limit.
- Cash dividends were $0.44 per common share in Q2 and $0.88 per share for the first six months. No share repurchases were made during the first six months.
Material Changes Versus the Prior Comparable Period
- On April 27, 2018, the company acquired Bluegrass Materials Company for approximately $1.623 billion, subject to a working-capital adjustment. Bluegrass added 23 active aggregates sites and operations in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania.
- The acquisition added approximately $46.4 million of revenue and $6.7 million of operating earnings during the period after closing. The purchase-price allocation remained preliminary at June 30, 2018.
- Acquisition-related expenses were $12.1 million in Q2 and $12.8 million for the six months. Selling acquired inventory at fair value created a $10.2 million Q2 and six-month negative impact on gross profit.
- Q2 other operating income included a $16.9 million gain on surplus land and a $7.7 million net gain on legal settlements. These items contributed to the year-over-year increase in operating earnings.
- The company repaid $300 million of 6.60% Senior Notes on April 16, 2018, increased its Trade Receivable Facility to $400 million, and had $170 million outstanding under its Revolving Facility at June 30, 2018.
- Q2 Building Materials operating earnings increased to $263.6 million from $212.2 million. Six-month West Group operating earnings declined to $157.8 million from $173.7 million, while Mid-America and Southeast operating earnings increased.
Guidance, Outlook, Risks and Unusual Items
- Management remained positive on the near- and long-term outlook, citing favorable employment and population trends and expected growth in infrastructure, nonresidential and residential construction.
- For 2018 heritage operations, management guided to aggregates average selling-price growth of 3% to 5% and volume growth of 4% to 6%. Infrastructure shipments were expected to rise 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 decline.
- Management identified transportation constraints, limited truck availability, railroad inefficiencies, contractor labor shortages, weather, higher energy and repair costs, project delays and supply-chain constraints as factors that could restrict volumes and margins.
- Other risks include construction-cycle volatility, infrastructure funding and project timing, residential and commercial demand, cement pricing, fuel and commodity costs, interest-rate exposure, customer credit losses, environmental regulation, acquisition integration and realization of Bluegrass synergies, leverage covenant compliance, tax-law changes and potential credit-rating pressure.
- The Trade Receivable Facility was scheduled to mature September 26, 2018; management expected to extend it. The facility contains a cross-default provision to other debt agreements.
- Adoption of the new revenue-recognition and cash-flow standards had an immaterial effect. The lease standard effective January 1, 2019 was expected to materially increase reported assets and liabilities.
- Management estimated $162.4 million of 2018 pension contributions, including $150.0 million to the qualified plan. A $75.0 million contribution was made in July 2018.
- A hypothetical 100-basis-point increase in rates on $1.09 billion of variable-rate borrowings would increase annual interest expense by approximately $10.9 million. A hypothetical 20% change in 2018 energy prices would affect full-year energy expense by approximately $50.0 million.
Investor Verification Priorities
- Verify the final purchase-price allocation, goodwill, deferred taxes, integration costs and realized synergies from the Bluegrass acquisition.
- Monitor the September 2018 maturity and extension or refinancing of the $400 million Trade Receivable Facility.
- Reconcile reported and adjusted earnings for acquisition-related expenses, acquired-inventory fair-value charges, land-sale gains and legal-settlement gains.
- Assess whether infrastructure funding, construction labor and transportation availability support the company’s aggregates volume guidance.
- Track debt reduction, variable-rate exposure, covenant headroom and the effect of limited cash balances following the acquisition.
- Evaluate margin effects from energy, fuel, labor, repair and transportation costs, particularly in aggregates, cement and Magnesia Specialties.
- Review the company’s full-year filings for updates to tax accounting under the 2017 Tax Act, pension funding, lease accounting implementation and contingent liabilities.