Martin Marietta Materials, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2016, filed November 2, 2016. Martin Marietta is principally a construction-aggregates producer, with operations in aggregates and downstream products, cement, and Magnesia Specialties. The company operated more than 400 quarries, distribution facilities, and plants across 26 states, Nova Scotia, and the Bahamas.
Aggregates represented 54% of nine-month net sales, aggregates-related downstream products represented 32%, cement 7%, and Magnesia Specialties 7%.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $1,103.9 million | $1,082.2 million | $2,869.9 million | $2,695.0 million |
| Net sales | $1,038.3 million | $1,005.2 million | $2,687.7 million | $2,487.3 million |
| Gross profit | $292.6 million | $262.5 million | $683.9 million | $536.9 million |
| Earnings from operations | $240.4 million | $179.5 million | $511.9 million | $342.1 million |
| Net earnings attributable to Martin Marietta | $159.5 million | $117.5 million | $326.5 million | $205.6 million |
| Diluted EPS | $2.49 | $1.74 | $5.08 | $3.03 |
| Operating cash flow | Not separately provided | Not separately provided | $414.1 million | $319.6 million |
Q3 net sales increased 3.3%, while nine-month net sales increased 8.1%. Gross margin excluding freight and delivery revenues was 28.2% in Q3 and 25.4% for nine months, compared with 26.1% and 21.6%, respectively, in the prior-year periods. GAAP operating margin was 21.8% in Q3 and 17.8% for nine months, compared with 16.6% and 12.7%.
Consolidated EBITDA was $322.8 million in Q3 and $741.9 million for nine months, compared with $248.2 million and $546.3 million, respectively, in 2015. The effective income tax rate for the nine-month period was 30.6%, compared with 29.4% in 2015.
At September 30, 2016, cash and cash equivalents were $60.7 million, compared with $168.4 million at December 31, 2015 and $436.4 million at September 30, 2015. Total debt was $1.765 billion, including $228.0 million of current maturities, versus $1.569 billion at December 31, 2015. Long-term debt was $1.537 billion. Total equity was $4.158 billion.
Nine-month cash flow included $285.5 million of capital expenditures, $178.7 million of acquisitions, $190.0 million of share repurchases, and $78.3 million of dividends. The company reported $438 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to covenant compliance.
Material changes versus the prior comparable period
- Aggregates Business nine-month net sales rose to $2.319 billion from $2.003 billion, and operating earnings rose to $444.3 million from $310.4 million.
- Aggregates pricing increased 8.5% in Q3 and 7.9% for nine months, while volumes declined 4.7% in Q3 but increased 1.8% for nine months. Q3 volumes were affected by rainfall, project delays, lower energy-related activity, and reduced rail-ballast demand.
- Ready mixed concrete benefited from stronger demand and pricing; nine-month net sales increased to $665.4 million from $486.9 million and gross profit increased to $83.2 million from $35.0 million.
- Cement net sales declined because the California cement operations were divested in September 2015. Excluding those operations, Q3 cement gross margin improved to 47.5% from 41.4%; reported cement operating earnings increased substantially because the prior-year period included the divestiture loss.
- Magnesia Specialties achieved record Q3 performance, with net sales of $60.2 million and operating earnings of $20.4 million, supported by lower energy and kiln-outage costs.
- The company acquired Rocky Mountain Materials and Asphalt and Rocky Mountain Premix in the first quarter and acquired the remaining interest in Ratliff Ready-Mix in Q3. The Ratliff transaction generated a $5.9 million remeasurement gain in other nonoperating income.
- The company repurchased 1.244 million shares for $190.0 million during the first nine months. Approximately 15.471 million shares remained authorized for repurchase at September 30, 2016.
Guidance, outlook, risks, and unusual items
- Management expected 2016 capital spending of approximately $350 million, compared with $285.5 million spent through September 30.
- Management expected public-sector construction to grow modestly, nonresidential construction to increase, and residential construction to continue its recovery. Energy-related activity was expected to remain mixed.
- The company expected $9.7 million of cement kiln-maintenance costs in Q4 2016, following $1.8 million incurred in Q3.
- Hurricane Matthew in early October disrupted operations in the Bahamas, Florida, Georgia, and the Carolinas, with particular effects expected in eastern North Carolina during Q4. Management also expected potential repair-related construction activity after flood waters receded.
- At September 30, the company’s trailing-twelve-month debt-to-EBITDA ratio under its credit agreement was 1.89x, below the 3.50x covenant limit. The Trade Receivable Facility was increased to $300 million and extended to September 27, 2017.
- Key risks include weather, infrastructure-funding delays or reductions, construction-cycle weakness, energy and fuel costs, cement supply and pricing volatility, transportation capacity, equipment failures, environmental and other regulation, acquisition integration, interest rates, credit ratings, and debt-covenant compliance.
- A hypothetical 100-basis-point increase in interest rates on $419 million of variable-rate borrowings would increase annual interest expense by approximately $4.2 million. A hypothetical 10% change in 2016 energy prices would change annual energy expense by approximately $25.7 million, assuming constant volumes.
- Management stated that litigation and environmental proceedings were not expected to have a material adverse effect based on currently available facts. The company was also obligated on a $25 million affiliate revolving line of credit, with indemnification from the affiliate.
Important facts for investors to verify
- Whether infrastructure funding and construction activity develop as projected, particularly in Texas, North Carolina, Iowa, Colorado, and Georgia.
- The sustainability of aggregates price increases and whether Q3 volume declines from weather, project delays, energy weakness, and rail demand continue.
- The impact of Hurricane Matthew, seasonal weather, and planned Q4 cement kiln maintenance on fourth-quarter results and cash flow.
- Acquisition integration, preliminary purchase-accounting adjustments, goodwill, and the earnings contribution from Rocky Mountain and Ratliff operations.
- Debt refinancing needs, including the floating-rate notes due June 30, 2017, the Trade Receivable Facility maturity, variable-rate exposure, and continued compliance with leverage covenants.
- Cash generation after capital expenditures, acquisitions, dividends, and share repurchases, given the decline in cash balances during the first nine months.
- The company’s planned adoption and potential financial impact of the new revenue-recognition, lease, and share-based-payment accounting standards.