Martin Marietta Materials, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three months ended March 31, 2016, compared with the three months ended March 31, 2015. Martin Marietta supplies construction aggregates and related products, cement, and magnesia-based specialty products. The Aggregates business operates through Mid-America, Southeast, and West groups across more than 400 locations.
Results are seasonal because construction activity is concentrated in the spring, summer, and fall; management cautions that first-quarter results are not indicative of full-year performance.
Key financial metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $734.0 million | $631.9 million | 16.2% increase |
| Total revenues | $788.7 million | $691.3 million | 14.1% increase |
| Gross profit | $144.6 million | $74.3 million | 94.8% increase |
| Gross margin | 18.3% | 10.7% | 760 basis-point increase |
| Gross margin excluding freight | 19.7% | 11.8% | 790 basis-point increase |
| Earnings from operations | $83.8 million | $25.6 million | 227.5% increase |
| Operating margin | 10.6% | 3.7% | 690 basis-point increase |
| Net earnings attributable to Martin Marietta | $45.0 million | $6.1 million | 635.0% increase |
| Diluted EPS | $0.69 | $0.07 | Increase of $0.62 |
| Consolidated EBITDA | $152.6 million | $91.2 million | 66.5% increase |
| Operating cash flow | $67.0 million | $35.1 million | 90.8% increase |
Aggregates product-line volume increased 13.1% and pricing increased 8.1%. Aggregates business revenue increased to $651.0 million from $526.1 million. Cement revenue was $73.6 million, compared with $102.1 million, primarily reflecting the 2015 divestiture of California cement operations. Magnesia Specialties revenue was $64.2 million, compared with $63.2 million.
At March 31, 2016, cash and cash equivalents were $27.2 million, compared with $168.4 million at December 31, 2015 and $56.4 million at March 31, 2015. Total debt was $1.753 billion, including $177.4 million classified as current, compared with $1.569 billion at December 31, 2015. Long-term debt was $1.575 billion.
Cash used for investing activities was $210.4 million, including $94.2 million of capital expenditures and $123.0 million for acquisitions. Financing activities provided $2.2 million, including $210.0 million of borrowings and $150.0 million of share repurchases. The company paid $25.8 million in dividends and maintained a $0.40 per-share quarterly dividend.
Material changes versus the prior comparable period
- Improved weather, stronger construction demand, higher aggregates pricing, and cost discipline drove the substantial increase in profitability.
- Ready mixed concrete revenue increased 46.4%, shipments increased 31.0%, and gross margin improved to 9.7% from 1.6%.
- Cement gross profit increased to $32.6 million from $19.0 million, and gross margin increased to 44.3% from 18.6%. The comparison benefited from the prior-year California operations divestiture and favorable energy costs.
- Mid-America and Southeast groups moved from operating losses in Q1 2015 to operating profits of $14.4 million and $7.0 million, respectively. West Group operating earnings increased to $38.8 million from $14.5 million.
- SG&A increased to $59.9 million from $49.5 million, partly due to higher incentive compensation and information-systems investment. Stock-based compensation increased to $7.2 million from $2.9 million because annual awards were granted earlier and included different award types.
- The company acquired Rocky Mountain Materials and Asphalt, Inc. and Rocky Mountain Premix Inc. for $123.0 million. The acquisition added four aggregates plants, two asphalt plants, two ready mixed concrete operations, and more than 500 million tons of mineral reserves. Preliminary purchase accounting remained subject to adjustment.
- The company repurchased 1.028 million shares for $150.0 million; 15.686 million shares remained authorized for repurchase at March 31, 2016.
- Adoption of ASU 2015-03 reclassified debt issuance costs as deductions from debt and retrospectively reclassified prior-period amounts.
Liquidity, debt, outlook, and risks
The company reported $407 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to covenant compliance. Its trailing-twelve-month consolidated debt-to-EBITDA ratio was 2.09x versus a principal covenant limit of 3.50x. The $250 million Trade Receivable Facility matures September 30, 2016; the $350 million Revolving Facility expires November 29, 2018. The company repaid $30 million outstanding under the Revolving Facility on April 5, 2016.
Management expects approximately $350 million of full-year capital spending and believes cash on hand, internal cash flow, and financing resources will support operations, debt service, capital expenditures, acquisitions, and dividends. Management expects to utilize the remaining $33 million of net operating-loss carryforwards acquired with TXI during 2016. The estimated effective tax rate for the quarter was approximately 30%, consistent with annual guidance.
Management expects modest public-sector growth in 2016, particularly in the second half; continued nonresidential construction growth; and continued residential recovery. Cement management expects favorable Texas supply-demand conditions, with cement business full-year 2016 net sales forecast at $310 million to $325 million. Planned cement kiln maintenance costs were $5.6 million in Q1, with expected costs of $2.7 million, $12.6 million, and $1.5 million in Q2, Q3, and Q4, respectively.
Principal risks include construction and infrastructure funding levels, economic and interest-rate conditions, energy and other input costs, adverse weather, cement and aggregates pricing pressure, volatility in Texas energy-related activity, transportation and equipment availability, environmental and other regulation, acquisition integration, credit-rating changes, debt-covenant compliance, and potential impairment of goodwill. A 100-basis-point increase in variable borrowing rates would increase annual interest expense by approximately $4.1 million based on borrowings outstanding at quarter-end. A 10% change in 2016 energy prices would affect annual energy expense by approximately $25.7 million, assuming constant volumes.
Management concluded that disclosure controls and procedures were effective as of March 31, 2016, with no material changes to internal control over financial reporting. Management and counsel considered the ultimate outcome of legal and administrative proceedings, including environmental matters, unlikely to have a material adverse effect.
Important facts for investors to verify
- Confirm the refinancing or repayment strategy for the $159.9 million drawn under the Trade Receivable Facility, which matures September 30, 2016.
- Assess whether the strong first-quarter aggregates volumes and pricing are sustainable after normalizing for weather, seasonality, acquisitions, and infrastructure timing.
- Monitor execution and purchase-accounting adjustments for the Rocky Mountain acquisition and its effect on West Group profitability.
- Compare actual full-year capital spending with the approximately $350 million outlook and evaluate the effect on cash balances and leverage.
- Track cement pricing increases, planned kiln maintenance, Texas demand, and whether full-year cement sales of $310 million to $325 million are achieved.
- Review the effects of California cement and San Antonio Asphalt divestitures when making comparable-period or run-rate assessments.
- Monitor fuel, coal, natural gas, repair, transportation, labor, and equipment costs, together with the company’s hedging and fixed-price arrangements.
- Verify debt-covenant compliance, credit ratings, variable-rate exposure, and the availability of unused borrowing capacity.