Martin Marietta Materials, Inc. — 2016 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; comparisons are primarily with the corresponding 2015 periods. The company supplies aggregates, ready-mixed concrete, asphalt and paving products, cement, and magnesia-based products through more than 400 locations in 26 states, Nova Scotia, and the Bahamas.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $915.4 million | $850.2 million | $1.649 billion | $1.482 billion |
| Total revenues | $977.3 million | $921.4 million | $1.766 billion | $1.613 billion |
| Gross profit | $246.7 million | $200.2 million | $391.3 million | $274.4 million |
| Earnings from operations | $187.7 million | $137.0 million | $271.5 million | $162.6 million |
| Net earnings attributable to Martin Marietta | $122.1 million | $81.9 million | $167.0 million | $88.1 million |
| Diluted earnings per share | $1.90 | $1.22 | $2.60 | $1.30 |
| Operating cash flow | Not separately provided | Not separately provided | $203.4 million | $127.1 million |
- Q2 net sales increased 7.7%; six-month net sales increased 11.3%.
- GAAP gross margin was 25.2% in Q2 and 22.2% for the six months, versus 21.7% and 17.0%, respectively, in 2015.
- Gross margin excluding freight and delivery revenues was 26.9% in Q2 and 23.7% for the six months, up from 23.5% and 18.5%.
- GAAP operating margin was 19.2% in Q2 and 15.4% for the six months, compared with 14.9% and 10.1% in the prior-year periods.
- Six-month consolidated EBITDA was $419.1 million versus $298.1 million; EBITDA margin as a percentage of net sales was 25.4% versus 20.1%.
- At June 30, cash and cash equivalents were $28.6 million, accounts receivable were $534.5 million, and inventories were $504.9 million.
- Total debt was $1.779 billion, including $238.2 million classified as current debt and $1.541 billion as long-term debt. The company reported a trailing-twelve-month debt-to-defined-EBITDA ratio of 1.98x, below its 3.50x covenant limit.
- The company had approximately $377 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to covenant compliance.
- Cash used for investing activities was $325.6 million, including $210.6 million of capital expenditures and $123.0 million for acquisitions. Cash used for financing activities was $17.5 million, including $190.0 million of share repurchases and $51.5 million of dividends.
Material changes versus the prior comparable periods
- Aggregates business net sales increased to $796.8 million in Q2 and $1.401 billion for the six months, from $689.4 million and $1.166 billion, respectively.
- Aggregates product-line volume increased 1.3% in Q2 and 6.2% for the six months, while pricing increased 6.8% and 7.4%, respectively.
- Ready-mixed concrete benefited from stronger demand and pricing: Q2 net sales increased 39% and gross margin excluding freight improved to 11.8% from 6.2%.
- Aggregates business operating earnings increased to $169.5 million in Q2 and $229.7 million for the six months, compared with $120.9 million and $129.6 million.
- Cement net sales declined primarily because California cement operations were divested on September 30, 2015. Excluding those operations, comparable Q2 cement shipments increased 2.2%.
- Magnesia Specialties net sales were broadly flat, while operating earnings increased to $19.2 million in Q2 and $39.8 million for the six months, primarily from lower energy and maintenance costs.
- The company acquired Rocky Mountain Materials and Asphalt and Rocky Mountain Premix during the first quarter for $123.0 million. The operations added four aggregates plants, two asphalt plants, two ready-mixed concrete operations, and more than 500 million tons of mineral reserves; the acquisition was not financially material on a pro forma basis.
- Share repurchases reduced outstanding shares by approximately 1.244 million during the first six months. Remaining authorization at June 30 was approximately 15.471 million shares.
- Stock-based compensation expense increased to $12.8 million from $7.5 million because of the timing and composition of the 2016 annual awards.
Outlook, risks, contingencies, and unusual items
- Management expected modest public-sector growth in 2016, particularly in the second half, supported by infrastructure funding and state initiatives. Nonresidential construction was expected to increase, and residential construction was expected to continue improving.
- Full-year capital spending was expected to approximate $350 million. Management expected an effective tax rate of approximately 30.4% and anticipated using the remaining $33 million of net operating loss carryforwards acquired with TXI.
- Planned cement kiln maintenance costs were $5.7 million in Q2, with $2.0 million expected in Q3 and $7.8 million in Q4.
- The $250 million Trade Receivable Facility matured September 30, 2016; management intended to renew it. The facility contains a cross-default provision to other debt agreements.
- Cash, projected operating cash flow, financing availability, and capital-market access were expected to support operations, debt service, capital expenditures, dividends, acquisitions, and share repurchases. The company stated that its composite credit rating remained investment grade, although one of three agencies rated it one level below investment grade.
- Key risks include weather and seasonality, infrastructure funding changes, construction-cycle weakness, continued declines in energy-related activity, cement supply and pricing volatility, energy and fuel costs, transportation and railcar availability, equipment failures, environmental and regulatory requirements, interest rates, credit-market access, acquisition integration, tax changes, and debt-covenant compliance.
- A hypothetical 100-basis-point increase in rates on $433 million of variable-rate borrowings would increase annual interest expense by approximately $4.3 million. A hypothetical 10% change in energy prices would change 2016 energy expense by approximately $25.7 million, before partial offsets.
- Management stated that litigation and environmental proceedings were not expected to have a material adverse effect based on currently available facts. Disclosure controls and procedures were considered effective as of June 30, 2016.
Investor verification points
- Verify the renewal or refinancing of the Trade Receivable Facility and the timing of upcoming debt maturities.
- Assess whether infrastructure funding, residential and nonresidential construction trends, and energy-related weakness support the stated outlook.
- Monitor aggregates pricing and volume, particularly the weather-affected West Group, and the sustainability of margin expansion.
- Evaluate the contribution and integration progress of the Colorado acquisition and any resulting impact on leverage and returns.
- Reconcile reported liquidity with seasonal working-capital needs, planned capital expenditures, dividends, acquisitions, and share repurchases.
- Review exposure to fuel, coal, natural gas, liquid asphalt, interest-rate, transportation, environmental, pension, and debt-covenant risks.