Martin Marietta Materials, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed August 7, 2015. Martin Marietta supplies construction aggregates and related products, cement, and magnesia-based products across the United States and selected international markets. The July 1, 2014 acquisition of Texas Industries, Inc. (TXI) materially affects year-over-year comparability.
Financial Performance and Position
| Metric | Q2 2015 | Q2 2014 | Six Months 2015 | Six Months 2014 |
|---|---|---|---|---|
| Net sales | $850.2 million | $601.9 million | $1.482 billion | $981.6 million |
| Total revenues | $921.4 million | $669.2 million | $1.613 billion | $1.098 billion |
| Gross profit | $200.2 million | $135.6 million | $274.4 million | $161.4 million |
| Earnings from operations | $137.0 million | $96.2 million | $162.6 million | $80.3 million |
| Net earnings attributable to Martin Marietta | $81.9 million | $59.5 million | $88.1 million | $37.9 million |
| Diluted EPS | $1.22 | $1.27 | $1.30 | $0.81 |
- Q2 net sales increased 41%; six-month net sales increased 51%, primarily reflecting the TXI acquisition and acquired aggregates operations.
- GAAP gross margin was 21.7% in Q2 and 17.0% year to date, compared with 20.3% and 14.7%, respectively, in 2014. Gross margin excluding freight and delivery revenues was 23.5% in Q2 and 18.5% year to date.
- Operating margin was 14.9% in Q2 and 10.1% year to date, compared with 14.4% and 7.3% in the prior-year periods.
- Interest expense increased to $19.1 million in Q2 and $38.4 million year to date, reflecting higher debt following the TXI acquisition.
- Six-month operating cash flow was $127.1 million, versus $70.4 million in 2014. Capital expenditures were $128.0 million, and investing cash flow was negative $134.9 million.
- Cash and cash equivalents were $44.2 million at June 30, 2015, compared with $108.7 million at December 31, 2014.
- Total debt was $1.658 billion, including $16.0 million of current maturities; long-term debt was $1.642 billion. The company reported a 2.36x trailing-twelve-month debt-to-defined-EBITDA ratio, below its 3.50x covenant limit.
- Unused borrowing capacity under the Revolving Facility and Trade Receivable Facility was approximately $520 million, subject to covenant compliance.
- Quarterly and year-to-date cash dividends were $0.40 and $0.80 per common share, respectively. The company repurchased 670,000 shares during the first six months.
Material Changes Versus the Prior Comparable Period
- The TXI acquisition added cement revenue of $100.4 million in Q2 and $197.0 million year to date, plus acquired aggregates and ready-mixed-concrete operations. TXI contributed $25.2 million of Q2 operating earnings and $33.9 million year to date.
- Aggregates product-line volume increased 7.8% and pricing increased 8.5% in Q2; year-to-date volume increased 11.5% and pricing increased 9.7%. Heritage aggregates volume was broadly stable after adjusting for 2014 divestitures, while pricing improved materially.
- Management estimated that unusually heavy rainfall deferred nearly $100 million of net sales, reduced Q2 earnings per diluted share by approximately $0.32 to $0.36, and reduced gross profit by approximately $35 million through deferred sales and lower operating leverage.
- Magnesia Specialties sales were essentially flat year to date at $119.2 million, while operating earnings declined to $36.5 million from $37.3 million, primarily because of maintenance costs and weaker domestic steel production.
- SG&A increased to $56.8 million in Q2 from $36.6 million, partly due to the acquired businesses, higher pension expense, and weather-delayed sales. Acquisition-related expenses were $2.1 million in Q2 and $3.7 million year to date.
- California cement operations were classified as held for sale, with related assets of approximately $426.5 million. Martin Marietta signed an agreement to sell the business for $420 million, subject to regulatory and customary closing conditions.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2015 aggregates shipments to increase 7% to 10%, heritage aggregates shipments to increase 3% to 5%, and aggregates pricing to increase 7% to 9%.
- Guidance included aggregates-related downstream sales of $875 million to $925 million, cement sales of $375 million to $400 million, and Magnesia Specialties sales of $240 million to $250 million.
- Management projected 2015 EBITDA of $810 million to $850 million, interest expense of $75 million to $80 million, an effective tax rate of approximately 31%, cash taxes of approximately $62 million, and capital expenditures of approximately $330 million.
- Weather-delayed shipments, capacity constraints, and the timing of construction activity could defer some shipments into 2016. Construction demand is seasonal and sensitive to rainfall, winter conditions, and hurricanes.
- Key market risks include uncertainty over federal highway funding after the October 29, 2015 expiration of the continuing resolution, state and local infrastructure funding, energy-related construction activity, residential and nonresidential construction, and steel-industry conditions.
- Other risks include fuel, coal, natural-gas and transportation costs; railcar, locomotive, truck, and driver availability; equipment failures; environmental and regulatory requirements; integration and synergy execution following TXI; interest-rate exposure; credit-rating changes; and compliance with debt covenants.
- A 100-basis-point increase in interest rates on the $310.2 million of variable-rate borrowings outstanding at June 30, 2015 would increase annual interest expense by approximately $3.1 million. A 10% change in energy prices was estimated to affect 2015 energy expense by approximately $27.9 million.
- The company entered into an 18-month fixed-price fuel contract totaling $55.4 million and a 15-year railcar lease totaling $24.8 million.
- Management stated that legal and environmental proceedings were not expected to have a material adverse effect based on currently available facts.
Investor Verification Checklist
- Verify the closing, proceeds, accounting treatment, and use of proceeds from the planned $420 million California cement divestiture.
- Assess reported growth excluding TXI acquisition effects, 2014 divestitures, and other acquisition-related items.
- Monitor rainfall-related shipment deferrals, capacity constraints, and the potential shift of sales and earnings into 2016.
- Reconcile the company’s non-GAAP measures, including EBITDA, heritage results, and margins excluding freight and delivery revenues, to GAAP results.
- Review debt maturities, variable-rate exposure, the $520 million of stated unused capacity, and compliance with the 3.50x leverage covenant.
- Compare actual 2015 performance with management’s shipment, pricing, EBITDA, capital-expenditure, tax, and segment-sales guidance.
- Evaluate federal and state infrastructure funding developments, energy-related construction demand, residential recovery, and transportation availability.
- Confirm the effect of pension expense, TXI integration costs, customer bad-debt writeoffs, planned cement kiln shutdowns, and other unusual items on recurring earnings.