Martin Marietta Materials, Inc. — First-Quarter 2014 Form 10-Q
Business Context and Reporting Period
Unaudited results for the three months ended March 31, 2014, compared with the first quarter of 2013. Martin Marietta is principally a construction-aggregates producer operating nearly 300 quarries, distribution facilities and plants across 30 states and international markets. Reportable businesses are the Mid-America, Southeast and West Aggregates groups and Specialty Products.
Financial Performance and Liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $379.7 million | $344.1 million | 10.4% increase |
| Total revenues | $428.6 million | $383.9 million | 11.6% increase |
| Gross profit | $25.8 million | $12.8 million | 101.5% increase |
| Gross margin on net sales | 6.8% | 3.7% | 310 basis-point increase |
| Loss from operations | $(15.9) million | $(23.3) million | Improved by $7.4 million |
| Net loss attributable to Martin Marietta | $(21.6) million | $(27.8) million | Improved by $6.2 million |
| Diluted loss per share | $(0.47) | $(0.61) | Improved by $0.14 |
| Cash flow from operations | $6.6 million | $18.6 million | Decrease of $12.0 million |
Cash and cash equivalents were $35.8 million at March 31, 2014, compared with $42.4 million at December 31, 2013 and $37.3 million at March 31, 2013. Capital expenditures were $36.9 million, and management expected approximately $155 million of 2014 capital expenditures.
Total debt was $1.068 billion, including $12.4 million of current maturities; long-term debt was $1.056 billion. The company had $327 million of unused Revolving Facility capacity, subject to covenant compliance. Trailing-twelve-month consolidated debt to defined EBITDA was 2.74x versus a 3.50x maximum covenant. The company paid $18.6 million of dividends, or $0.40 per common share.
Material Changes Versus the Prior Comparable Period
- Aggregates product-line shipments increased 8.1%, while pricing declined 1.3%, primarily because of geographic and product mix. West Group shipments increased 21.5%; Mid-America and Southeast shipments declined 5.3% and 2.5%, respectively.
- Aggregates business operating loss improved to $15.8 million from $30.5 million. West Group shifted to operating earnings of $2.1 million from a loss of $8.1 million.
- Vertically integrated operations improved: ready-mixed-concrete sales increased 45%, and the business generated $7.6 million of gross profit versus a $4.8 million loss in the prior-year quarter.
- Specialty Products produced record first-quarter net sales of $57.4 million, up 3.9%, but operating earnings declined to $16.3 million from $17.1 million because of higher natural-gas costs.
- SG&A declined to $34.2 million from $37.6 million, partly due to lower pension expense and the absence of 2013 information-systems-upgrade costs.
- The company incurred $9.5 million of business-development expenses related to the proposed Texas Industries, Inc. merger. Excluding these expenses, adjusted operating loss was $6.4 million and adjusted loss per share was $0.35.
- Operating cash flow declined because higher sales increased working-capital requirements, despite the lower net loss.
Guidance, Outlook, Risks and Unusual Items
Management expected the proposed all-stock TXI merger to close in summer 2014, subject to regulatory and other approvals. Until closing or termination, dividends were limited to regular quarterly payments of $0.40 per share and share repurchases were prohibited. The company paid $19.5 million on April 2, 2014 for the remaining 50% interest in a joint venture. The trade-receivable facility maturity was extended on April 18, 2014 to September 30, 2014.
- 2014 aggregates shipments were expected to increase 4% to 5%, with pricing increasing 3% to 5% and direct production cost per ton declining slightly.
- Vertically integrated businesses were expected to generate $385 million to $405 million of net sales and $40 million to $45 million of gross profit.
- Specialty Products sales were expected at $225 million to $235 million, with gross profit of $85 million to $90 million.
- Management expected interest expense to remain relatively flat, an effective tax rate of approximately 29% excluding discrete events, and capital expenditures of approximately $155 million.
- Key risks include uncertainty over federal highway funding after MAP-21 expiration, construction-cycle and economic conditions, weather, fuel and natural-gas costs, transportation availability, interest rates, credit-rating changes, acquisition integration and leverage-covenant compliance.
- A 100-basis-point increase in variable borrowing rates would increase annual interest expense by approximately $4.2 million. A 10% change in energy prices was estimated to affect 2014 pretax earnings by approximately $19.9 million.
- The company faces EPA Clean Air Act enforcement matters concerning its Woodville, Ohio lime facility and could not reasonably estimate potential penalties or equipment upgrades. Management also disclosed merger-related stockholder litigation and believes it is without merit.
Important Facts for Investors to Verify
- Progress, approval status, financing, dilution and integration implications of the TXI transaction.
- Renewal or replacement of the trade-receivable facility after September 30, 2014 and compliance with debt covenants.
- Whether expected aggregates volume and pricing growth offsets weather, mix and input-cost pressures.
- Federal and state infrastructure-funding decisions following MAP-21 expiration.
- Natural-gas, diesel and other energy-cost trends, including the effect on Specialty Products margins.
- Resolution and potential financial impact of the Woodville environmental matter and merger-related litigation.
- Conversion of first-quarter operating improvement into full-year cash flow, given the business’s pronounced seasonality.