Martin Marietta Materials, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 7, 2013. The company is principally a construction-aggregates producer operating 303 quarries, distribution facilities and plants across 33 states, Canada, the Bahamas and the Caribbean. Its businesses are Aggregates, vertically integrated asphalt, ready-mixed concrete and road paving operations, and Specialty Products.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $600.5 million | $537.5 million | $1.452 billion | $1.377 billion |
| Total revenues | $665.3 million | $592.3 million | $1.611 billion | $1.530 billion |
| Gross profit | $143.1 million | $124.0 million | $262.9 million | $250.4 million |
| Gross margin | 21.5% | 20.9% | 16.3% | 16.4% |
| Operating earnings | $108.8 million | $91.5 million | $155.2 million | $115.9 million |
| Operating margin | 16.4% | 15.5% | 9.6% | 7.6% |
| Net earnings attributable to Martin Marietta | $71.8 million | $62.9 million | $85.3 million | $62.9 million |
| Diluted EPS | $1.54 | $1.36 | $1.84 | $1.36 |
| Cash dividends per share | $0.40 | $0.40 | $1.20 | $1.20 |
Margins excluding freight and delivery revenues were 23.8% in the third quarter versus 23.1% in the prior-year quarter and 18.1% for the nine-month period versus 18.2% in 2012. The nine-month effective tax rate was 25.9% for continuing operations versus 16.2% in 2012, principally reflecting prior-year tax benefits and the Canadian Advance Pricing Agreement-related items.
- Operating cash flow: $165.6 million for the first nine months, compared with $122.0 million in 2012.
- Capital expenditures: $102.3 million through September 30; full-year 2013 spending was expected to be approximately $155 million.
- Cash and liquidity: Cash was $57.2 million at September 30, compared with $25.4 million at December 31, 2012. Unused Revolving Facility capacity was approximately $277 million, subject to the leverage covenant.
- Debt: Total debt was $1.113 billion, including $1.107 billion classified as long-term debt. The trade receivable facility had $150 million outstanding and matures April 19, 2014; management stated it intended and was able to refinance the balance.
- Leverage: Trailing-twelve-month debt to defined EBITDA was 3.06x versus a 3.50x covenant limit. The company was in compliance at September 30, 2013.
- Balance sheet: Total assets were $3.337 billion and total equity was $1.499 billion at September 30, 2013.
Material changes versus the prior comparable period
- Third-quarter net sales increased 11.7%, operating earnings increased 18.9%, and diluted EPS increased 13.2%.
- Nine-month net sales increased 5.4%, while operating earnings increased 33.8%. The 2012 nine-month results included $35.1 million of business-development costs related to an unsuccessful proposed business combination; this accounted for much of the operating earnings comparison.
- Third-quarter aggregates volumes increased 8.1% and pricing increased 2.3%; production cost per ton increased 2.6%. Nine-month aggregates volumes increased 0.2% and pricing increased 2.9%.
- Private-sector construction strengthened: third-quarter nonresidential shipments increased 19% and residential shipments increased 15%. Infrastructure shipments were essentially flat in the quarter and declined 6.0% for the nine months.
- The company acquired three aggregates quarries in the greater Atlanta area on July 1, 2013, adding more than 800 million tons of reserves and contributing 379 thousand tons of third-quarter shipments.
- Specialty Products achieved record third-quarter net sales of $55.8 million and operating earnings of $17.3 million. Higher coal costs and a planned kiln outage pressured margins, while the Woodville kiln supported sales.
- SG&A increased to 6.2% of third-quarter net sales from 6.0% and to 7.8% for the nine months from 7.3%, driven by pension, incentive compensation, professional services and information-systems upgrade costs.
- Net cash used in investing activities increased to $167.0 million from $98.2 million, primarily because of the Atlanta acquisition and capital spending. Financing cash flow improved to $33.2 million from a use of $14.4 million, reflecting higher net debt borrowings.
Guidance, outlook, risks and unusual items
- Management expected full-year aggregates shipments to be flat to slightly higher than 2012, with aggregates pricing up 2% to 4%. Infrastructure volumes were expected to decline in the mid-single digits, while nonresidential and residential volumes were expected to increase in the mid-single digits and high single digits, respectively.
- Expected full-year vertically integrated net sales were $335 million to $355 million and gross profit was $18 million to $20 million. Specialty Products net sales were expected at $220 million to $230 million and gross profit at $81 million to $85 million.
- Management expected a roughly 26% effective tax rate, relatively flat interest expense, and approximately $155 million of capital expenditures.
- Preliminary 2014 expectations called for slight infrastructure growth, mid-to-high single-digit nonresidential growth, double-digit residential growth and low-single-digit ChemRock/Rail growth.
- Key risks include U.S. economic conditions, federal and state transportation funding, MAP-21 expiration, TIFIA delays, sequestration and debt-ceiling uncertainty, government shutdown effects, weather, construction-cycle volatility, fuel and energy costs, transportation availability, steel utilization, natural-gas prices and the ability to integrate acquisitions.
- The Specialty Products business was operating near capacity and remained sensitive to steel utilization, customer changes, coal and natural-gas costs. A 10% change in energy costs was estimated to affect annual pretax earnings by approximately $18.8 million.
- A 100-basis-point increase in rates on $460.0 million of variable-rate borrowings would increase annual interest expense by approximately $4.6 million.
- The company disclosed an unresolved Clean Air Act New Source Review matter involving its Woodville, Ohio lime plant. Potential penalties or equipment upgrades could not yet be reasonably estimated, although management did not expect material effects on the consolidated business.
- Other notable items included a $1.8 million gain from revising asset-retirement-obligation estimates, higher bad-debt recoveries, pension settlement and actuarial costs, and an affiliate loan of $3.4 million supported by collateral.
- Management stated that disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.
Investor verification checklist
- Verify the sustainability of aggregates volume and pricing growth, particularly after the expected infrastructure weakness and seasonal fourth-quarter weather effects.
- Assess the effect of higher production, repair, workers’ compensation, fuel and other energy costs on future margins.
- Review the April 2014 maturity and refinancing plan for the $150 million Trade Receivable Facility and the company’s leverage-covenant headroom.
- Evaluate the Atlanta quarry acquisition’s contribution, integration progress and effect on debt and operating returns.
- Reconcile the reported nine-month earnings improvement for the $35.1 million prior-year business-development charge and the higher 2013 tax rate.
- Monitor federal and state infrastructure funding, MAP-21 and TIFIA developments, construction activity, housing starts and nonresidential indicators.
- Review the Woodville, Ohio environmental proceeding, the affiliate co-borrower arrangement and other contingencies for potential cash or earnings exposure.