Martin Marietta Materials, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; filed August 4, 2014. The unaudited results cover the Aggregates business, Specialty Products, and corporate activities. The July 1, 2014 acquisition of Texas Industries, Inc. (TXI) was completed after quarter-end and is not included in the reported financial statements.
Business Context
Martin Marietta is primarily a construction-aggregates producer operating nearly 300 quarries, distribution facilities, and plants across 30 states, Canada, the Bahamas, and the Caribbean. The Aggregates business includes crushed stone, sand and gravel, asphalt, ready mixed concrete, and road paving. Specialty Products produces magnesia-based chemicals and dolomitic lime.
Financial Performance
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Net sales | $601.9 million | $507.3 million | $981.6 million | $851.4 million |
| Total revenues | $669.2 million | $561.3 million | $1,097.9 million | $945.2 million |
| Gross profit | $135.6 million | $107.0 million | $161.4 million | $119.8 million |
| Earnings from operations | $96.2 million | $69.6 million | $80.3 million | $46.3 million |
| Net earnings attributable to Martin Marietta | $59.5 million | $41.3 million | $37.9 million | $13.5 million |
| Diluted EPS | $1.27 | $0.89 | $0.81 | $0.29 |
- Margins: Q2 gross margin was 20.3% of total revenues versus 19.1% a year earlier; excluding freight and delivery revenues, gross margin was 22.5% versus 21.1%. Q2 operating margin was 14.4% versus 12.4%; excluding freight and delivery revenues, it was 16.0% versus 13.7%.
- Six-month margins: Gross margin was 14.7% versus 12.7%; excluding freight and delivery revenues, 16.4% versus 14.1%. Operating margin was 7.3% versus 4.9%.
- Cash flow: Six-month operating cash flow was $70.4 million versus $48.5 million. Capital expenditures were $84.7 million versus $50.0 million, producing negative operating cash flow less capital expenditures of approximately $14.4 million.
- Liquidity: Cash and cash equivalents were $34.3 million at June 30, 2014, compared with $43.7 million at June 30, 2013 and $42.4 million at December 31, 2013. The company reported $307 million of unused Revolving Facility capacity, subject to covenant compliance.
- Debt: Total debt was $1.085 billion, including $1.072 billion of long-term debt. The trailing-twelve-month debt-to-defined-EBITDA ratio was 2.49x, within the 3.50x covenant limit. A temporary 3.75x limit applied for the September 30, 2014 calculation date.
- Dividends: Cash dividends were $0.40 per common share for the quarter and $0.80 per share for the six-month period.
Material Changes Versus Prior Comparable Period
- Q2 net sales increased 18.6%, while six-month net sales increased 15.3%.
- Aggregates product-line volume increased 12.7% in Q2 and 10.9% for the six-month period; pricing increased 5.0% and 2.4%, respectively.
- Aggregates business Q2 net sales increased to $540.0 million from $450.7 million, and operating earnings increased to $86.9 million from $58.9 million.
- West Group Q2 operating earnings increased to $30.9 million from $16.4 million. Southeast Group improved to a $1.3 million operating loss from a $5.2 million loss.
- Specialty Products generated record Q2 net sales of $61.9 million and operating earnings of $21.0 million, versus $56.6 million and $18.7 million, respectively.
- Q2 SG&A declined to 6.1% of net sales from 7.5%, primarily due to lower pension expense and the absence of 2013 information-systems upgrade costs.
- Reported earnings included $5.3 million of TXI-related business-development and acquisition-integration expenses in Q2 and $15.0 million for the six-month period. Management reported adjusted diluted EPS of $1.34 for Q2 and $1.01 for six months, excluding these costs.
- The company paid $19.6 million on April 2, 2014 to acquire the remaining 50% interest in an existing joint venture.
TXI Transaction, Outlook, and Risks
- On July 1, 2014, Martin Marietta acquired TXI in an approximately $2.68 billion stock transaction based on the July 1 closing price, issuing approximately 20.3 million shares. TXI adds major cement, aggregates, ready mixed concrete, and concrete-products operations, particularly in Texas and California. Initial purchase accounting was not complete as of August 4, 2014.
- To finance the transaction and refinance TXI debt, the company issued $300 million of floating-rate senior notes due 2017 and $400 million of 4.25% senior notes due 2024. Proceeds were used to redeem $650 million of TXI 9.25% notes, plus premium and accrued interest. Management expected approximately $195 million of second-half cash payments for TXI-related costs and debt redemption premiums.
- Management reaffirmed full-year heritage aggregates pricing growth of 3% to 5% and expects heritage aggregates shipments to increase 6% to 8%. It projected vertically integrated net sales of $385 million to $405 million, gross profit of $40 million to $45 million, Specialty Products net sales of $225 million to $235 million, and capital expenditures of approximately $155 million.
- Management expects an effective tax rate of approximately 29%, excluding discrete events, and relatively flat interest expense compared with 2013.
- Key risks include uncertainty regarding renewal of MAP-21 and Highway Trust Fund financing, construction-market weakness, weather, energy and diesel costs, railcar and trucking availability, interest rates and credit-market access, tax-law changes, environmental requirements, and the ability to integrate TXI and realize expected synergies.
- The company must divest an Oklahoma aggregates quarry and two Texas rail yards under its agreement with the Department of Justice concerning the TXI transaction.
- Legal proceedings are considered unlikely to have a material adverse effect based on currently available information. However, EPA Clean Air Act notices involving the Woodville, Ohio lime plant could ultimately require penalties or equipment upgrades, and the potential cost was not reasonably estimable.
Investor Verification Points
- Verify the final purchase accounting, goodwill, debt balances, integration costs, synergies, and operating results attributable to TXI in subsequent filings.
- Reconcile reported EPS with management’s non-GAAP adjusted EPS, including the treatment of TXI-related expenses and any debt-redemption premium.
- Monitor post-acquisition leverage and compliance with the debt covenant as the temporary 3.75x limit expires and the 3.50x limit resumes for December 31, 2014.
- Assess whether aggregates volume and pricing guidance is supported by infrastructure funding, residential and nonresidential construction, and energy-sector demand.
- Review cash requirements for TXI integration, debt refinancing, capital expenditures, dividends, and the potential divestitures required by the DOJ agreement.
- Evaluate exposure to weather, diesel and other energy costs, transportation constraints, environmental obligations, and construction-market concentration.