Business Context and Reporting Period
Martin Marietta Materials, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company is principally a construction aggregates producer, with vertically integrated asphalt, ready-mixed concrete and paving operations, plus Specialty Products consisting of magnesia-based chemicals and dolomitic lime. Operations span 297 quarries, distribution facilities and plants across 33 states, Canada, the Bahamas and the Caribbean.
Effective January 1, 2013, the Aggregates business was reorganized into the Mid-America, Southeast and West Groups. Prior-year segment data was reclassified to conform to the new presentation.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $345.2 million | $350.5 million |
| Total revenues | $385.0 million | $394.0 million |
| Gross profit | $12.6 million | $23.8 million |
| Gross margin on total revenues | 3.3% | 6.0% |
| Gross margin excluding freight and delivery revenues | 3.6% | 6.8% |
| Loss from operations | $(23.6) million | $(35.3) million |
| Net loss attributable to Martin Marietta | $(27.8) million | $(36.7) million |
| Diluted loss per share | $(0.61) | $(0.81) |
| Cash provided by operating activities | $18.6 million | $(4.3) million |
Amounts in the filing are generally presented in thousands unless otherwise noted.
- Aggregates net sales declined to $290.0 million from $298.8 million. Aggregates shipments fell 8.8%, while product-line pricing increased 5.7%.
- Aggregates gross profit declined to a $5.0 million loss from $6.6 million of profit, primarily because lower shipments reduced operating leverage. The vertically integrated operations reported $42.2 million of sales and contributed to the decline in gross profit.
- Specialty Products produced record first-quarter net sales of $55.2 million and record gross profit of $19.6 million. Dolomitic lime benefited from the new kiln completed in late 2012.
- SG&A increased to $37.6 million, or 10.9% of net sales, from $33.0 million, or 9.4%. The increase primarily reflected information-systems upgrade costs.
- Q1 2012 included $25.9 million of business-development costs related to an unconsummated proposed business combination. This reduced the year-over-year improvement in operating loss comparisons.
- Cash and cash equivalents were $37.3 million at March 31, 2013, compared with $25.4 million at December 31, 2012 and $45.0 million at March 31, 2012.
- Total debt was $1.079 billion at March 31, 2013, including $1.073 billion of long-term debt, compared with $1.048 billion at December 31, 2012 and $1.135 billion at March 31, 2012.
- Capital expenditures were $21.9 million in the quarter. Management forecast approximately $155 million of 2013 capital expenditures.
- The company paid $18.5 million of dividends, or $0.40 per common share, and repurchased no shares.
Material Changes Versus the Prior Comparable Period
- Net sales decreased 1.5%, but the net loss attributable to Martin Marietta improved by $8.9 million, mainly because the prior-year period included $25.9 million of business-development costs.
- Gross profit decreased $11.2 million. Aggregates pricing contributed approximately $12.9 million of favorable impact, but volume weakness reduced gross profit by approximately $22.5 million.
- Aggregates volume was affected by a more normal and, in some markets, more severe winter than in 2012, when unusually warm weather accelerated construction activity.
- Specialty Products sales increased 6.7%, although operating earnings declined to $17.1 million from $18.2 million because the prior-year period included a $1.2 million favorable litigation settlement.
- Operating cash flow improved by $22.9 million year over year, reflecting lower accounts receivable and the absence of the prior-year business-development cash impact.
- Total equity declined to $1.410 billion from $1.450 billion at December 31, 2012, primarily reflecting the quarterly net loss and dividend declaration.
Liquidity, Debt and Financial Risks
- The company reported $237 million of unused borrowing capacity under its revolving facility, subject to the leverage covenant.
- The trailing-twelve-month debt-to-defined-EBITDA ratio was 3.22x at March 31, 2013. The temporarily amended covenant maximum was 3.75x for March 31 and June 30, 2013, returning to 3.50x for the September 30, 2013 calculation date. Management stated that the company was in compliance and expected the ratio to remain below 3.50x at June 30.
- The existing accounts receivable credit facility expired on April 20, 2013. On April 19, 2013, the company established a $150 million trade receivable securitization facility, maturing April 19, 2014, with the option to increase commitments by up to $100 million subject to lender commitments.
- A hypothetical 100-basis-point increase in variable borrowing rates would increase annual interest expense by approximately $4.3 million. A hypothetical 10% change in energy prices would affect annual pretax earnings by approximately $18.8 million.
- Management stated that cash, projected operating cash flow and financing availability should be sufficient for operating needs, debt service, capital expenditures, potential investments and dividends for the foreseeable future.
Outlook, Commentary, Risks and Unusual Items
- Management expected 2013 Aggregates shipments to increase 4% to 6% and Aggregates pricing to increase 2% to 4%. Expected end-market trends included mid-single-digit infrastructure volume growth, high-single-digit nonresidential growth, double-digit residential volume growth and flat ChemRock/Rail demand.
- Vertically integrated operations were expected to generate $350 million to $375 million of net sales and $20 million to $22 million of gross profit.
- Specialty Products net sales were expected at $220 million to $230 million, with gross profit of $81 million to $85 million. Management expected interest expense to remain relatively flat and the effective tax rate to approximate 26%, excluding discrete events.
- Management cited positive indicators including higher housing starts, construction employment, highway obligations and transportation funding under MAP-21. However, the company cautioned that first-quarter results are highly seasonal and are not indicative of the full year.
- Key risks include economic weakness, federal sequestration and debt-ceiling issues, changes in transportation funding, state budget pressures, weather, construction volume and pricing, fuel and raw-material costs, transportation availability, energy-sector and steel-industry demand, credit ratings, interest rates and tax-law changes.
- The company remains subject to an EPA enforcement matter involving Clean Air Act New Source Review requirements at its Woodville, Ohio dolomitic lime plant. Potential penalties or equipment upgrades could not be reasonably estimated.
- Unrecognized tax benefits totaled $17.8 million at March 31, 2013. Up to $12.1 million could decrease during the following twelve months through settlements and statute-of-limitations expirations, although related U.S. tax expense could offset part of the benefit.
- Management stated that litigation and environmental proceedings were not expected to materially affect consolidated results, cash flows or financial position, but the EPA matter could materially affect the Specialty Products segment.
Investor Verification Priorities
- Verify the sustainability of the projected 4% to 6% Aggregates volume growth and 2% to 4% pricing growth against actual construction activity and weather conditions.
- Monitor the debt-to-EBITDA ratio as the covenant limit returns to 3.50x and assess refinancing and liquidity needs before the March 2015 Credit Agreement maturity.
- Confirm the replacement trade receivable facility’s utilization, borrowing base and April 2014 maturity terms.
- Assess whether Specialty Products can maintain record sales and gross profit while operating near capacity and facing steel utilization, customer concentration and natural-gas-cost risks.
- Track the EPA Woodville, Ohio proceeding, potential compliance expenditures and any related reserves or disclosures.
- Reconcile reported non-GAAP margins, freight pass-through treatment and segment reorganization effects when comparing future periods.