Martin Marietta Materials, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. The filing was signed November 2, 2017. Martin Marietta is a building-materials supplier with aggregates, cement, ready-mixed concrete, asphalt and paving operations, plus Magnesia Specialties. Its operations span more than 270 quarries and distribution facilities in 26 states, Nova Scotia and the Bahamas.
Financial Performance and Position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenues | $1.088 billion | $1.104 billion | $2.995 billion | $2.870 billion |
| Net sales | $1.022 billion | $1.038 billion | $2.810 billion | $2.688 billion |
| Gross profit | $291.7 million | $293.3 million | $712.8 million | $686.0 million |
| Gross margin | 26.8% | 26.6% | 23.8% | 23.9% |
| Earnings from operations | $227.0 million | $242.7 million | $517.0 million | $519.5 million |
| Net earnings attributable to Martin Marietta | $151.5 million | $159.5 million | $336.2 million | $326.5 million |
| Diluted EPS | $2.39 | $2.49 | $5.30 | $5.08 |
| Consolidated EBITDA | $302.0 million | $322.8 million | $742.0 million | $741.9 million |
- Cash flow: Nine-month operating cash flow was $418.4 million versus $421.7 million in the prior-year period. Capital expenditures were $308.7 million, and management expected full-year capital spending of approximately $450 million to $500 million.
- Liquidity: Cash and cash equivalents were $35.2 million at September 30, 2017, down from $60.7 million at September 30, 2016. The Company reported $918.0 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to covenant compliance.
- Debt: Total debt was $1.723 billion, including $1.643 billion of long-term debt. The Company issued $300 million of floating-rate senior notes due 2020 and $300 million of 3.450% senior notes due 2027 in May 2017. The trailing-twelve-month debt-to-EBITDA covenant ratio was 1.74x versus a 3.50x maximum.
- Equity returns: Dividends paid during the first nine months were $81.0 million. The Company repurchased $100.0 million of common stock during the period, but made no repurchases in the third quarter. Approximately 14.669 million shares remained authorized for repurchase.
Material Changes Versus Prior Comparable Period
- Third-quarter total revenues declined 1.5%, net sales declined 1.6%, operating earnings declined 6.5%, net earnings attributable to Martin Marietta declined 5.0%, and diluted EPS declined 4.0%.
- Third-quarter aggregates volumes declined 3.2%, while aggregates pricing increased 5.1%. Volume declines reflected unusually heavy precipitation, hurricanes, project delays, labor constraints and government uncertainty.
- Third-quarter Building Materials net sales declined to $963.6 million from $978.1 million. Aggregates sales increased, but cement and ready-mixed concrete sales declined. Building Materials operating earnings declined to $220.6 million from $238.7 million, primarily reflecting weaker West Group performance.
- Third-quarter consolidated gross margin improved 20 basis points, but SG&A increased to 5.3% of revenue from 5.0%. Operating earnings were pressured by $12.4 million of nonrecurring leased-railcar repair costs.
- Nine-month total revenues increased 4.4%, net sales increased 4.6%, gross profit increased 3.9%, net earnings attributable to Martin Marietta increased 3.0%, and diluted EPS increased 4.3%. EBITDA was essentially unchanged.
- Nine-month aggregates volumes declined 0.6%, offset by a 4.7% pricing increase. Ready-mixed concrete and asphalt shipments increased, while cement volumes declined.
- Magnesia Specialties nine-month sales increased 4.3%, but operating earnings declined because production-cost increases, maintenance costs and limestone-stripping costs outpaced sales growth.
Outlook, Commentary, Risks and Unusual Items
- Management remained optimistic about the long-term outlook but revised 2017 end-market guidance because of skilled-labor shortages, project delays and government uncertainty. Infrastructure aggregates volumes were expected to decrease in the mid-single digits, nonresidential volumes to remain relatively flat, residential volumes to increase in the high-single digits, and ChemRock/Rail volumes to decrease in the high-double digits.
- Management expected the next wave of major energy-related construction projects to bid in 2018. Residential activity remained strong, particularly in the Southeast, while infrastructure volumes remained below the Company’s recent five-year average.
- The pending acquisition of Bluegrass Materials was valued at $1.625 billion in cash. The transaction remained under Department of Justice review and was expected to close in the first half of 2018. Management expected to finance it with new senior notes and/or credit-facility borrowings.
- Other unusual items included a $13.5 million real-estate gain, approximately $7.5 million of expense related to the CFO’s retirement, and $12.4 million of railcar repair costs. These items affected comparisons and operating results.
- The Trade Receivable Facility maturity was extended to September 26, 2018. The Company classified its $300 million of 6.60% senior notes due April 2018 as noncurrent because it intended and was able to refinance them on a long-term basis.
- The Company committed to purchase or lease 1,100 railcars costing approximately $84 million, with most spending expected in 2018.
- Key risks include weather and hurricanes, infrastructure funding and project timing, construction and energy-market conditions, labor and transportation availability, fuel and other input costs, equipment failures, environmental regulation, interest rates, acquisition integration, leverage-covenant compliance and the effect of acquisitions on the investment-grade credit rating.
- The Company expected the 2018 revenue-recognition standard to have no material impact and expected to adopt it using the full retrospective method. The 2019 lease standard was expected to have a material balance-sheet effect, but the impact had not been quantified.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2017, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the Bluegrass acquisition received regulatory approval, closed as expected and required additional debt or equity financing.
- Actual 2017 aggregates volumes and pricing by end market, particularly infrastructure, residential and ChemRock/Rail.
- Refinancing or repayment of the $300 million senior notes due April 2018 and the maturity of the Trade Receivable Facility in September 2018.
- Post-acquisition leverage, covenant headroom and continued investment-grade credit ratings.
- The effect of weather, project delays, labor shortages, railcar availability and energy costs on volumes and margins.
- Whether the unusual railcar repair, CFO-retirement and real-estate-sale items recur or reverse in subsequent periods.
- The final balance-sheet impact of the new lease accounting standard and the completed accounting treatment for the Bluegrass acquisition.