Martin Marietta Materials, Inc. — Q1 2017 Form 10-Q Summary
Reporting period: Three months ended March 31, 2017; unaudited consolidated results. Martin Marietta supplies aggregates, cement, ready mixed concrete, asphalt and paving products, and magnesia-based chemicals and lime. Effective January 1, 2017, the company reorganized its Texas operations and now reports Mid-America, Southeast and West Building Materials groups, plus Magnesia Specialties.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $791.7 million | $734.0 million | 7.9% increase |
| Total revenues | $843.9 million | $788.7 million | 7.0% increase |
| Gross profit | $147.1 million | $145.3 million | 1.3% increase |
| Earnings from operations | $77.2 million | $86.0 million | 10.3% decrease |
| Net earnings attributable to Martin Marietta | $42.3 million | $45.0 million | 5.9% decrease |
| Diluted EPS | $0.67 | $0.69 | Decrease |
| Operating cash flow | $74.0 million | $68.3 million | 8.4% increase |
| Consolidated EBITDA | $147.7 million | $152.6 million | 3.2% decrease |
Margins: Gross margin was 17.4% of total revenues versus 18.4% in the prior-year quarter. Excluding freight and delivery revenues, gross margin was 18.6% versus 19.8%. Operating margin was 9.1% versus 10.9%, or 9.7% versus 11.7% excluding freight and delivery revenues.
Balance sheet and liquidity: Cash and cash equivalents were $55.4 million at March 31, 2017. Total debt was $1.846 billion, including $290.0 million classified as current, compared with $1.686 billion at December 31, 2016. The company reported $497.5 million of unused borrowing capacity under its revolving and trade receivable facilities, subject to covenant compliance. Its trailing-twelve-month debt-to-EBITDA ratio was 1.89x, below the 3.50x covenant limit.
Cash deployment: Capital spending was $102.1 million, dividends paid were $26.6 million, and the company repurchased 458,000 shares for approximately $100.0 million. Total first-quarter shareholder returns through repurchases and dividends were $126.6 million.
Material Changes Versus the Prior Comparable Period
- Net sales increased primarily from higher pricing and stronger ready mixed concrete, asphalt and paving activity. Building Materials net sales rose 8.0% to $728.4 million, while Magnesia Specialties sales rose 6.4% to $63.3 million.
- Aggregates pricing increased 5.3%, while aggregate volumes decreased 0.2%. Ready mixed concrete shipments increased 15%; total cement shipments decreased 5.4%.
- Gross profit increased modestly, but margins declined because of cost increases, investment in capacity and preparation for higher anticipated demand, fixed costs in the seasonally low first quarter, and product and geographic mix.
- Corporate selling, general and administrative expense increased, including a higher incentive-compensation accrual. Earnings from operations declined despite higher sales.
- Interest expense increased to $20.9 million from $20.0 million. The effective tax rate was 25.6%, benefiting from a $2.3 million excess tax benefit related to stock-based compensation.
- Operating cash flow improved, while investing cash use declined to $101.6 million from $210.4 million because the prior-year period included a $123.0 million acquisition.
- The company adopted ASU 2016-09 for share-based payment accounting and early adopted ASU 2017-07, which reclassified certain pension and postretirement costs to nonoperating expense. Prior-period amounts were reclassified where required.
Outlook, Risks and Unusual Items
- Management expects public-sector activity to increase during 2017 as FAST Act projects, state and local initiatives, and other infrastructure funding progress.
- Nonresidential construction is expected to increase modestly, although the timing of energy-related projects remains uncertain. Residential construction is expected to continue growing in key markets.
- Full-year capital spending is expected to approximate $400 million to $500 million. Management expects available cash, operating cash flow and financing resources to support operations, debt service, capital expenditures, potential acquisitions and dividends.
- The $300 million trade receivable facility matures September 27, 2017, and the $700 million revolving facility expires November 29, 2018. The $300 million floating-rate notes mature June 30, 2017, with management intending to refinance them on a long-term basis.
- Seasonality and weather can materially affect production, shipments and profitability. Key risks include infrastructure funding and project timing, construction demand, pricing, energy and repair costs, equipment and transportation availability, environmental regulation, interest rates, acquisitions and debt-covenant compliance.
- A hypothetical 100-basis-point increase in rates on $800.0 million of variable-rate borrowings would increase annual interest expense by approximately $8.0 million. A 10% change in 2017 energy prices would change annual energy expense by approximately $23.1 million, before offsets.
- Magnesia Specialties sales increased, but operating earnings declined because natural gas costs and planned and unplanned maintenance costs outpaced sales growth.
- Management stated that legal and administrative proceedings are not expected to have a material adverse effect based on currently available facts. Disclosure controls and procedures were effective as of March 31, 2017.
Important Facts for Investors to Verify
- Refinancing plans and terms for the floating-rate notes and the trade receivable facility maturity.
- Whether infrastructure funding and anticipated construction activity convert into higher shipment volumes during the remaining construction season.
- Progress on the announced $8.00-per-ton cement price increase effective April 1, 2017, and its effect on margins.
- Trends in fuel, natural gas, maintenance, transportation and other input costs relative to pricing gains.
- Share repurchase and dividend levels, remaining repurchase authorization of approximately 14.7 million shares, and their effect on leverage and liquidity.
- Compliance with debt covenants, investment-grade credit ratings and the availability of financing for refinancing or acquisitions.
- The balance-sheet impact of the new lease standard, which management expected to be material but had not quantified as of the filing date.