Martin Marietta Materials, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2014. Martin Marietta supplies construction aggregates and related asphalt, ready-mixed concrete and road-paving services, cement, and specialty products through approximately 420 facilities serving 30 states and international markets.
The July 1, 2014 acquisition of Texas Industries, Inc. (TXI) materially expanded the company into cement, ready-mixed concrete and additional aggregates operations. TXI results are included from the acquisition date.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $917.9 million | $600.5 million | $1.900 billion | $1.452 billion |
| Total revenues | $1.004 billion | $665.3 million | $2.102 billion | $1.611 billion |
| Gross profit | $195.6 million | $143.1 million | $357.0 million | $262.9 million |
| Earnings from operations | $116.0 million | $108.8 million | $196.3 million | $155.2 million |
| Net earnings attributable to Martin Marietta | $53.7 million | $71.8 million | $91.6 million | $85.3 million |
| Diluted EPS | $0.79 | $1.54 | $1.70 | $1.84 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $201.6 million | $165.6 million |
GAAP gross margin was 19.5% in the quarter and 17.0% year to date, compared with 21.5% and 16.3%, respectively, in the prior-year periods. Excluding freight and delivery revenues, gross margin was 21.3% for the quarter and 18.8% year to date. Operating margin was 11.6% for the quarter and 9.3% year to date.
Reported earnings were reduced by $26.1 million of net TXI acquisition-related expenses and $10.9 million of one-time acquired-inventory fair-value charges in the quarter. Adjusted diluted EPS was $1.45 versus reported EPS of $0.79; nine-month adjusted diluted EPS was $2.74 versus reported EPS of $1.70.
Liquidity, debt and capital resources
- Cash and cash equivalents were $73.6 million at September 30, 2014, versus $42.4 million at December 31, 2013.
- Total debt was $1.618 billion, including $1.604 billion of long-term debt, versus total debt of $1.031 billion at December 31, 2013.
- Net cash provided by operating activities was $201.6 million. Investing activities provided $35.2 million, primarily reflecting divestiture proceeds, while financing activities used $205.6 million.
- Capital expenditures were $138.6 million through September 30, 2014; full-year capital spending was expected to be approximately $220 million to $230 million.
- The company issued $700 million of senior notes to help fund the TXI transaction and refinance TXI debt. Management expected annual interest savings of approximately $34 million compared with TXI’s prior financing costs.
- Unused borrowing capacity under the revolving and trade receivable facilities was approximately $570 million, subject to the leverage covenant. The September 30, 2014 debt-to-defined-EBITDA ratio was 2.91x, versus a temporary covenant limit of 3.75x; the limit returns to 3.50x for December 31, 2014.
Material changes versus the prior comparable period
- Net sales increased 52.9% in the quarter and 30.9% for the nine-month period, largely because of the TXI acquisition. Heritage operations also grew, with quarterly heritage aggregates volume up 2.7% and pricing up 5.1%; nine-month volume and pricing increased 7.5% and 3.5%, respectively.
- Quarterly net earnings and diluted EPS declined despite higher operating earnings, primarily because of TXI acquisition expenses, inventory fair-value charges, higher interest expense and a higher effective tax rate.
- Quarterly operating earnings increased to $116.0 million from $108.8 million, while adjusted operating earnings were $152.9 million after excluding acquisition-related items and the inventory charge.
- TXI contributed $287.6 million of revenue and $18.8 million of operating earnings from July 1 through September 30, 2014.
- Corporate operating expenses increased substantially because of $74.0 million of TXI business-development, transaction and integration expenses in the quarter. Consolidated SG&A nevertheless declined to 5.3% of net sales from 6.2%.
- Assets increased to $7.339 billion from $3.260 billion at December 31, 2013, primarily reflecting TXI goodwill, property, plant and equipment, operating permits and other acquired assets. Goodwill increased to $2.043 billion from $616.6 million.
Guidance, outlook, commentary and risks
- Management expected 2014 heritage aggregates shipments to increase 6% to 8% and pricing to increase 3% to 5%. Heritage downstream businesses were expected to generate $375 million to $385 million of net sales and $35 million to $40 million of gross profit.
- Specialty Products 2014 net sales guidance was $225 million to $235 million, with gross profit of $85 million to $90 million. Interest expense was expected to approximate $65 million and the effective tax rate approximately 39%.
- TXI operations were expected to be approximately breakeven to earnings per diluted share for 2014, excluding nonrecurring costs and corporate overhead allocations. Management anticipated improved cement profitability in 2015 through utilization, efficiency and interplant initiatives.
- Management cited favorable trends in infrastructure, shale-related construction, nonresidential construction and residential development. It also identified federal and state highway funding uncertainty, TXI integration, construction cycles, weather, fuel and energy costs, transportation availability, cement imports, environmental regulation and interest rates as significant risks.
- The EPA’s Clean Air Act proceedings involving the Specialty Products dolomitic lime plant in Ohio remain unresolved. The company could not reasonably estimate potential penalties or equipment-upgrade costs.
- The company stated that disclosure controls were effective, but its assessment excluded internal controls for newly acquired TXI ready-mixed concrete and cement operations, which represented 18% of consolidated assets.
Important facts for investors to verify
- Final TXI purchase-price allocation, including goodwill, operating permits, deferred taxes and other acquired assets and liabilities; the measurement period remained open at September 30, 2014.
- Progress toward realizing TXI integration synergies and the expected improvement in cement and ready-mixed concrete profitability.
- Compliance with the debt covenant after the temporary 3.75x limit expires and the 3.50x limit resumes for December 31, 2014.
- Actual 2014 capital expenditures, interest expense, tax rate and cash taxes compared with management’s guidance.
- Resolution and potential cost of the EPA Clean Air Act matter and other environmental or regulatory obligations.
- Exposure to federal and state infrastructure funding, construction activity, weather, fuel and energy costs, rail and truck availability, cement pricing and imports.
- Whether reported earnings trends remain representative after excluding TXI acquisition costs, acquired-inventory charges and other unusual items.