SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-12744
MARTIN MARIETTA MATERIALS, INC.
(Exact name of registrant as specified in its charter)
North Carolina
56-1848578
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
2710 Wycliff Road, Raleigh, NC
27607-3033
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code 919-781-4550
Former name: None
Former name, former address and former fiscal year, if changes since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
Non-accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.
Class
Outstanding as of July 31, 2015
Common Stock, $0.01 par value
67,001,255
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended June 30, 2015
Page
Part I. Financial Information:
Item 1. Financial Statements.
Consolidated Balance Sheets – June 30, 2015, December 31, 2014 and June 30, 2014
3
Consolidated Statements of Earnings and Comprehensive Earnings – Three and Six Months Ended June 30, 2015 and 2014
4
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2015 and 2014
5
Consolidated Statement of Total Equity - Six Months Ended June 30, 2015
6
Notes to Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
55
Item 4. Controls and Procedures.
56
Part II. Other Information:
Item 1. Legal Proceedings.
57
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4. Mine Safety Disclosures.
Item 6. Exhibits.
58
Signatures
59
Exhibit Index
60
Page 2 of 60
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
June 30,
December 31,
2015
2014
(Unaudited)
(Audited)
(Dollars in Thousands, Except Per Share Data)
ASSETS
Current Assets:
Cash and cash equivalents
$
44,169
108,651
34,329
Accounts receivable, net
497,468
421,001
343,784
Inventories, net
479,856
484,919
348,168
Current deferred income tax benefits
234,594
244,638
72,413
Assets held for sale
426,495
—
Other current assets
82,667
29,607
78,007
Total Current Assets
1,765,249
1,288,816
876,701
Property, plant and equipment
5,421,449
5,691,676
3,970,472
Allowances for depreciation, depletion and amortization
(2,371,926
)
(2,288,906
(2,195,098
Net property, plant and equipment
3,049,523
3,402,770
1,775,374
Goodwill
2,065,882
2,068,799
616,621
Operating permits, net
447,702
499,487
16,829
Other intangibles, net
67,242
95,718
30,067
Other noncurrent assets
104,056
108,802
40,451
Total Assets
7,499,654
7,464,392
3,356,043
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdraft
183
Accounts payable
201,235
202,476
139,442
Accrued salaries, benefits and payroll taxes
27,590
36,576
17,393
Pension and postretirement benefits
8,133
6,953
2,356
Accrued insurance and other taxes
57,078
58,356
33,014
Current maturities of long-term debt and short-term facilities
15,966
14,336
12,404
Accrued interest
16,165
16,136
7,386
Other current liabilities
37,667
61,632
32,730
Total Current Liabilities
363,834
396,648
244,725
Long-term debt
1,642,035
1,571,059
1,072,397
Pension, postretirement and postemployment benefits
272,461
249,333
82,662
Noncurrent deferred income taxes
756,526
734,583
275,279
Other noncurrent liabilities
154,365
160,021
113,981
Total Liabilities
3,189,221
3,111,644
1,789,044
Equity:
Common stock, par value $0.01 per share
668
671
463
Preferred stock, par value $0.01 per share
Additional paid-in capital
3,274,098
3,243,619
456,989
Accumulated other comprehensive loss
(112,814
(106,159
(42,141
Retained earnings
1,146,821
1,213,035
1,149,388
Total Shareholders' Equity
4,308,773
4,351,166
1,564,699
Noncontrolling interests
1,660
1,582
2,300
Total Equity
4,310,433
4,352,748
1,566,999
Total Liabilities and Equity
See accompanying notes to the consolidated financial statements.
Page 3 of 60
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
Three Months Ended
Six Months Ended
(In Thousands, Except Per Share Data)
Net Sales
850,249
601,937
1,482,124
981,615
Freight and delivery revenues
71,170
67,288
130,641
116,240
Total revenues
921,419
669,225
1,612,765
1,097,855
Cost of sales
650,096
466,335
1,207,710
820,177
Freight and delivery costs
Total cost of revenues
721,266
533,623
1,338,351
936,417
Gross Profit
200,153
135,602
274,414
161,438
Selling, general & administrative expenses
56,783
36,566
106,233
70,813
Acquisition-related expenses, net
2,092
5,280
3,696
15,060
Other operating expenses and (income), net
4,294
(2,485
1,930
(4,779
Earnings from Operations
136,984
96,241
162,555
80,344
Interest expense
19,087
12,947
38,418
25,149
Other nonoperating (income) and expenses, net
(3,011
(292
(2,118
3,171
Earnings from continuing operations before taxes on income
120,908
83,586
126,255
52,024
Income tax expense
38,929
23,906
38,117
15,482
Earnings from Continuing Operations
81,979
59,680
88,138
36,542
Loss on discontinued operations, net of related tax benefit of
$24 and $25, respectively
(56
(70
Consolidated net earnings
59,624
36,472
Less: Net earnings (loss) attributable to noncontrolling interests
41
103
73
(1,432
Net Earnings Attributable to Martin Marietta Materials, Inc.
81,938
59,521
88,065
37,904
Net Earnings (Loss) Attributable to Martin Marietta Materials, Inc.:
Earnings from continuing operations
59,577
37,974
Loss from discontinued operations
Consolidated Comprehensive Earnings: (See Note 1)
Earnings attributable to Martin Marietta Materials, Inc.
75,847
60,124
81,410
39,877
Earnings (Loss) attributable to noncontrolling interests
43
104
78
(1,430
75,890
60,228
81,488
38,447
Net Earnings (Loss) Attributable to Martin Marietta Materials, Inc.
Per Common Share:
Basic from continuing operations attributable to common shareholders
1.23
1.28
1.30
0.81
Discontinued operations attributable to common shareholders
Diluted from continuing operations attributable to common shareholders
1.22
1.27
Weighted-Average Common Shares Outstanding:
Basic
67,373
46,395
67,392
46,355
Diluted
67,633
46,529
67,654
46,477
Cash Dividends Per Common Share
0.40
0.80
Page 4 of 60
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Cash Flows from Operating Activities:
Adjustments to reconcile consolidated net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization
134,958
86,147
Stock-based compensation expense
7,524
4,370
Gains on divestitures and sales of assets
(853
(1,747
Deferred income taxes
33,906
(6,433
Excess tax benefits from stock-based compensation transactions
(55
(1,922
Other items, net
(341
3,227
Changes in operating assets and liabilities, net of effects of acquisitions
and divestitures:
(76,061
(98,911
(27,661
(4,269
(3,416
35,842
Other assets and liabilities, net
(29,070
17,587
Net Cash Provided by Operating Activities
127,069
70,363
Cash Flows from Investing Activities:
Additions to property, plant and equipment
(127,990
(84,737
Acquisitions, net
(10,713
(117
Proceeds from divestitures and sales of assets
1,972
2,154
Repayments from affiliate
1,808
529
Payment of railcar construction advances
(25,234
(14,513
Reimbursement of railcar construction advances
25,234
14,513
Net Cash Used for Investing Activities
(134,923
(82,171
Cash Flows from Financing Activities:
Borrowings of long-term debt
80,000
100,000
Repayments of long-term debt
(8,144
(46,417
Payments on capital lease obligations
(1,831
(1,052
Debt issuance costs
(881
Change in bank overdraft
(183
(2,556
Dividends paid
(54,285
(37,254
Purchase of remaining interest in existing subsidiaries
(19,604
Issuances of common stock
27,760
9,542
Repurchases of common stock
(100,000
1,922
Net Cash (Used for) Provided by Financing Activities
(56,628
3,700
Net Decrease in Cash and Cash Equivalents
(64,482
(8,108
Cash and Cash Equivalents, beginning of period
42,437
Cash and Cash Equivalents, end of period
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
35,447
25,173
Cash paid for income taxes
24,334
3,511
Page 5 of 60
CONSOLIDATED STATEMENT OF TOTAL EQUITY
(in thousands)
Shares of Common Stock
Common Stock
Additional Paid-in Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Noncontrolling Interests
Balance at December 31, 2014
67,293
Other comprehensive (loss) earnings,
net of tax
(6,655
(6,650
Dividends declared
Issuances of common stock for stock
award plans
368
22,955
22,958
(670
(6
(99,994
Balance at June 30, 2015
66,991
Page 6 of 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Significant Accounting Policies
Organization
Martin Marietta Materials, Inc. (the “Corporation” or “Martin Marietta”) is engaged principally in the construction aggregates business. The aggregates product line accounted for 58% of 2014 consolidated net sales and includes crushed stone, sand and gravel, and is used for construction of highways and other infrastructure projects, and in the nonresidential and residential construction industries. Aggregates products are also used in the railroad, agricultural, utility and environmental industries. These aggregates products, along with the Corporation’s aggregates-related downstream product lines, which accounted for 25% of 2014 consolidated net sales and include asphalt products, ready mixed concrete and road paving construction services, are sold and shipped from a network of more than 400 quarries, distribution facilities and plants to customers in 32 states, Canada, the Bahamas and the Caribbean Islands. The aggregates and aggregates-related downstream product lines are reported collectively as the “Aggregates business”.
The Corporation currently conducts the Aggregates business through three reportable segments: the Mid-America Group, the Southeast Group and the West Group.
AGGREGATES BUSINESS
Reportable Segments
Mid-America Group
Southeast Group
West Group
Operating Locations
Indiana, Iowa,
northern Kansas, Kentucky, Maryland, Minnesota, Missouri,
eastern Nebraska, North Carolina, Ohio,
South Carolina,
Virginia, Washington and
West Virginia
Alabama, Florida, Georgia, Mississippi, Tennessee, Nova Scotia and the Bahamas
Arkansas, Colorado, southern Kansas,
Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah
and Wyoming
The Corporation has a Cement segment, which was acquired July 1, 2014 and accounted for 8% of 2014 consolidated net sales, with production facilities located in Midlothian, Texas, south of Dallas/Fort Worth; Hunter, Texas, south of San Antonio; and Oro Grande, near Los Angeles, California. The cement business produces Portland and specialty cements, such as masonry and oil well cements. Similar to the Aggregates business, cement is used in infrastructure projects, nonresidential and residential construction, and the railroad, agricultural, utility and environmental industries. The high calcium limestone reserves used as a raw material are a part of owned property adjacent to each of the plants. The Corporation also operates cement terminals, a packaging facility and cement grinding facility at the Crestmore plant near Riverside, California.
The Corporation has a Magnesia Specialties segment with manufacturing facilities in Manistee, Michigan and Woodville, Ohio. The Magnesia Specialties segment, which accounted for 9% of 2014 consolidated net sales, produces magnesia-based chemicals products used in industrial, agricultural and environmental applications and dolomitic lime sold primarily to customers in the steel industry.
Page 7 of 60
(Continued)
Significant Accounting Policies (continued)
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Corporation have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and in Article 10 of Regulation S-X. The Corporation has continued to follow the accounting policies set forth in the audited consolidated financial statements and related notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014. In the opinion of management, the interim consolidated financial information provided herein reflects all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods. The consolidated results of operations for the six months ended June 30, 2015 are not indicative of the results expected for other interim periods or the full year. The consolidated balance sheet at December 31, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.
Revenue Recognition Standard
The FASB issued an accounting standard update that amends the accounting guidance on revenue recognition. The new standard intends to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The new standard is effective for interim and annual reporting periods beginning after December 15, 2017 and can be applied on a full retrospective or modified retrospective approach. The Corporation is currently evaluating the impact of the provisions of the new standard, and at this time does not expect the impact to be material to its consolidated results of operations.
Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss
Consolidated comprehensive earnings/loss for the Corporation consist of consolidated net earnings or loss; adjustments for the funded status of pension and postretirement benefit plans; foreign currency translation adjustments; and the amortization of the value of terminated forward starting interest rate swap agreements into interest expense, and are presented in the Corporation’s consolidated statements of earnings and comprehensive earnings.
Comprehensive earnings attributable to Martin Marietta is as follows:
Net earnings attributable to Martin Marietta
Materials, Inc.
Other comprehensive (loss) earnings, net of tax
(6,091
603
1,973
Comprehensive earnings attributable to
Martin Marietta Materials, Inc.
Page 8 of 60
Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)
Comprehensive earnings (loss) attributable to noncontrolling interests, consisting of net earnings or loss and adjustments for the funded status of pension and postretirement benefit plans, is as follows:
Net earnings (loss) attributable to noncontrolling interests
Other comprehensive earnings, net of tax
2
1
Comprehensive earnings (loss) attributable to
noncontrolling interests
Accumulated other comprehensive loss consists of unrealized gains and losses related to the funded status of pension and postretirement benefit plans; foreign currency translation; and the unamortized value of terminated forward starting interest rate swap agreements, and is presented on the Corporation’s consolidated balance sheets.
Changes in accumulated other comprehensive loss, net of tax, are as follows:
Unamortized
Value of
Terminated
Accumulated
Pension and
Forward Starting
Other
Postretirement
Foreign
Interest Rate
Comprehensive
Benefit Plans
Currency
Swap
Loss
Three Months Ended June 30, 2015
Balance at beginning of period
(105,151
990
(2,562
(106,723
Other comprehensive (loss) earnings before
reclassifications, net of tax
(10,670
229
(10,441
Amounts reclassified from accumulated other
comprehensive loss, net of tax
4,158
192
4,350
(6,512
Balance at end of period
(111,663
1,219
(2,370
Three Months Ended June 30, 2014
(44,267
4,816
(3,293
(42,744
(426
842
416
comprehensive earnings, net of tax
8
179
187
(418
(44,685
5,658
(3,114
Page 9 of 60
The other comprehensive loss before reclassifications for pension and postretirement benefit plans is net of tax benefit of $6,793,000 and $276,000 for the three months ended June 30, 2015 and 2014, respectively.
Six Months Ended June 30, 2015
(106,688
3,278
(2,749
Other comprehensive loss before
(10,845
(2,059
(12,904
Amounts reclassified from accumulated
other comprehensive (loss) earnings, net of tax
5,870
379
6,249
(4,975
Six Months Ended June 30, 2014
(44,549
3,902
(3,467
(44,114
(430
1,756
1,326
other comprehensive earnings, net of tax
294
353
647
(136
The other comprehensive loss before reclassifications for pension and postretirement benefit plans is net of tax benefit of $6,904,000 and $280,000 for the six months ended June 30, 2015 and 2014, respectively.
Page 10 of 60
Changes in net noncurrent deferred tax assets recorded in accumulated other comprehensive loss are as follows:
Pension and Postretirement Benefit Plans
Unamortized Value of Terminated Forward Starting Interest Rate Swap
Net Noncurrent Deferred Tax Assets
67,552
1,679
69,231
Tax effect of other comprehensive earnings
4,073
(125
3,948
71,625
1,554
73,179
29,016
2,155
31,171
271
(116
155
29,287
2,039
31,326
68,568
1,799
70,367
3,057
(245
2,812
29,198
2,269
31,467
89
(230
(141
Page 11 of 60
Reclassifications out of accumulated other comprehensive loss are as follows:
Affected line items in the consolidated
statements of earnings and
comprehensive earnings
Pension and postretirement
benefit plans
Amortization of:
Prior service credit
(469
(791
(939
(1,404
Actuarial loss
7,274
804
10,546
1,889
6,805
13
9,607
485
Cost of sales; Selling, general
and administrative expenses
Tax benefit
(2,647
(5
(3,737
(191
Income tax benefit
Unamortized value of terminated
forward starting interest
rate swap
Additional interest expense
317
295
624
583
Earnings per Common Share
The numerator for basic and diluted earnings (loss) per common share is net earnings/loss attributable to Martin Marietta reduced by dividends and undistributed earnings attributable to the Corporation’s unvested restricted stock awards and incentive stock awards. If there is a net loss, no amount of the undistributed loss is attributed to unvested participating securities. The denominator for basic earnings per common share is the weighted-average number of common shares outstanding during the period. Diluted earnings per common share are computed assuming that the weighted-average number of common shares is increased by the conversion, using the treasury stock method, of awards to be issued to employees and nonemployee members of the Corporation’s Board of Directors under certain stock-based compensation arrangements if the conversion is dilutive. For the three and six months ended June 30, 2015 and 2014, the diluted per-share computations reflect a change in the number of common shares outstanding to include the number of additional shares that would have been outstanding if the potentially dilutive common shares had been issued.
Page 12 of 60
Earnings per Common Share (continued)
The following table reconciles the numerator and denominator for basic and diluted earnings per common share:
(In Thousands)
Net earnings from continuing operations attributable to
Less: Distributed and undistributed earnings attributable to
unvested awards
(876
246
403
154
Basic and diluted net earnings available to common
shareholders from continuing operations attributable
to Martin Marietta Materials, Inc.
82,814
59,331
87,662
37,820
Basic and diluted net loss available to common
shareholders from discontinued operations
shareholders attributable to Martin Marietta Materials, Inc.
59,275
37,750
Basic weighted-average common shares outstanding
Effect of dilutive employee and director awards
260
134
262
122
Diluted weighted-average common shares outstanding
2.
Business Combinations and Assets Held for Sale
The Corporation acquired Texas Industries, Inc. (“TXI”) on July 1, 2014. For the three and six months ended June 30, 2015, total revenues of $243,837,000 and $467,896,000, respectively, and earnings from operations of $25,242,000 and $33,936,000, respectively, were attributable to TXI operations and included in the Corporation’s consolidated statements of earnings.
Acquisition-related expenses, net, associated with TXI were $2,135,000 and $3,586,000 for the three and six months ended June 30, 2015, respectively. For the three and six months ended June 30, 2014, acquisition-related expenses, net, associated with TXI were $5,265,000 and $14,991,000, respectively.
Page 13 of 60
Business Combinations and Assets Held for Sale (continued)
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined consolidated results of operations for the Corporation and TXI as though the companies were combined as of January 1, 2014. Transactions between Martin Marietta and TXI during the periods presented in the pro forma financial statements have been eliminated as if Martin Marietta and TXI were consolidated affiliates during the periods. Financial information for periods prior to the July 1, 2014 actual acquisition date included in the pro forma earnings does not reflect any cost savings or associated costs to achieve such savings from operating efficiencies, synergies, debt refinancing, utilization of TXI net operating loss carryforwards or other restructuring that resulted from the combination.
The unaudited pro forma financial information for the three and six months ended June 30, 2014 includes TXI’s historical operating results for the three and six months ended May 31, 2014 (due to a difference in TXI’s historical reporting periods).
The pro forma financial statements do not purport to project the future financial position or operating results of the combined company. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place as of January 1, 2014.
June 30, 2014
Net sales
831,760
1,395,150
Earnings (Loss) from continuing operations attributable to
controlling interest
68,313
(11,474
Assets Held for Sale
At June 30, 2015, the Corporation classified assets related to the California cement operations as assets held for sale, and primarily included the cement plant, mobile equipment and intangible assets. In addition, assets held for sale also included inventory. These assets are reported within the Cement Group segment in Note 10.
There are liabilities that will be transferred as part of the sale, which are reported in other current liabilities on the consolidated balance sheet.
Page 14 of 60
3.
The following table shows the changes in goodwill by reportable segment and in total:
Mid-America
Southeast
West
Group
Cement
Total
Balance at January 1, 2015
282,117
50,346
852,436
883,900
Adjustments to purchase price allocations
15,882
(18,978
(3,096
Acquisitions
893
Divestitures
(714
281,403
869,211
864,922
4.
Inventories, Net
Finished products
427,298
413,766
358,759
Products in process and raw materials
60,498
65,250
20,732
Supplies and expendable parts
112,587
125,092
65,287
600,383
604,108
444,778
Less: Allowances
(120,527
(119,189
(96,610
Page 15 of 60
5.
Long-Term Debt
6.6% Senior Notes, due 2018
299,243
299,123
299,006
7% Debentures, due 2025
124,516
124,500
124,485
6.25% Senior Notes, due 2037
228,208
228,184
228,165
4.25 % Senior Notes, due 2024
395,511
395,309
Floating Rate Notes, due 2017, interest rate of 1.38% and
1.33% at June 30, 2015 and December 31, 2014, respectively
299,108
298,869
Term Loan Facility, due 2018, interest rate of 1.69% at June 30,
2015; 1.67% at December 31, 2014; and 1.65% at June 30, 2014
230,167
236,258
242,350
Revolving Facility, interest rate of 1.40% at June 30, 2014
40,000
Trade Receivable Facility, interest rate of 0.88% and 0.75% at
June 30, 3015 and 2014, respectively
150,000
Other notes
1,248
3,152
795
Total debt
1,658,001
1,585,395
1,084,801
Less: Current maturities
(15,966
(14,336
(12,404
The Corporation, through a wholly-owned special purpose subsidiary, has a $250,000,000 trade receivable securitization facility (the “Trade Receivable Facility”), which matures on September 30, 2016. The Trade Receivable Facility, with SunTrust Bank, Regions Bank, PNC Bank, N.A. and certain other lenders that may become a party to the facility from time to time, is backed by eligible trade receivables, as defined, of $450,791,000, $369,575,000 and $311,792,000 at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. These receivables are originated by the Corporation and then sold to the wholly-owned special purpose subsidiary by the Corporation. The Corporation continues to be responsible for the servicing and administration of the receivables purchased by the wholly-owned special purpose subsidiary. Borrowings under the Trade Receivable Facility bear interest at a rate equal to one-month LIBOR plus 0.7% and are limited to the lesser of the facility limit or the borrowing base, as defined, of $377,688,000, $313,428,000 and $258,787,000 at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. The Trade Receivable Facility contains a cross-default provision to the Corporation’s other debt agreements.
Page 16 of 60
Long-Term Debt (continued)
The Corporation’s Credit Agreement, which provides a $250,000,000 senior unsecured term loan (the “Term Loan Facility”) and a $350,000,000 five-year senior unsecured revolving facility (the “Revolving Facility”), requires the Corporation’s ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, depletion and amortization (“EBITDA”), as defined by the Credit Agreement, for the trailing twelve months (the “Ratio”) to not exceed 3.50x as of the end of any fiscal quarter, provided that the Corporation may exclude from the Ratio debt incurred in connection with certain acquisitions for a period of 180 days so long as the Corporation, as a consequence of such specified acquisition, does not have its rating on long-term unsecured debt fall below BBB by Standard & Poor’s or Baa2 by Moody’s and the Ratio calculated without such exclusion does not exceed 3.75x. Additionally, if no amounts are outstanding under both the Revolving Facility and the Trade Receivable Facility, consolidated debt, including debt for which the Corporation is a co-borrower, may be reduced by the Corporation’s unrestricted cash and cash equivalents in excess of $50,000,000, such reduction not to exceed $200,000,000, for purposes of the covenant calculation.
In 2014, the Corporation amended the Credit Agreement to ensure the impact of the business combination with TXI does not impair liquidity available under the Term Loan Facility and the Revolving Facility. The amendment adjusts consolidated EBITDA to add back fees, costs or expenses relating to the TXI business combination incurred on or prior to the closing of the combination not to exceed $95,000,000; any integration or similar costs or expenses related to the TXI business combination incurred in any period prior to the second anniversary of the closing of the TXI business combination not to exceed $70,000,000; and any make-whole fees incurred in connection with the redemption of TXI’s 9.25% senior notes due 2020. The Corporation was in compliance with this Ratio at June 30, 2015.
Available borrowings under the Revolving Facility are reduced by any outstanding letters of credit issued by the Corporation under the Revolving Facility. At June 30, 2015, December 31, 2014 and June 30, 2014, the Corporation had $2,507,000 of outstanding letters of credit issued under the Revolving Facility.
Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. For the three and six months ended June 30, 2015, the Corporation recognized $317,000 and $624,000, respectively, as additional interest expense. For the three and six months ended June 30, 2014, the Corporation recognized $295,000 and $583,000, respectively, as additional interest expense. The ongoing amortization of the terminated value of the forward starting interest rate swap agreements will increase annual interest expense by approximately $1,200,000 until the maturity of the 6.6% Senior Notes in 2018.
6.
Financial Instruments
The Corporation’s financial instruments include cash equivalents, accounts receivable, notes receivable, bank overdraft, accounts payable, publicly-registered long-term notes, debentures and other long-term debt.
Cash equivalents are placed primarily in money market funds, money market demand deposit accounts and Eurodollar time deposits. The Corporation’s cash equivalents have maturities of less than three months. Due to the short maturity of these investments, they are carried on the consolidated balance sheets at cost, which approximates fair value.
Page 17 of 60
Financial Instruments (continued)
Accounts receivable are due from a large number of customers, primarily in the construction industry, and are dispersed across wide geographic and economic regions. However, accounts receivable are more heavily concentrated in certain states (namely, Texas, Colorado, North Carolina, Iowa and Georgia). The estimated fair values of accounts receivable approximate their carrying amounts due to the short-term nature of the receivables.
Notes receivable are primarily promissory notes with customers and are not publicly traded. Management estimates that the fair value of notes receivable approximates the carrying amount. The estimated fair values of notes receivable approximate their carrying amounts due to the short-term nature of the receivables.
The bank overdraft represents amounts to be funded to financial institutions for checks that have cleared the bank. The estimated fair value of the bank overdraft approximates its carrying value due to the short-term nature of the overdraft.
Accounts payable represent amounts owed to suppliers and vendors. The estimated fair value of accounts payable approximates its carrying amount due to the short-term nature of the payables.
The carrying values and fair values of the Corporation’s long-term debt were $1,658,001,000 and $1,729,511,000, respectively, at June 30, 2015; $1,585,395,000 and $1,680,584,000, respectively, at December 31, 2014; and $1,084,801,000 and $1,168,302,000, respectively, at June 30, 2014. The estimated fair value of the publicly-registered long-term notes was estimated based on Level 1 of the fair value hierarchy using quoted market prices. The fair value of the Notes was based on Level 2 of the fair value hierarchy using quoted market prices for similar debt instruments. The estimated fair value of other borrowings, which primarily represents variable-rate debt, approximates its carrying amount as the interest rates reset periodically.
7.
Income Taxes
Six Months Ended June 30,
Estimated effective income tax rate:
Continuing operations
30.2
%
29.8
Discontinued operations
26.4
Consolidated overall
The Corporation’s effective income tax rate reflects the effect of federal and state income taxes and the impact of differences in book and tax accounting arising from the net permanent benefits associated with the statutory depletion deduction for mineral reserves and the domestic production deduction. The effective income tax rate for discontinued operations reflect the tax effects of individual operations’ transactions and are not indicative of the Corporation’s overall effective income tax rate.
The Corporation records interest accrued in relation to unrecognized tax benefits as income tax expense. Penalties, if incurred, are recorded as operating expenses in the consolidated statements of earnings and comprehensive earnings.
Page 18 of 60
8.
Pension and Postretirement Benefits
The estimated components of the recorded net periodic benefit cost (credit) for pension and postretirement benefits are as follows:
Three Months Ended June 30,
Pension
Postretirement Benefits
Service cost
5,513
3,092
34
51
Interest cost
8,213
5,624
305
Expected return on assets
(8,887
(6,677
Prior service cost (credit)
101
96
(570
(887
Actuarial loss (gain)
7,351
877
(77
(73
Special termination benefit
1,206
Net periodic benefit cost (credit)
13,497
3,012
(384
(604
11,505
7,131
68
93
16,575
12,971
464
559
(18,190
(15,400
211
223
(1,150
(1,627
10,700
2,022
(154
(133
1,462
22,263
6,947
(772
(1,108
Page 19 of 60
9.
Commitments and Contingencies
Legal and Administrative Proceedings
The Corporation is engaged in certain legal and administrative proceedings incidental to its normal business activities. In the opinion of management and counsel, based upon currently-available facts, it is remote that the ultimate outcome of any litigation and other proceedings, including those pertaining to environmental matters, relating to the Corporation and its subsidiaries, will have a material adverse effect on the overall results of the Corporation’s operations, its cash flows or its financial position.
Borrowing Arrangements with Affiliate
The Corporation is a co-borrower with an unconsolidated affiliate for a $25,000,000 revolving line of credit agreement with BB&T Bank. The affiliate has agreed to reimburse and indemnify the Corporation for any payments and expenses the Corporation may incur from this agreement. The Corporation holds a lien on the affiliate’s membership interest in a joint venture as collateral for payment under the revolving line of credit.
In 2013, the Corporation loaned $3,402,000 to this unconsolidated affiliate to repay in full the outstanding balance of the affiliate’s loan with Bank of America, N.A. in 2013 and entered into a loan agreement with the affiliate for monthly repayment of principal and interest of that loan amount. The loan was repaid in full during first quarter 2015. As of December 31, 2014 and June 30, 2014, the amounts due from the affiliate related to this loan was $1,808,000 and $2,455,000, respectively.
In addition, the Corporation has a $6,000,000 outstanding loan due from this unconsolidated affiliate as of June 30, 2015, December 31, 2014 and June 30, 2014.
Employees
Approximately 12% of the Corporation’s employees are represented by a labor union. All such employees are hourly employees. The Corporation maintains collective bargaining agreements relating to the union employees with the Aggregates business, Cement and Magnesia Specialties segments. For the Cement segment located in California and Texas, 100% of its hourly employees at the Oro Grande cement plant and Crestmore clinker grinding facility, both located in California, are represented by labor unions. The Oro Grande collective bargaining agreement expires June 2016, and the Crestmore collective bargaining agreement expires in August 2016. For the Magnesia Specialties segment located in Manistee, Michigan and Woodville, Ohio, 100% of its hourly employees are represented by labor unions. The Manistee collective bargaining agreement expires in August 2019, and the Woodville collective bargaining agreement expires in May 2018.
10.
Business Segments
The Aggregates business contains three reportable business segments: Mid-America Group, Southeast Group and West Group. The Corporation also has Cement and Magnesia Specialties segments. Corporate loss from operations primarily includes depreciation on capitalized interest, expenses for certain corporate administrative functions, business development and integration expenses, unallocated corporate expenses and other nonrecurring and/or non-operational adjustments. Intersegment sales represent net sales from one segment to another segment.
Page 20 of 60
Business Segments (Continued)
The following tables display selected financial data for continuing operations for the Corporation’s reportable business segments. Total revenues and net sales in the table below, as well as the consolidated statements of earnings and comprehensive earnings, do not include intersegment sales as these sales are eliminated.
Total revenues:
257,649
240,526
398,482
356,235
81,518
75,168
146,195
134,988
411,235
286,811
731,807
477,598
Total Aggregates Business
750,402
602,505
1,276,484
968,821
105,899
207,999
Magnesia Specialties
65,118
66,720
128,282
129,034
Net sales:
237,415
218,703
367,120
325,236
76,483
70,725
136,253
126,106
375,489
250,589
662,570
411,004
689,387
540,017
1,165,943
862,346
100,405
196,970
60,457
61,920
119,211
119,269
Earnings (Loss) from operations:
66,894
57,283
62,691
45,517
4,818
(1,302
3,269
(7,413
49,177
30,873
63,676
32,954
120,889
86,854
129,636
71,058
22,468
34,697
18,751
20,995
36,541
37,280
Corporate
(25,124
(11,608
(38,319
(27,994
Page 21 of 60
Business Segments (continued)
Cement intersegment sales, which are to the ready mixed concrete product line in the West Group, were $20,854,000 and $38,955,000 for the three and six months ended June 30, 2015, respectively.
Assets employed:
1,343,337
1,290,833
1,311,860
601,130
604,044
606,933
2,559,411
2,444,400
1,084,291
4,503,878
4,339,277
3,003,084
2,413,867
2,451,799
148,296
150,359
151,129
433,613
522,957
201,830
The assets employed at December 31, 2014 reflect a reclassification of approximately $600 million of goodwill from the Cement segment to the West Group segment compared with the amounts presented in the Segments note (Note O) to the consolidated financial statements in the 2014 Form 10-K. This correction had no impact on the consolidated balance sheet as of December 31, 2014, or the consolidated statements of earnings (including earnings per diluted share), comprehensive earnings, total equity and cash flows for the year then ended. Further, goodwill by reportable segment was correctly presented in the Goodwill and Intangible Assets note (Note B) to the 2014 consolidated financial statements.
Page 22 of 60
The Aggregates business includes the aggregates product line and aggregates-related downstream product lines, which include asphalt, ready mixed concrete and road paving product lines. All aggregates-related downstream product lines reside in the West Group. The following tables, which are reconciled to consolidated amounts, provide net sales and gross profit by line of business: Aggregates (further divided by product line), Cement and Magnesia Specialties.
Aggregates
481,616
421,974
813,830
685,858
Asphalt
18,896
22,627
28,541
33,125
Ready Mixed Concrete
149,750
52,379
277,323
90,388
Road Paving
39,125
43,037
46,249
52,975
Gross profit (loss):
137,272
100,142
178,690
110,194
4,314
4,869
2,851
3,443
9,341
6,982
11,424
9,926
3,577
(249
265
(4,231
154,504
111,744
193,230
119,332
30,414
49,400
21,224
23,394
41,402
42,149
(5,989
(9,618
(43
Page 23 of 60
11.
Supplemental Cash Flow Information
The components of the change in other assets and liabilities, net, are as follows:
Other current and noncurrent assets
(5,501
(6,139
(13,794
(755
(1,278
3,911
Accrued income taxes
(19,902
16,678
Accrued pension, postretirement and postemployment benefits
16,283
4,281
Other current and noncurrent liabilities
(4,878
(389
The change in accrued salaries, benefits and payroll taxes in 2015 is primarily attributable to payments of severance expense. The change in accrued income taxes in 2015 is due to the planned utilization of net operating losses acquired with TXI. This resulted in a reclass between current income taxes payable and deferred tax assets.
Noncash investing and financing activities are as follows:
Noncash investing and financing activities:
Acquisition of assets through capital lease
1,331
6,333
Acquisition of assets through asset exchange
5,000
Page 24 of 60
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter Ended June 30, 2015
OVERVIEW
Martin Marietta Materials, Inc. (the “Corporation” or “Martin Marietta”) is a leading supplier of aggregates products (crushed stone, sand and gravel) and heavy building materials for the construction industry, including infrastructure, nonresidential, residential, railroad ballast, agricultural and chemical grade stone used in environmental applications. The Corporation’s annual consolidated net sales and operating earnings are predominately derived from its Aggregates business, which mines, processes and sells granite, limestone, sand, gravel and other aggregates-related downstream business, including asphalt, ready mixed concrete and road paving construction services for use in all sectors of the public infrastructure, environmental industries, nonresidential and residential construction industries, as well as agriculture, railroad ballast, chemical, utility and other uses. The Aggregates business shipped and delivered aggregates, asphalt products and ready mixed concrete from a network of more than 400 quarries, underground mines, distribution facilities and plants to customers in 32 states, Canada, the Bahamas and the Caribbean Islands. The Aggregates business’ products are used primarily by commercial customers principally in domestic construction of highways and other infrastructure projects and for nonresidential and residential building development. Aggregates products are also used in the railroad, agricultural, utility and environmental industries.
The Corporation currently conducts its Aggregates business through three reportable business segments: Mid-America Group, Southeast Group and West Group.
Indiana, Iowa, northern Kansas, Kentucky, Maryland, Minnesota, Missouri, eastern Nebraska, North Carolina, Ohio, South Carolina, Virginia, Washington and West Virginia
Arkansas, Colorado, southern Kansas, Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah and Wyoming
Primary Product Lines
Aggregates (crushed stone, sand and gravel)
Aggregates (crushed stone, sand and gravel), asphalt, ready mixed concrete and road paving
Primary Types of Aggregates Locations
Quarries and Distribution Facilities
Quarries, Plants and
Distribution Facilities
Primary Modes of Transportation for Aggregates Product Line
Truck and Rail
Truck, Rail and Water
Page 25 of 60
The Cement business produces Portland and specialty cements, such as masonry and oil well cements. Similar to the Aggregates business, cement is used in infrastructure projects, nonresidential and residential construction, and the railroad, agricultural, utility and environmental industries. The production facilities are located in Midlothian, Texas, south of Dallas/Fort Worth; Hunter, Texas, between Austin and San Antonio; and Oro Grande, California, near Los Angeles. The limestone reserves used as a raw material are located on property, owned by the Corporation, adjacent to each of the plants. The Corporation also operates a cement terminal and packaging facility at the Crestmore plant near Riverside, California, and operates its Portland cement grinding facility on an as-needed basis. The cement facilities currently have total annual capacity of 6.6 million tons. In addition to the manufacturing and packaging facilities, the Corporation operates eight cement distribution terminals. The corporation has signed a sale agreement to divest of the Oro Grande, California facility. Closing is expected by September 30, 2015.
The Corporation also has a Magnesia Specialties segment that produces magnesia-based chemicals products used in industrial, agricultural and environmental applications and dolomitic lime sold primarily to customers in the steel industry.
CRITICAL ACCOUNTING POLICIES
The Corporation outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2014. There were no changes to the Corporation’s critical accounting policies during the six months ended June 30, 2015.
Except as indicated, the comparative analysis in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects results from continuing operations and is based on net sales and cost of sales. Gross margin and operating margin calculated as percentages of total revenues represent the most directly comparable financial measures calculated in accordance with generally accepted accounting principles (“GAAP”). However, gross margin as a percentage of net sales and operating margin as a percentage of net sales represent non-GAAP measures. The Corporation presents these ratios calculated based on net sales, as it is consistent with the basis by which management reviews the Corporation’s operating results. Further, management believes it is consistent with the basis by which investors analyze the Corporation’s operating results given that freight and delivery revenues and costs represent pass-throughs and have no profit mark-up. The following tables present the calculations of gross margin and operating margin for the three and six months ended June 30, 2015 and 2014 in accordance with GAAP and reconciliations of the ratios as percentages of total revenues to percentages of net sales.
Gross Margin in Accordance with GAAP
Gross profit
Gross margin
21.7
20.3
17.0
14.7
Page 26 of 60
Gross Margin Excluding Freight and Delivery Revenues
Less: Freight and delivery revenues
(71,170
(67,288
(130,641
(116,240
Gross margin excluding freight and delivery revenues
23.5
22.5
18.5
16.4
Operating Margin in Accordance with GAAP
Earnings from operations
Operating margin
14.9
14.4
10.1
7.3
Operating Margin Excluding Freight and Delivery Revenues
Operating margin excluding freight and delivery revenues
16.1
16.0
11.0
8.2
Page 27 of 60
The earnings per diluted share impact of acquisition-related expenses, net, related to the TXI acquisition, represents a non-GAAP measure. It is presented for investors and analysts to evaluate and forecast the Corporation’s ongoing financial results, as acquisition-related expenses, net, related to TXI are nonrecurring.
The following shows the calculation of the impact of acquisition-related expenses, net, related to the combination with TXI on the loss per diluted share for the quarter ended June 30, 2014 (in thousands except per share data).
Three Months
Six Months
Ended
Acquisition-related expenses, net, related to the business combination with TXI
5,265
14,991
(2,074
(5,905
After-tax impact of acquisition-related expenses, net, related to the
business combination with TXI
3,191
9,086
Diluted average number of common shares outstanding
Per diluted share impact of acquisition-related expenses, net, related
to the business combination with TXI
(0.07
(0.20
The Corporation presents the increase in heritage aggregates product line shipments for the West Group and the Aggregates business excluding the three operations that were divested in the third quarter of 2014. These non-GAAP measures are presented for investors and analysts to have a more comparable analysis of shipment trends based on the operations owned by the Corporation for the quarter ended June 30, 2015. The following shows the calculation of the heritage aggregates product line shipments for the West Group and the Aggregates business for the quarter ended June 30, 2014, excluding shipments from the operations divested in the third quarter 2014 (shipment tons in thousands).
Aggregates Business
Reported heritage aggregates product line shipments for quarter ended June 30, 2014
15,371
38,974
Less: aggregates product line shipments for three operations divested in third quarter of 2014
(998
Adjusted heritage aggregates product line shipments for quarter ended June 30, 2014
14,373
37,976
Reported heritage aggregates product line shipments for quarter ended June 30, 2015
13,919
38,241
Change in 2015 heritage aggregates product line shipments over adjusted shipments
for quarter ended June 30, 2014
(3.2
)%
0.7
Page 28 of 60
Incremental gross margin (excluding freight and delivery revenues) is a non-GAAP measure. The Corporation presents this metric to enhance analysts’ and investors’ understanding of the impact of increased net sales on profitability. The following shows the calculation of incremental gross margin (excluding freight and delivery revenues) for the heritage Aggregates business for the quarter ended June 30, 2015 (dollars in thousands).
Heritage Aggregates business net sales for the quarter ended June 30, 2015
555,314
Heritage Aggregates business net sales for the quarter ended June 30, 2014
Incremental net sales
15,297
Heritage Aggregates business gross profit for the quarter ended June 30, 2015
144,479
Heritage Aggregates business gross profit for the quarter ended June 30, 2014
Incremental gross profit
32,735
Incremental gross margin (excluding freight and delivery revenues) for quarter ended June 30, 2015
214
Earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a widely accepted financial indicator of a company’s ability to service and/or incur indebtedness. EBITDA is not defined by generally accepted accounting principles and, as such, should not be construed as an alternative to net earnings or operation cash flow. EBITDA for the Cement business for the quarter and period ended June 30, 2015 is as follows (dollars in thousands):
Earnings before taxes on income
Add back:
36
62
Depreciation, depletion and amortization expense
15,358
30,611
EBITDA
37,862
65,370
Page 29 of 60
Significant items for the quarter ended June 30, 2015 (unless noted, all comparisons are versus the prior-year quarter):
·
Consolidated net sales of $850.2 million compared with $601.9 million, an increase of 41%
Aggregates product line volume increase of 7.8%; aggregates product line price increase of 8.5%
Heritage aggregates product line volume increase of 0.7%, excluding shipments from 2014 divestitures from prior-year quarter; reported heritage volume decrease of 1.9%
Heritage aggregates product line price increase of 7.6%
Cement business net sales of $100.4 million, gross profit of $30.4 million and EBITDA of $37.8 million
Magnesia Specialties net sales of $60.5 million and earnings from operations of $18.8 million
Heritage consolidated gross margin (excluding freight and delivery revenues) of 26.0%, up 350 basis points; consolidated gross margin (excluding freight and delivery revenues) of 23.5%, up 100 basis points
Consolidated selling, general and administrative expenses (SG&A) of $56.8 million, or 6.7% of net sales
Consolidated earnings from operations of $137.0 million compared with $96.2 million (which includes $5.3 million of business development expenses related to the TXI acquisition)
Earnings per diluted share of $1.22 compared with $1.27 (which includes a $0.07 per diluted share charge for business development expenses related to the TXI acquisition)
Rainfall lowered second quarter 2015 earnings per diluted share by an estimated $0.32 to $0.36
Heritage aggregates business delivers incremental gross margin of 214%
Page 30 of 60
The following table presents net sales, gross profit (loss), selling, general and administrative expenses and earnings (loss) from operations data for the Corporation and its reportable segments for the three months ended June 30, 2015 and 2014. In each case, the data is stated as a percentage of net sales of the Corporation or the relevant segment, as the case may be.
Amount
% of
Heritage:
236,534
242,297
Total Heritage Aggregates Business
100.0
Total Heritage Consolidated
615,771
Acquisitions:
Aggregates Business – Mid-America Group
881
Aggregates Business – West Group
133,192
Total Acquisitions
234,478
80,224
33.9
68,593
31.4
9,493
12.4
3,053
4.3
54,762
22.6
40,098
26.0
20.7
35.1
37.8
(5,503
160,200
(47
(5.3
10,071
7.6
30,415
30.3
(486
39,953
Page 31 of 60
Selling, general & administrative expenses:
13,304
13,192
4,503
4,577
11,265
10,746
29,072
5.2
28,515
5.3
2,391
4.0
2,468
12,549
5,583
44,012
7.1
6.1
4,790
3.6
6,647
6.6
1,334
12,771
5.4
6.7
66,942
43,644
115,404
20.8
31.0
(22,186
111,969
18.2
(48
(5.4
5,533
4.2
22.4
(2,938
25,015
10.7
Page 32 of 60
Net sales by product line for the Aggregates business, which reflect the elimination of inter-product line sales, are as follows:
445,427
51,866
Total Heritage
134,073
The following tables present volume and pricing data and shipments data for the aggregates product line.
June 30, 2015
Volume
Pricing
Volume/Pricing Variance (1)
Heritage Aggregates Product Line (2):
2.3
5.7
6.0
2.4
(9.4
Heritage Aggregates Operations(2)
(1.9
Aggregates Product Line (3)
7.8
8.5
Page 33 of 60
(tons in thousands)
Shipments
19,048
18,626
5,274
4,976
38,973
3,762
42,003
Tons to external customers
36,847
37,417
Internal tons used in other product lines
1,394
1,557
Total heritage aggregates tons
2,804
958
Total acquisition aggregates tons
(1)
Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.
(2)
Heritage Aggregates Product Line and Heritage Aggregates Operations exclude volume and pricing data for acquisitions that have not been included in operations for a full calendar year.
(3)
Aggregates Product Line includes all acquisitions from the date of acquisition and divestitures through the date of disposal.
Second-quarter results reflect continued strong performance. Among other things, each heritage aggregates business reportable segment significantly improved gross profits, generating an incremental gross margin contribution in line with, or exceeding, the Corporation’s stated objectives. This result was achieved despite historic levels of rainfall throughout the United States, and notably in Texas. According to the National Oceanic and Atmospheric Administration (NOAA), the United States experienced the second wettest second quarter in more than a century. The NOAA further indicated that Texas reported its wettest second quarter and first six months of the year for the 121 years this data has been tracked. These highly unusual factors resulted in nearly $100 million in deferred net sales across all product lines
Page 34 of 60
which lowered gross profit by an estimated $27 million. Additionally, precipitation reduced production and operating leverage, which negatively affected gross profit by an estimated additional $8 million to $13 million. Nevertheless, strong pricing, operational excellence and management’s stringent cost discipline, coupled with continued slow-but-steady economic recovery in the southeastern United States, contributed to a 100-basis-point expansion of consolidated gross margin (excluding freight and delivery fees).
The average per-ton selling price for the heritage aggregates product line was $11.83 and $11.00 for the three months ended June 30, 2015 and 2014, respectively, and the average per-ton selling price for the acquired aggregates product line was $13.52 for the three months ended June 30, 2015. The acquired aggregates product line selling price reflects the impact of higher priced sand and gravel, as well as freight for tons sold through rail yards, which combined account for over 70% of shipments.
Heritage aggregates product line shipments increased 0.7%, excluding shipments from the third-quarter 2014 divestiture of three operations from the prior-year quarter. The divestiture included an Oklahoma quarry and two Dallas, Texas rail-located distribution yards and was required by the Department of Justice in connection with the closing of the TXI acquisition. Shipments from these divestitures continue to be reported in heritage volumes in the prior-year quarter. Aggregates product line shipments in the Southeast Group increased 6.0%, and the Mid-America Group achieved an increase of 2.3%. Wet weather had the most significant impact in the West Group, where volumes decreased 3.2%, excluding 998,000 tons from the divested operations from the prior-year quarter. The reported variance for the West Group was a 9.4% decline, which reflects an estimated 2,198,000 tons of shipments deferred due to rainfall. Iowa also experienced significant precipitation during the second quarter which deferred an estimated 500,000 tons of shipments.
Heritage aggregates product line shipments to the infrastructure market comprised 43% of quarterly volumes and decreased 4%. The Mid-America and Southeast Group each achieved an increase of 2%, which was offset by the impact of rainfall in the West Group. In addition to Texas, major project activity is accelerating in North Carolina, Georgia and Florida. Infrastructure investments are being driven by state initiatives and public private partnerships while federal funding continues to be provided under a continuing resolution. The provisions of the Moving Ahead for Progress in the 21st Century, or MAP-21, have been extended through October 29, 2015. Management continues to anticipate the U.S. Congress working towards passage of a new multi-year bill later this year.
The nonresidential market represented 32% of quarterly heritage aggregates product line shipments and decreased 3%. Light nonresidential, which includes the commercial sector, increased 23% and was offset by a decline in heavy nonresidential, which includes the industrial and energy sectors. Activity varies significantly by state, with growth in nonresidential starts for the last twelve months strongest in Texas; however, weather constrained activity during the second quarter. Louisiana, Florida and Georgia have also reported significant increases in nonresidential projects. The overall growth in light nonresidential shipments illustrates economic diversity and the ability of other nonresidential projects to replace energy-related shipments currently displaced by volatile oil prices. Notwithstanding, the Corporation continues to expect energy-related activity to remain strong, supported by more than $100 billion of planned projects along the Gulf Coast, including a significant portion in Texas.
The residential end-use market accounted for 16% of quarterly heritage aggregates product line shipments, and volumes within this market increased 4%. Nationally, residential starts are up 8% for the trailing-12 months through June 2015. Florida and Georgia achieved double-digit growth and, along with Texas, were each ranked in the top five states for the
Page 35 of 60
same period. The ChemRock/Rail market accounted for the remaining 9% of heritage aggregates product line volumes. Volumes to this end use decreased slightly, primarily related to excessive rainfall in Colorado and Iowa.
Heritage aggregates product line pricing grew in all reportable groups, led by the 10.7% increase in the West Group. Improvement was notable in South Texas and Colorado. The Mid-America Group and Southeast Group reported increases of 5.7% and 2.4%, respectively. The Corporation announced various mid-year price increases in all divisions of its Aggregates business and is realizing increased pricing across all of its segments.
The particularly wet weather throughout several of the Corporation’s operating areas not only affected sales, but also adversely affected aggregates product line production and resulted in lower operating leverage. As a result, total production cost per ton shipped increased 3%. Lower energy costs continue to benefit the cost structure.
The heritage aggregates product line leveraged a 7.6% increase in average selling price to expand its gross margin (excluding freight and delivery revenues) 540 basis points. The legacy TXI aggregates product line operations experienced significant amounts of rainfall that negatively affected shipments and margins. In total, acquired aggregates product line operations, which include legacy TXI quarries and two small acquisitions completed during the first quarter, had net sales of $36.2 million and a gross margin (excluding freight and delivery revenues) of 21.7%.
The Corporation’s aggregates-related downstream product lines include asphalt, ready mixed concrete and road paving businesses in Arkansas, Colorado, Texas and Wyoming. Average selling prices by product line for the Corporation’s aggregates-related downstream product lines are as follows:
$42.20/ton
$42.06/ton
$101.54/yd³
$92.23/yd³
Ready Mixed Concrete (4)
$86.80/yd³
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Unit shipments by product line for the Corporation’s aggregates-related downstream product lines are as follows:
Asphalt Product Line (in thousands):
356
458
Internal tons used in road paving business
456
492
Total asphalt tons
812
950
Ready Mixed Concrete (in thousands of cubic yards):
Heritage
498
552
Acquisitions(4)
1,115
Total cubic yards
1,613
(4)
Ready mixed operations acquired by Martin Marietta on July 1, 2014. For comparative purposes, for the three months ended June 30, 2014, TXI shipped 1,285,000 cubic yards of ready mixed concrete.
Management estimates rain reduced ready mixed concrete shipments by 454,000 cubic yards, of which 371,000 cubic yards was attributable to ready mix locations in Texas. The heritage ready mixed concrete product line reported pricing improvement of 10.1%.
The heritage ready mixed concrete product line reported a 10% increase in average selling price. However, weather-driven lower shipments limited the improvement in gross margin (excluding freight and delivery revenues) to 50 basis points. For the quarter, the legacy TXI ready mixed concrete operations contributed $98 million of net sales.
As illustrated in the second quarter of 2015, the Aggregates business is significantly affected by erratic weather patterns, seasonal changes and other weather-related conditions. Production and shipment levels for aggregates, asphalt, ready mixed concrete and road paving materials correlate with general construction activity levels, most of which occurs in the spring, summer and fall. Thus, production and shipment levels vary by quarter. Operations concentrated in the northern and midwestern United States generally experience more severe winter weather conditions than operations in the southeast and southwest. Excessive rainfall, and conversely excessive drought, can also jeopardize shipments, production and profitability in all markets served by the Corporation. Because of the potentially significant impact of weather on the Corporation’s operations, current period and year to date results are not indicative of expected performance for other interim periods or the full year. Depending on the timing and extent of any weather disruptions, shipments may be delayed to later in a year or deferred until the following year.
Cement Business
The Cement business is benefitting from continued strength in Texas markets, where demand exceeds local supply. The Portland Cement Association, or PCA, forecasts continued favorable supply/demand imbalance in Texas over the next several years. Further, the PCA currently forecasts growth each year through 2019. For the quarter, the business generated $100.4 million of net sales and $30.4 million of gross profit. The business announced a price increase
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effective April 1, 2015. However, there is a lag time before the full impact is realized. Plant utilization varies between 75% and 85% for plants in Texas and 70% and 75% in California. The business incurred $5.9 million in planned cement kiln shutdown costs during the second quarter. Shutdown costs are expected to be heaviest in the fourth quarter.
Cement shipments for the three months ended June 30, 2015 were (tons in thousands):
994
209
Total cement tons
1,203
Similar to the aggregates and ready mixed concrete product lines, the cement business estimated 215,000 tons of shipments were deferred to future periods due to the unseasonably wet weather.
Average selling price per-ton for the cement operations for the three months ended June 30, 2015 was $98.86. For comparative purposes, the average selling price per-ton for the three months ended June 30, 2014, a period prior to the Corporation’s ownership of these operations, was $84.71.
Magnesia Specialties Business
Magnesia Specialties continued to deliver strong performance and generated second-quarter net sales of $60.5 million and a gross margin (excluding freight and delivery revenues) of 35.1%. Net sales reflect lower domestic steel production, which is down almost 8% year-to-date versus the comparable period of 2014. Second-quarter earnings from operations were $18.8 million compared with $21.0 million, with the decrease primarily driven by maintenance costs in 2015.
Consolidated Operating Results
Consolidated SG&A was 6.7% of net sales compared with 6.1% in the prior-year quarter. The increase reflects the impact of approximately $110 million of net sales delayed to later in the year and higher pension expenses. The Corporation incurred acquisition-related expenses of $2.1 million, which is in line with the expected run rate for the next few quarters. Earnings from operations for the quarter were $137.0 million compared with $96.2 million in the prior-year period.
Excluding discrete events, the 2015 estimated effective income tax rate for the year-to-date period was 31%, consistent with annual guidance. For the year, the Corporation expects to utilize allowable federal net operating loss carryforwards of $363 million, which were acquired with TXI.
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The following presents a rollforward of consolidated gross profit (dollars in thousands):
Consolidated gross profit, quarter ended June 30, 2014
Aggregates product line:
Heritage volume weakness
(8,049
Heritage pricing strength
31,852
Cost decreases, net
5,471
Increase in aggregates product line gross profit
29,274
Aggregates-related downstream product lines
3,461
Acquired aggregates business operations
10,025
Acquired cement
Decrease in Magnesia Specialties
(2,170
Decrease in corporate
(6,453
Increase in consolidated gross profit
64,551
Consolidated gross profit, quarter ended June 30, 2015
Gross profit (loss) by business is as follows:
129,416
7,172
7,856
2,169
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The consolidated heritage gross margin (excluding freight and delivery revenues) for the quarter was 26.0%, a 350-basis-point improvement compared with the prior-year quarter.
Consolidated SG&A was 6.7% of net sales compared with 6.1% in the prior-year quarter. The increase reflects the impact of weather-deferred net sales and higher pension expenses. The Corporation incurred acquisition-related expenses of $2.1 million, which is in line with the expected run rate for the next few quarters. Earnings from operations for the quarter were $137.0 million compared with $96.2 million in the prior-year quarter.
Among other items, other operating income and expenses, net, includes gains and losses on the sale of assets; recoveries and writeoffs related to customer accounts receivable; rental, royalty and services income; accretion expense, depreciation expense and gains and losses related to asset retirement obligations. For the second quarter, consolidated other operating income and expenses, net, was an expense of $4.3 million in 2015 and income of $2.5 million in 2014. Second quarter 2015 reflects a higher writeoff of customer accounts receivable and lower gains on the disposal of fixed assets. The 10-year average of annual accounts receivable writeoffs has been $2 million. During the quarter ended June 30, 2015, the Corporation reserved two large accounts and wrote-off a customer account who declared bankruptcy, collectively totaling $3.2 million. Conversely, second quarter 2014 provided bad debt recoveries of $0.6 million.
Other nonoperating income and expenses, net, includes foreign currency translation gains and losses, interest and other miscellaneous income and equity adjustments for nonconsolidated affiliates. The $2.7 million increase in other nonoperating income, net, reflects higher earnings from nonconsolidated companies compared with 2014, coupled with life insurance proceeds.
Significant items for the six months ended June 30, 2015 (unless noted, all comparisons are versus the prior-year period):
Earnings per diluted share of $1.30 compared with $0.81 (which includes a $0.20 per diluted share charge for business development and acquisition integration expenses related to the business combination with TXI)
Consolidated net sales of $1,482 million compared with $981.6 million, an increase of 51%
Aggregates product line volume increase of 11.5%; aggregates product line price increase of 9.7%
Heritage aggregates product line volume increase of 3.1%, excluding shipments from 2014 divestitures from prior-year quarter; reported heritage volume increase of 0.3%;
Heritage aggregates product line price increase of 8.7%
Cement business net sales of $197.0 million, earnings from operations of $34.7 million and EBITDA of $65.4 million
Magnesia Specialties net sales of $119.2 million and earnings from operations of $36.5 million
Heritage consolidated gross margin (excluding freight and delivery revenues) of 20.6%, up 420 basis points; consolidated gross margin (excluding freight and delivery revenues) of 18.5%, up 210 basis points
Consolidated selling, general and administrative expenses (SG&A) of $106.2 million, or 7.2% of net sales, remained flat
Consolidated earnings from operations of $162.6 million compared with $80.3 million (which includes $15.0 million of business development expenses related to the TXI acquisition)
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The following table presents net sales, gross profit (loss), selling, general and administrative expenses and earnings (loss) from operations data for the Corporation and its reportable segments for the six months ended June 30, 2015 and 2014. In each case, the data is stated as a percentage of net sales of the Corporation or the relevant segment, as the case may be.
366,152
411,135
913,540
1,032,751
968
251,435
449,373
87,551
23.9
67,046
20.6
12,593
9.2
0.1
79,227
19.3
52,099
12.7
179,371
19.6
13.8
34.7
35.3
(8,298
212,475
(23.8
14,089
5.6
25.1
(1,320
61,939
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26,249
26,126
8,792
8,785
22,223
21,680
57,264
6.3
56,591
4,757
4,914
4.1
18,663
9,308
80,684
7.2
9,541
3.8
13,322
6.8
2,686
25,549
62,922
58,801
124,992
13.7
30.7
31.3
(33,125
0
128,408
(231
(23.9
4,875
1.9
17.6
(5,194
34,147
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Net sales by product line for the Aggregates business are follows:
745,744
93,005
46,250
252,403
4.9
(8.0
0.3
8.7
11.5
9.7
29,149
27,176
9,364
8,977
25,251
27,440
63,764
63,593
7,075
70,839
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61,479
61,136
2,285
2,457
5,304
1,771
The per-ton average selling price for the aggregates product line was $11.88 and $10.93 for the six months ended June 30, 2015 and 2014, respectively.
Average selling prices by product line for the Corporation’s aggregates-related downstream operations are as follows:
$42.56/ton
$42.11/ton
$100.35/yd³
$90.97/yd³
$87.70/yd³
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Unit shipments by product line for the Corporation’s aggregates-related downstream operations are as follows:
569
706
513
570
1,082
1,276
897
959
2,080
2,977
TXI ready mixed concrete operations acquired on July 1, 2014.
For 2015, Magnesia Specialties reported net sales of $119.2 million, flat with the prior-year period. Earnings from operations were $36.5 million compared with $37.3 million.
Consolidated gross margin (excluding freight and delivery revenues) was 18.5% for 2015 versus 16.4% for 2014. The following presents a rollforward of the Corporation’s gross profit (dollars in thousands):
Consolidated gross profit, six months ended June 30, 2014
Heritage volume strength
2,043
60,413
Cost increases, net
(8,749
53,707
6,332
13,859
(747
(9,575
112,976
Consolidated gross profit, six months ended June 30, 2015
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163,901
12,354
14,790
(931
Consolidated SG&A expenses were 7.2% of net sales, flat compared with the prior-year period.
For the first six months, consolidated other operating income and expenses, net, was an expense of $1.9 million in 2015 compared with income of $4.8 million in 2014, due in part to higher customer accounts receivable writeoffs in 2015 and higher gains on the disposal of assets in 2014. The 10-year average of annual accounts receivable writeoffs has been $2 million. During the six months ended June 30, 2015, the Corporation reserved two large accounts and wrote-off a customer account who declared bankruptcy, collectively totaling $4.0 million. Conversely, the six months ended June 30, 2014, the Corporation had bad debt recoveries of $0.6 million.
In addition to other offsetting amounts, other nonoperating income and expenses, net, are comprised generally of interest income and net equity earnings from nonconsolidated investments. Consolidated other nonoperating income and expenses, net, for the six months ended June 30 was income of $2.1 million in 2015 compared with expense of $3.2 million in 2014, primarily driven by increased income from nonconsolidated affiliates.
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LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the six months ended June 30, 2015 was $127.1 million compared with $70.4 million for the same period in 2014. The increase was primarily attributable to higher earnings before depreciation, depletion and amortization expense, partially offset by increased cash payments in 2015 for 2014 taxes that were ineligible for NOL utilization. Operating cash flow is primarily derived from consolidated net earnings before deducting depreciation, depletion and amortization, and the impact of changes in working capital. Depreciation, depletion and amortization were as follows:
Depreciation
119,807
80,952
Depletion
6,452
2,696
Amortization
8,699
2,499
The increase in depreciation, depletion and amortization expense is attributable to the acquired property, plant and equipment and other intangible assets from business combinations, primarily TXI. Depreciation, depletion and amortization expense for the acquired businesses was $44.6 million for the six months ended June 30, 2015.
The seasonal nature of the construction aggregates business impacts quarterly operating cash flow when compared with the full year. Full-year 2014 net cash provided by operating activities was $381.7 million compared with $70.4 million for the first six months of 2014. For the year, the Corporation expects to utilize allowable federal net operating loss carryforwards of $363 million acquired with TXI.
During the first six months ended June 30, 2015, the Corporation invested $128.0 million of capital into its business. Full-year capital spending is expected to be approximately $330 million. Comparable full-year capital expenditures were $232.2 million in 2014, including $80 million for the Medina Rock and Rail (“Medina”) capital project. With a budgeted cost of nearly $160 million, the Medina project is the largest capital expansion project in the Corporation’s history. The project, located outside of San Antonio, consists of building a rail-connected limestone aggregates processing facility with the capability of producing in excess of 10 million tons per year.
The Corporation can repurchase its common stock through open-market purchases pursuant to authority granted by its Board of Directors or through private transactions at such prices and upon such terms as the Chief Executive Officer deems appropriate. During the six months ended June 30, 2015, the Corporation repurchased 670,000 shares of common stock. At June 30, 2015, 19,330,000 shares of common stock were remaining under the Corporation’s repurchase authorization.
The Corporation entered into a definitive agreement to sell its California cement business for $420 million. The sale, which is subject to regulatory approval under the Hart-Scott-Rodino Act and customary conditions, is expected to close
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in the third quarter of 2015. While the Corporation believes the California cement plant is one of the most up-to-date plants in the region, it is not in close proximity to other core assets of the Corporation and, unlike other marketplace competitors, is not vertically integrated with ready mixed concrete production. After careful evaluation, it was determined a divestiture is the best avenue to maximize shareholder value. The Corporation expects to use the proceeds from the sale to repurchase additional shares of its stock.
The Credit Agreement (which consists of a $250 million Term Loan Facility and a $350 million Revolving Facility) requires the Corporation’s ratio of consolidated debt to consolidated earnings before interest, taxes, depreciation, depletion and amortization (“EBITDA”), as defined, for the trailing twelve month period (the “Ratio”) to not exceed 3.50x as of the end of any fiscal quarter, provided that the Corporation may exclude from the Ratio debt incurred in connection with certain acquisitions for a period of 180 days so long as the Corporation, as a consequence of such specified acquisition, does not have its ratings on long-term unsecured debt fall below BBB by Standard & Poor’s or Baa2 by Moody’s and the Ratio calculated without such exclusion does not exceed 3.75x. Additionally, if there are no amounts outstanding under the Revolving Facility, consolidated debt, including debt for which the Corporation is a co-borrower, will be reduced for purposes of the covenant calculation by the Corporation’s unrestricted cash and cash equivalents in excess of $50 million, such reduction not to exceed $200 million.
The Ratio is calculated as debt, including debt for which the Corporation is a co-borrower, divided by consolidated EBITDA, as defined by the Credit Agreement, for the trailing twelve months. Consolidated EBITDA is generally defined as earnings before interest expense, income tax expense, and depreciation, depletion and amortization expense for continuing operations. Additionally, stock-based compensation expense is added back and interest income is deducted in the calculation of consolidated EBITDA. Certain other nonrecurring noncash items, if they occur, can affect the calculation of consolidated EBITDA.
In 2014, the Corporation amended the Credit Agreement to ensure the impact of the business combination with TXI does not impair liquidity available under the Term Loan Facility and the Revolving Facility. The amendment adjusts consolidated EBITDA to add back fees, costs or expenses relating to the TXI business combination incurred on or prior to the closing of the combination not to exceed $95,000,000; any integration or similar costs or expenses related to the TXI business combination incurred in any period prior to the second anniversary of the closing of the TXI business combination not to exceed $70,000,000; and any make-whole fees incurred in connection with the redemption of TXI’s 9.25% senior notes due 2020.
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At June 30, 2015, the Corporation’s ratio of consolidated debt to consolidated EBITDA, as defined, for the trailing twelve months EBITDA was 2.36 times and was calculated as follows:
July 1, 2014 to
(Dollars in thousands)
Earnings from continuing operations attributable to Martin Marietta
205,729
79,326
117,387
267,626
12,147
Acquisition-related expenses, net, related to the TXI acquisition
31,284
Deduct:
Interest income
(428
Consolidated EBITDA, as defined
713,071
Consolidated debt, including debt for which the Corporation is a co-borrower,
at June 30, 2015
1,683,676
Consolidated debt to consolidated EBITDA, as defined, at June 30, 2015 for the
trailing twelve months EBITDA
2.36x
The Trade Receivable Facility contains a cross-default provision to the Corporation’s other debt agreements. In the event of a default on the Ratio, the lenders can terminate the Credit Agreement and Trade Receivable Facility and declare any outstanding balances as immediately due.
Cash on hand, along with the Corporation’s projected internal cash flows and availability of financing resources, including its access to debt and equity capital markets, is expected to continue to be sufficient to provide the capital resources necessary to support anticipated operating needs, cover debt service requirements, meet capital expenditures and discretionary investment needs, fund certain acquisition opportunities that may arise and allow for payment of dividends for the foreseeable future. At June 30, 2015, the Corporation had $520 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to complying with the related leverage covenant. The Revolving Facility expires on November 29, 2018 and the Trade Receivable Facility expires on September 30, 2016.
The Corporation may be required to obtain financing to fund certain strategic acquisitions, if any such opportunities arise, or to refinance outstanding debt. Any strategic acquisition of size for cash would likely require an appropriate balance of newly-issued equity with debt in order to maintain a composite investment-grade credit rating. Furthermore, the Corporation is exposed to the credit markets, through the interest cost related to its variable-rate debt, which included borrowings under its Term Loan Facility at June 30, 2015. The Corporation is currently rated by three credit rating agencies; two of those agencies’ credit ratings are investment-grade level and the third agency’s credit rating is one level below investment grade. The Corporation’s composite credit rating remains at investment-grade level, which facilitates obtaining financing at lower rates than noninvestment-grade ratings.
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CONTRACTUAL AND OFF BALANCE SHEET OBLIGATIONS
During 2015, the Corporation entered into an 18-month fixed price fuel contract which totaled $55.4 million and a 15-year railcar lease which totaled $24.8 million at June 30, 2015.
< 1 Year
1 to 3 Years
3 to 5 Years
> 5 Years
Off Balance Sheet:
Operating lease - rail
24,793
1,653
3,306
16,528
Purchase commitment - energy
55,409
36,939
18,470
80,202
38,592
21,776
TRENDS AND RISKS
The Corporation outlined the risks associated with its business in its Annual Report on Form 10-K for the year ended December 31, 2014. Management continues to evaluate its exposure to all operating risks on an ongoing basis.
OUTLOOK
The Corporation is encouraged by positive trends in its business and markets, notably:
Nonresidential construction is expected to grow in both the heavy industrial and commercial sectors. The Dodge Momentum Index remains high and signals continued growth.
Energy-related economic activity, including follow-on public and private construction activities in the Corporation’s primary markets, is anticipated to remain strong. Residential construction is expected to continue to grow, driven by historically low levels of construction activity over the previous several years, employment gains, low mortgage rates, significant lot absorption, higher multi-family rental rates and rising housing prices.
For the public sector, authorized highway funding from MAP-21 should remain stable compared with 2014. Additionally, state initiatives to finance infrastructure projects, including support from TIFIA, are expected to grow and continue to play an expanded role in public-sector activity.
The significant amount of rainfall during the first half of the year coupled with capacity constraints is expected to delay a portion of weather-delayed shipments into 2016. Based on this expectation and external trends, the Corporation anticipates the following for the full year, which reflects the pending sale of the California cement operations:
Aggregates end-use markets compared to 2014 levels are as follows:
Infrastructure market to be relatively flat.
Nonresidential market to increase in the high-single digits.
Residential market to experience a double-digit increase.
ChemRock/Rail market to remain relatively flat.
Aggregates product line shipments to increase by 7% to 10% compared with 2014 levels.
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Heritage aggregates shipments to increase 3% to 5%.
Aggregates product line pricing to increase by 7% to 9% compared with 2014.
Aggregates product line production cost per ton shipped to decline slightly.
Aggregates-related downstream product lines to generate between $875 million and $925 million of net sales and $65 million to $70 million of gross profit.
Net sales for the Cement segment to be between $375 million and $400 million, generating $110 million to $120 million of gross profit.
Net sales for the Magnesia Specialties segment to be between $240 million and $250 million, generating $85 million to $90 million of gross profit.
SG&A expenses as a percentage of net sales to be less than 6.0%, despite an $18 million increase in heritage pension costs that resulted from lower discount rate.
Interest expense to approximate $75 million to $80 million.
Estimated effective income tax rate to approximate 31%, excluding discrete events.
Consolidated EBITDA to range from $810 million to $850 million.
Cash taxes paid to approximate $62 million.
Capital expenditures to approximate $330 million, including $35 million of synergy-related capital and $80 million for Medina limestone quarry.
The 2015 outlook includes management’s assessment of the likelihood of certain risks and uncertainties that will affect performance. The most significant risks to the Corporation’s performance will be Congress’ actions and timing surrounding federal highway funding and uncertainty over the funding mechanism for the Highway Trust Fund. Congress recently extended federal highway funding through continuing resolution through October 29, 2015. Further, a decline in consumer confidence may negatively impact investment in construction projects. While both MAP-21 and TIFIA credit assistance are excluded from the U.S. debt ceiling limit, this issue may have a significant impact on the economy and, consequently, construction activity. Other risks and uncertainties related to the Corporation’s future performance include, but are not limited to: both price and volume, and a recurrence of widespread decline in aggregates volume negatively affecting aggregates price; the termination, capping and/or reduction of the federal and/or state gasoline tax(es) or other revenue related to infrastructure construction; a significant change in the funding patterns for traditional federal, state and/or local infrastructure projects; a reduction in defense spending, and the subsequent impact on construction activity on or near military bases; a decline in nonresidential construction; a decline in energy-related drilling activity resulting from a sustained period of low global oil prices or changes in oil production patterns in response to this decline and certain regulatory or other economic factors; a slowdown in the residential construction recovery, or some combination thereof; a reduction in economic activity in the Corporation’s Midwest states resulting from reduced funding levels provided by the Agricultural Act of 2014 and a reduction in capital investment by the railroads; an increase in the cost of compliance with governmental laws and regulations; unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to our cement production facilities; and the possibility that certain expected synergies and operating efficiencies in
Page 51 of 60
connection with the TXI acquisition are not realized within the expected time-frames or at all. Further, increased highway construction funding pressures resulting from either federal or state issues can affect profitability. If these negatively affect transportation budgets more than in the past, construction spending could be reduced. Cement is subject to cyclical supply and demand and price fluctuations. The Magnesia Specialties business runs at near capacity; therefore any unplanned changes in costs or realignment of customers introduce volatility to the earnings of this segment.
The Corporation’s principal business serves customers in aggregates-related construction markets. This concentration could increase the risk of potential losses on customer receivables; however, payment bonds normally posted on public projects, together with lien rights on private projects, help to mitigate the risk of uncollectible receivables. The level of aggregates demand in the Corporation’s end-use markets, production levels and the management of production costs will affect the operating leverage of the Aggregates business and, therefore, profitability. Production costs in the Aggregates business are also sensitive to energy and raw material prices, both directly and indirectly. Diesel fuel and other consumables change production costs directly through consumption or indirectly by increased energy-related input costs, such as steel, explosives, tires and conveyor belts. Fluctuating diesel fuel pricing also affects transportation costs, primarily through fuel surcharges in the Corporation’s long-haul distribution network. The Cement business is also energy intensive and fluctuations in the price of coal affects costs. The Magnesia Specialties business is sensitive to changes in domestic steel capacity utilization and the absolute price and fluctuations in the cost of natural gas.
Transportation in the Corporation’s long-haul network, particularly the supply of railcars and locomotive power and condition of rail infrastructure to move trains, affects the Corporation’s ability to efficiently transport aggregate into certain markets, most notably Texas, Florida and the Gulf Coast. In addition, availability of railcars and locomotives affects the Corporation’s ability to move dolomitic lime, a key raw material for magnesia chemicals, to both the Corporation’s plant in Manistee, Michigan, and customers. The availability of trucks, drivers and railcars to transport the Corporation’s products, particularly in markets experiencing high growth and increased demand, is also a risk and pressures the associated costs.
All of the Corporation’s businesses are also subject to weather-related risks that can significantly affect production schedules and profitability. The first and fourth quarters are most adversely affected by winter weather. Hurricane activity in the Atlantic Ocean and Gulf Coast generally is most active during the third and fourth quarters.
Risks to the outlook also include shipment declines as a result of economic events beyond the Corporation’s control. In addition to the impact on nonresidential and residential construction, the Corporation is exposed to risk in its estimated outlook from credit markets and the availability of and interest cost related to its debt.
The Corporation’s future performance is also exposed to risks from tax reform at the federal and state levels.
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OTHER MATTERS
If you are interested in Martin Marietta stock, management recommends that, at a minimum, you read the Corporation’s current Annual Report and Forms 10-K, 10-Q and 8-K reports to the Securities and Exchange Commission (SEC) over the past year. The Corporation’s recent proxy statement for the annual meeting of shareholders also contains important information. These and other materials that have been filed with the SEC are accessible through the Corporation’s website at www.martinmarietta.com and are also available at the SEC’s website at www.sec.gov. You may also write or call the Corporation’s Corporate Secretary, who will provide copies of such reports.
Investors are cautioned that all statements in this Form 10-Q that relate to the future involve risks and uncertainties, and are based on assumptions that the Corporation believes in good faith are reasonable but which may be materially different from actual results. Forward-looking statements give the investor management’s expectations or forecasts of future events. You can identify these statements by the fact that they do not relate only to historical or current facts. They may use words such as “anticipate,” “expect,” “should be,” “believe,” “will”, and other words of similar meaning in connection with future events or future operating or financial performance. Any or all of our forward-looking statements here and in other publications may turn out to be wrong.
Factors that the Corporation currently believes could cause actual results to differ materially from the forward-looking statements in this Annual Report include, but are not limited to, Congress’ actions and timing surrounding federal highway funding and uncertainty over the funding mechanism for the Highway Trust Fund; the performance of the United States economy and the resolution and impact of the debt ceiling and sequestration issues; widespread decline in aggregates pricing; the history of both cement and ready mixed concrete, to be subject to significant changes in supply, demand and price; the termination, capping and/or reduction of the federal and/or state gasoline tax(es) or other revenue related to infrastructure construction; the level and timing of federal and state transportation funding, most particularly in Texas, North Carolina, Iowa, Colorado and Georgia; the ability of states and/or other entities to finance approved projects either with tax revenues or alternative financing structures; levels of construction spending in the markets the Corporation serves; a reduction in defense spending, and the subsequent impact on construction activity on or near military bases; a decline in the commercial component of the nonresidential construction market, notably office and retail space; a slowdown in energy-related drilling activity, particularly in Texas; a slowdown in residential construction recovery; a reduction in construction activity and related shipments due to a decline in funding under the domestic farm bill; unfavorable weather conditions, particularly Atlantic Ocean hurricane activity, the late start to spring or the early onset of winter and the impact of a drought or excessive rainfall in the markets served by the Corporation; the volatility of fuel costs, particularly diesel fuel, and the impact on the cost of other consumables, namely steel, explosives, tires and conveyor belts, and with respect to the Cement and Magnesia Specialties businesses, natural gas; continued increases in the cost of other repair and supply parts; unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to cement production facilities; increasing governmental regulation, including environmental laws; transportation availability, notably the availability of railcars and locomotive power to move trains to supply the Corporation’s Texas, Florida and Gulf Coast markets; increased transportation costs, including increases from higher passed-through energy and other costs to comply with tightening regulations as well as higher volumes of rail and water shipments; availability of trucks and licensed drivers for transport of the Corporation’s materials, particularly in areas with significant energy-related activity, such as Texas and Colorado; availability and cost of construction equipment in the United States; weakening in the steel industry markets served by the Corporation’s dolomitic lime products; proper functioning of information technology and
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automated operating systems to manage or support operations; inflation and its effect on both production and interest costs; ability to successfully integrate acquisitions quickly and in a cost-effective manner and achieve anticipated profitability to maintain compliance with the Corporation’s leverage ratio debt covenant; changes in tax laws, the interpretation of such laws and/or administrative practices that would increase the Corporation’s tax rate; violation of the Corporation’s debt covenant if price and/or volumes return to previous levels of instability; downward pressure on the Corporation’s common stock price and its impact on goodwill impairment evaluations; reduction of the Corporation’s credit rating to non-investment grade resulting from strategic acquisitions; and other risk factors listed from time to time found in the Corporation’s filings with the SEC. Other factors besides those listed here may also adversely affect the Corporation, and may be material to the Corporation. The Corporation assumes no obligation to update any such forward-looking statements.
INVESTOR ACCESS TO COMPANY FILINGS
Shareholders may obtain, without charge, a copy of Martin Marietta’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission for the fiscal year ended December 31, 2014, by writing to:
Martin Marietta
Attn: Corporate Secretary
2710 Wycliff Road
Raleigh, North Carolina 27607-3033
Additionally, Martin Marietta’s Annual Report, press releases and filings with the Securities and Exchange Commission, including Forms 10-K, 10-Q, 8-K and 11-K, can generally be accessed via the Corporation’s website. Filings with the Securities and Exchange Commission accessed via the website are available through a link with the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system. Accordingly, access to such filings is available upon EDGAR placing the related document in its database. Investor relations contact information is as follows:
Telephone: (919) 783-4540
Website address: www.martinmarietta.com
Information included on the Corporation’s website is not incorporated into, or otherwise create a part of, this report.
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The Corporation’s operations are highly dependent upon the interest rate-sensitive construction and steelmaking industries. Consequently, these marketplaces could experience lower levels of economic activity in an environment of rising interest rates or escalating costs.
Management has considered the current economic environment and its potential impact to the Corporation’s business. Demand for aggregates products, particularly in the infrastructure construction market, has already been negatively affected by federal and state budget and deficit issues and the uncertainty over future highway funding levels beyond the expiration of MAP-21 which has been extended via several continuing resolutions, the latest of which expires October 29, 2015. Further, delays or cancellations to capital projects in the nonresidential and residential construction markets could occur if companies and consumers are unable to obtain financing for construction projects or if consumer confidence continues to be eroded by economic uncertainty.
Demand in the residential construction market is affected by interest rates. The Federal Reserve kept the federal funds rate near zero percent during the six months ended June 30, 2015, unchanged since 2008. The residential construction market accounted for 14% of the Corporation’s aggregates product line shipments in 2014.
Aside from these inherent risks from within its operations, the Corporation’s earnings are also affected by changes in short-term interest rates. However, rising interest rates are not necessarily predictive of weaker operating results. In fact, since 2007, the Corporation’s profitability increased when interest rates rose, based on the last twelve months quarterly historical net income regression versus a 10-year U.S. government bond. In essence, the Corporation’s underlying business generally serves as a natural hedge to rising interest rates.
Variable-Rate Borrowing Facilities. At June 30, 2015, the Corporation had a $600 million Credit Agreement, comprised of a $350 million Revolving Facility and $250 million Term Loan Facility, and a $250 million Trade Receivable Facility. Borrowings under these facilities bear interest at a variable interest rate. A hypothetical 100-basis-point increase in interest rates on borrowings of $310.2 million, which was the collective outstanding balance at June 30, 2015, would increase interest expense by $3.1 million on an annual basis.
Pension Expense. The Corporation’s results of operations are affected by its pension expense. Assumptions that affect pension expense include the discount rate and, for the defined benefit pension plans only, the expected long-term rate of return on assets. Therefore, the Corporation has interest rate risk associated with these factors. The impact of hypothetical changes in these assumptions on the Corporation’s annual pension expense is discussed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2014.
Energy Costs. Energy costs, including diesel fuel, natural gas, coal and liquid asphalt, represent significant production costs of the Corporation. The Corporation entered into a fixed price arrangement for 40% of its diesel fuel to reduce its diesel fuel price risk. The Magnesia Specialties business has fixed price agreements covering half of its 2015 coal requirements and the cement business has fixed pricing agreements on 100% of its 2015 coal requirements. A hypothetical 10% change in the Corporation’s energy prices in 2015 as compared with 2014, assuming constant volumes, would change 2015 energy expense by $27.9 million. However, the impact would be partially offset by the change in the amount capitalized into inventory standards.
Commodity risk. Cement is a commodity and competition is based principally on price, which is highly sensitive to changes in supply and demand. Prices are often subject to material changes in response to relatively minor fluctuations in supply and demand, general economic conditions and other market conditions beyond the Corporation’s control. Increases in the production capacity of industry participants or increases in cement imports tend to create an oversupply
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of such products leading to an imbalance between supply and demand, which can have a negative impact on product prices. There can be no assurance that prices for products sold will not decline in the future or that such declines will not have a material adverse effect on the Corporation’s business, financial condition and results of operations. Based on forecasted net sales for the Cement business for full-year 2015 of $375 million to $400 million, a hypothetical 10% change in sales price would impact net sales by $37.5 million to $40 million.
Item 4. Controls and Procedures
As of June 30, 2015, an evaluation was performed under the supervision and with the participation of the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and the operation of the Corporation’s disclosure controls and procedures. Based on that evaluation, the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2015. As permitted by the Securities and Exchange Commission, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls over accounts receivable related to the TXI ready mixed concrete operations, which are included in the consolidated financial statements for the period ending June 30, 2015. The excluded assets constituted less than one percent of consolidated total assets as of June 30, 2015.
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PART II- OTHER INFORMATION
Reference is made to Part I. Item 3. Legal Proceedings of the Martin Marietta Annual Report on Form 10-K for the year ended December 31, 2014.
Reference is made to Part I. Item 1A. Risk Factors and Forward-Looking Statements of the Martin Marietta Annual Report on Form 10-K for the year ended December 31, 2014.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
Maximum Number of
Purchased as Part of
Shares that May Yet
Total Number of
Average Price
Publicly Announced
be Purchased Under
Period
Shares Purchased
Paid per Share
Plans or Programs
the Plans or Programs
April 1, 2015 - April 30, 2015
20,000,000
May 1, 2015 - May 31, 2015
156,106
150.67
19,843,894
June 1, 2015 - June 30, 2015
513,812
148.97
19,330,082
Reference is made to the press release dated February 10, 2015 for the December 31, 2014 fourth-quarter and full-year results and announcement of the new share repurchase program. The Corporation’s Board of Directors authorized a maximum of 20 million shares to be repurchased under the program. The program does not have an expiration date.
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
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Exhibit No.
Document
31.01
Certification dated August 7, 2015 of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02
Certification dated August 7, 2015 of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01
Written Statement dated August 7, 2015 of Chief Executive Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02
Written Statement dated August 7, 2015 of Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
95
Mine Safety Disclosures
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: August 7, 2015
By:
/s/ Anne H. Lloyd
Anne H. Lloyd
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
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