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, 2016
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 August 2, 2016
Common Stock, $0.01 par value
63,437,540
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended June 30, 2016
Page
Part I. Financial Information:
Item 1. Financial Statements.
Consolidated Balance Sheets – June 30, 2016, December 31, 2015 and June 30, 2015
3
Consolidated Statements of Earnings and Comprehensive Earnings – Three and Six Months Ended June 30, 2016 and 2015
4
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2016 and 2015
5
Consolidated Statement of Total Equity - Six Months Ended June 30, 2016
6
Notes to Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
56
Item 4. Controls and Procedures.
57
Part II. Other Information:
Item 1. Legal Proceedings.
58
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 4. Mine Safety Disclosures.
Item 6. Exhibits.
59
Signatures
60
Exhibit Index
61
Page 2 of 61
PART I. FINANCIAL INFOMRATION
(UNAUDITED) CONSOLIDATED BALANCE SHEETS
June 30,
December 31,
2016
2015
(Dollars in Thousands, Except Per Share Data)
ASSETS
Current Assets:
Cash and cash equivalents
$
28,596
168,409
44,169
Accounts receivable, net
534,459
410,921
497,468
Inventories, net
504,877
469,141
479,856
Assets held for sale
—
426,495
Other current assets
53,997
33,164
82,134
Total Current Assets
1,121,929
1,081,635
1,530,122
Property, plant and equipment
5,896,512
5,613,198
5,421,449
Allowances for depreciation, depletion and amortization
(2,574,307
)
(2,457,198
(2,371,926
Net property, plant and equipment
3,322,205
3,156,000
3,049,523
Goodwill
2,136,783
2,068,235
2,065,882
Operating permits, net
442,349
444,725
447,702
Other intangibles, net
64,327
65,827
67,242
Other noncurrent assets
145,712
141,189
99,926
Total Assets
7,233,305
6,957,611
7,260,397
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdraft
7,143
10,235
Accounts payable
197,733
164,718
201,235
Accrued salaries, benefits and payroll taxes
24,864
30,939
27,590
Pension and postretirement benefits
9,120
8,168
8,133
Accrued insurance and other taxes
62,525
62,781
57,078
Current maturities of long-term debt and short-term facilities
238,155
18,713
15,433
Accrued interest
16,573
16,156
16,165
Other current liabilities
45,491
54,948
37,667
Total Current Liabilities
601,604
366,658
363,301
Long-term debt
1,541,062
1,550,061
1,637,905
Pension, postretirement and postemployment benefits
236,562
224,538
272,461
Deferred income taxes, net
639,776
583,459
521,932
Other noncurrent liabilities
197,801
172,718
154,365
Total Liabilities
3,216,805
2,897,434
2,949,964
Equity:
Common stock, par value $0.01 per share
633
643
668
Preferred stock, par value $0.01 per share
Additional paid-in capital
3,318,859
3,287,827
3,274,098
Accumulated other comprehensive loss
(106,068
(105,622
(112,814
Retained earnings
800,028
874,436
1,146,821
Total Shareholders' Equity
4,013,452
4,057,284
4,308,773
Noncontrolling interests
3,048
2,893
1,660
Total Equity
4,016,500
4,060,177
4,310,433
Total Liabilities and Equity
See accompanying notes to the consolidated financial statements.
Page 3 of 61
(UNAUDITED) CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
Three Months Ended
Six Months Ended
(In Thousands, Except Per Share Data)
Net Sales
915,436
850,249
1,649,396
1,482,124
Freight and delivery revenues
61,862
71,170
116,636
130,641
Total revenues
977,298
921,419
1,766,032
1,612,765
Cost of sales
668,735
650,096
1,258,061
1,207,710
Freight and delivery costs
Total cost of revenues
730,597
721,266
1,374,697
1,338,351
Gross Profit
246,701
200,153
391,335
274,414
Selling, general & administrative expenses
61,509
56,783
121,370
106,233
Acquisition-related expenses, net
896
2,092
1,322
3,696
Other operating (income) and expenses, net
(3,446
4,294
(2,869
1,930
Earnings from Operations
187,742
136,984
271,512
162,555
Interest expense
20,294
19,087
40,328
38,418
Other nonoperating (income) and expenses, net
(8,100
(3,011
(9,130
(2,118
Earnings before taxes on income
175,548
120,908
240,314
126,255
Taxes on income
53,435
38,929
73,145
38,117
Consolidated net earnings
122,113
81,979
167,169
88,138
Less: Net earnings attributable to noncontrolling interests
41
122
73
Net Earnings Attributable to Martin Marietta Materials, Inc.
122,052
81,938
167,047
88,065
Consolidated Comprehensive Earnings: (See Note 1)
Earnings attributable to Martin Marietta Materials, Inc.
119,817
75,847
166,601
81,410
Earnings attributable to noncontrolling interests
63
43
155
78
119,880
75,890
166,756
81,488
Per Common Share:
Basic attributable to common shareholders
1.91
1.23
2.61
1.30
Diluted attributable to common shareholders
1.90
1.22
2.60
Weighted-Average Common Shares Outstanding:
Basic
63,532
67,373
63,845
67,392
Diluted
63,802
67,633
64,091
67,654
Cash Dividends Per Common Share
0.40
0.80
Page 4 of 61
(UNAUDITED) 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
139,617
134,958
Stock-based compensation expense
12,801
7,524
Gain on divestitures and sales of assets
(261
(853
Deferred income taxes
34,389
33,906
Excess tax benefits from stock-based compensation transactions
(3,948
(55
Other items, net
(5,767
(341
Changes in operating assets and liabilities, net of effects of acquisitions
and divestitures:
(117,524
(76,061
(33,131
(27,661
32,521
(3,416
Other assets and liabilities, net
(22,495
(29,070
Net Cash Provided by Operating Activities
203,371
127,069
Cash Flows from Investing Activities:
Additions to property, plant and equipment
(210,559
(127,990
Acquisitions, net
(123,000
(10,713
Cash received in acquisition
3,446
Proceeds from divestitures and sales of assets
4,474
1,972
Repayments from affiliate
1,808
Payment of railcar construction advances
(25,234
Reimbursement of railcar construction advances
25,234
Net Cash Used for Investing Activities
(325,639
(134,923
Cash Flows from Financing Activities:
Borrowings of debt
280,000
80,000
Repayments of debt
(70,420
(8,144
Payments on capital lease obligations
(1,563
(1,831
Change in bank overdraft
(3,092
(183
Dividends paid
(51,467
(54,285
Issuances of common stock
15,049
27,760
Repurchases of common stock
(190,000
(100,000
3,948
55
Net Cash Used for Financing Activities
(17,545
(56,628
Net Decrease in Cash and Cash Equivalents
(139,813
(64,482
Cash and Cash Equivalents, beginning of period
108,651
Cash and Cash Equivalents, end of period
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest
36,630
35,447
Cash paid for income taxes
47,159
24,334
Page 5 of 61
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARES
(UNAUDITED) 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, 2015
64,479
Other comprehensive earnings,
net of tax
(446
33
(413
Dividends declared
Issuances of common stock for stock
award plans
197
2
18,231
18,233
(1,244
(12
(189,988
Balance at June 30, 2016
63,432
Page 6 of 61
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 56% of consolidated net sales for the six months ended June 30, 2016 (55% of full-year 2015 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 29% of consolidated net sales for the six months ended June 30, 2016 (27% of full-year 2015 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 in 26 states, Nova Scotia and the Bahamas. 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, 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 accounted for 8% of consolidated net sales for the six months ended June 30, 2016 (11% of full-year 2015 consolidated net sales). The Cement segment has production facilities located in Midlothian, Texas, south of Dallas-Fort Worth and Hunter, Texas, north of San Antonio. The Cement business produces Portland and specialty 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 owned by the Cement business and are adjacent to each of the plants.
The Corporation has a Magnesia Specialties segment with manufacturing facilities in Manistee, Michigan, and Woodville, Ohio. The Magnesia Specialties segment, which accounted for 7% of consolidated net sales for the six months ended June 30, 2016 (7% of full-year 2015 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 61
(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, 2015. In the opinion of management, the interim consolidated financial information provided herein reflects all adjustments, consisting of normal recurring accruals, necessary for a fair statement 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, 2016 are not indicative of the results expected for other interim periods or the full year. The consolidated balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all disclosures required by accounting principles generally accepted in the United States. 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, 2015.
Debt Issuance Costs
The Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which amends the presentation of debt issuance costs in the financial statements. The ASU requires an entity to present debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts, and does not impact the recognition and measurement guidance for debt issuance costs. The Corporation adopted ASU 2015-03 on January 1, 2016 and has retrospectively adjusted the prior periods presented, resulting in a reclassification of $3,588,000 and $4,130,000 from Other noncurrent assets to Long-term debt as of December 31, 2015 and June 30, 2015, respectively, and $533,000 from Other current assets to Current maturities of long-term debt and short-term maturities as of December 31, 2015 and June 30, 2015.
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 January 1, 2018 and can be applied on a full retrospective or modified retrospective approach. The Corporation will not early adopt this standard. The Corporation is currently evaluating the impact the provisions of the new standard will have on its financial statements and expects to complete its evaluation by the end of 2016.
Page 8 of 61
Lease Standard
In February 2016, the FASB issued a new accounting standard, Accounting Standards Update 2016-2 – Leases, intending to improve financial reporting of leases and to provide more transparency into off-balance sheet leasing obligations. The guidance requires virtually all leases, excluding mineral interest leases, to be recorded on the balance sheet and provides guidance on the recognition of lease expense and income. The new standard is effective January 1, 2019 and must be applied on a modified retrospective approach. The Corporation is currently evaluating the impact the new standard will have on its financial statements.
Share-based Payment Standard
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies certain aspects of accounting guidance and requirements for share-based transactions. The ASU is effective for reporting periods beginning January 1, 2017. The Corporation is evaluating the impact of the ASU on its financial statements.
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, net of tax
(2,235
(6,091
(6,655
Comprehensive earnings attributable to Martin Marietta
Page 9 of 61
Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)
Comprehensive earnings attributable to noncontrolling interests, consisting of net earnings and adjustments for the funded status of pension and postretirement benefit plans, is as follows:
Net earnings attributable to noncontrolling interests
Other comprehensive earnings, net of tax
Comprehensive earnings 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) earnings, 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, 2016
Balance at beginning of period
(101,907
(149
(1,777
(103,833
Other comprehensive loss before
reclassifications, net of tax
(3,736
(232
(3,968
Amounts reclassified from accumulated other
comprehensive earnings, net of tax
1,529
204
1,733
Other comprehensive (loss) earnings, net of tax
(2,207
Balance at end of period
(104,114
(381
(1,573
Three Months Ended June 30, 2015
(105,151
990
(2,562
(106,723
Other comprehensive (loss) earnings before
(10,670
229
(10,441
4,158
192
4,350
(6,512
(111,663
1,219
(2,370
Page 10 of 61
The other comprehensive loss before reclassifications for pension and postretirement benefit plans is net of tax of $2,346,000 and $6,793,000 for the three months ended June 30, 2016 and 2015, respectively.
Six Months Ended June 30, 2016
(103,380
(264
(1,978
(3,830
(117
(3,947
Amounts reclassified from accumulated
other comprehensive earnings, net of tax
3,096
405
3,501
(734
Six Months Ended June 30, 2015
(106,688
3,278
(2,749
(106,159
(10,845
(2,059
(12,904
5,870
379
6,249
(4,975
The other comprehensive loss before reclassifications for pension and postretirement benefit plans is net of tax of $2,405,000 and $6,904,000 for the six months ended June 30, 2016 and 2015, respectively.
Page 11 of 61
Changes in net noncurrent deferred tax assets recorded in accumulated other comprehensive loss are as follows:
Pension and Postretirement
Unamortized Value of Terminated Forward Starting Interest Rate Swap
Net Noncurrent Deferred Tax Assets
65,523
1,159
66,682
Tax effect of other comprehensive earnings
1,408
(136
1,272
66,931
1,023
67,954
67,552
1,679
69,231
4,073
(125
71,625
1,554
73,179
66,467
1,290
67,757
464
(267
68,568
1,799
70,367
3,057
(245
2,812
Page 12 of 61
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
Settlement charge
Amortization of:
Prior service credit
(518
(469
(806
(939
Actuarial loss
3,007
7,274
5,787
10,546
2,489
6,805
5,040
9,607
Cost of sales; Selling, general
and administrative expenses
Tax benefit
(960
(2,647
(1,944
(3,737
Unamortized value of terminated
forward starting interest
rate swap
Additional interest expense
340
317
672
624
Page 13 of 61
Earnings per Common Share
The numerator for basic and diluted earnings per common share is net earnings attributable to Martin Marietta Materials, Inc. reduced by dividends and undistributed earnings attributable to certain of the Corporation’s stock-based compensation. 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, 2016 and 2015, 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.
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
Martin Marietta Materials, Inc.
Less: Distributed and undistributed earnings attributable to
unvested awards
519
(876
730
403
Basic and diluted net earnings available to common
shareholders attributable to Martin Marietta Materials, Inc.
121,533
82,814
166,317
87,662
Basic weighted-average common shares outstanding
Effect of dilutive employee and director awards
270
260
246
262
Diluted weighted-average common shares outstanding
2.
Inventories, Net
Finished products
463,807
433,649
425,732
Products in process and raw materials
60,324
55,194
62,059
Supplies and expendable parts
113,110
110,882
112,592
637,241
599,725
600,383
Less: Allowances
(132,364
(130,584
(120,527
Total
Page 14 of 61
3.
Long-Term Debt
6.6% Senior Notes, due 2018
299,294
299,113
298,931
7% Debentures, due 2025
124,046
124,002
123,960
6.25% Senior Notes, due 2037
227,947
227,917
227,898
4.25 % Senior Notes, due 2024
394,977
394,690
394,441
Floating Rate Notes, due 2017, interest rate of 1.73%,
1.71% and 1.38% at June 30, 2016, December 31, 2015
and June 30, 2015, respectively
298,793
298,868
298,514
Term Loan Facility, due 2018, interest rate of 1.96%, 1.86% and 1.69%
at June 30, 2016, December 31, 2015 and June 30, 2015,
respectively
213,571
222,521
228,346
Trade Receivable Facility, interest rate of 1.16% and 0.88% at
June 30, 2016 and June 30, 2015, respectively
220,000
Other notes
589
1,663
1,248
Total debt
1,779,217
1,568,774
1,653,338
Less: Current maturities
(238,155
(18,713
(15,433
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. Management intends to renew the Trade Receivable Facility beyond 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, and is limited to the lesser of the facility limit or the borrowing base, as defined, of $391,600,000, $282,258,000 and $450,791,000 at June 30, 2016, December 31, 2015 and June 30, 2015, 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%. The Trade Receivable Facility contains a cross-default provision to the Corporation’s other debt agreements.
Page 15 of 61
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 accordance with the amended Credit Agreement, the Corporation adjusted consolidated EBITDA to add back 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. The Corporation was in compliance with this Ratio at June 30, 2016.
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, 2016, December 31, 2015 and June 30, 2015, the Corporation had $2,507,000 of outstanding letters of credit issued under the Revolving Facility.
Current debt maturities consist of borrowings under the Trade Receivable Facility as well as the current portions of the Term Loan Facility and other notes. The increase in current debt maturities as of June 30, 2016 is attributable to the balance drawn on the Trade Receivable Facility. The Floating Rate Notes have been classified as a noncurrent liability as the Corporation has the intent and ability to refinance on a long-term basis before or at its maturity of June 30, 2017.
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, 2016, the Corporation recognized $340,000 and $672,000, respectively, as additional interest expense. For the three and six months ended June 30, 2015, the Corporation recognized $317,000 and $624,000, 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 $1,400,000 until the maturity of the 6.6% Senior Notes in 2018.
4.
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 original 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 16 of 61
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 classified in the line items Other current assets and Other noncurrent assets on the consolidated balance sheets and are not publicly traded. Management estimates that the fair value of notes receivable approximates the carrying amount due to the variable interest rates 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 $1,779,217,000 and $1,890,319,000, respectively, at June 30, 2016; $1,568,774,000 and $1,625,193,000, respectively, at December 31, 2015; and $1,653,338,000 and $1,729,511,000, respectively, at June 30, 2015. 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 estimated fair value of other borrowings, which primarily represents variable-rate debt, was based on Level 2 of the fair value hierarchy using quoted market prices for similar debt instruments, and approximates their carrying amounts as the interest rates reset periodically.
5.
Income Taxes
The Corporation’s effective income tax rates for the six months ended June 30, 2016 and 2015 were 30.4% and 30.2%, respectively. The estimated effective income tax rates reflect 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 Corporation records interest accrued in relation to unrecognized tax benefits as income tax expense. Penalties, if incurred, are recorded as other expenses in the consolidated statements of earnings and comprehensive earnings.
Page 17 of 61
6.
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
5,776
5,513
34
Interest cost
9,331
8,213
259
Expected return on assets
(9,822
(8,887
Prior service cost (credit)
91
101
(609
(570
Actuarial loss (gain)
3,146
7,351
(139
(77
Special termination benefit
638
1,206
(8
Net periodic benefit cost (credit)
9,160
13,497
(473
(384
Six Months Ended June 30,
11,082
11,505
68
17,938
16,575
432
(18,848
(18,190
175
211
(981
(1,150
6,036
10,700
(249
(154
764
1,462
17,206
22,263
(763
(772
The Corporation currently estimates that it will contribute $38,752,000 to its pension and SERP plans in 2016.
Page 18 of 61
7.
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 addition, the Corporation has a $6,000,000 outstanding loan due from this unconsolidated affiliate as of June 30, 2016, December 31, 2015 and June 30, 2015.
Employees
Approximately 10% 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 and Magnesia Specialties segments. 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.
8.
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 19 of 61
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, exclude intersegment sales, which are eliminated.
Total revenues:
278,676
257,649
465,023
398,482
87,600
81,518
159,271
146,195
484,918
411,235
877,913
731,807
Total Aggregates Business
851,194
750,402
1,502,207
1,276,484
Cement
62,468
105,899
136,019
207,999
Magnesia Specialties
63,636
65,118
127,806
128,282
Net sales:
258,988
237,415
432,360
367,120
82,676
76,483
149,961
136,253
455,115
375,489
819,040
662,570
796,779
689,387
1,401,361
1,165,943
59,791
100,405
129,664
196,970
58,866
60,457
118,371
119,211
Earnings (Loss) from operations:
80,552
66,894
94,976
62,691
11,548
4,818
18,519
3,269
77,404
49,177
116,201
63,676
169,504
120,889
229,696
129,636
21,309
22,468
47,626
34,697
19,227
18,751
39,791
36,541
Corporate
(22,298
(25,124
(45,601
(38,319
Page 20 of 61
The decline in the Cement business’s total and net sales is primarily attributable to the California cement operations, included in the three and six months ended June 30, 2015 and divested as of September 30, 2015. For the three months ended June 30, 2015, total revenues, net sales and loss from operations for the California cement operations were $35,318,000, $34,160,000 and $485,000, respectively. For the six months ended June 30, 2015, total revenues, net sales and loss from operations for the California cement operations were $69,674,000, $67,267,000 and $7,906,000, respectively.
Cement intersegment sales, which are to the aggregates and ready mixed concrete product lines in the West Group, were $27,649,000 and $54,637,000 for the three and six months ended June 30, 2016, respectively, and $20,854,000 and $38,955,000 for the three and six months ended June 30, 2015, respectively.
The Aggregates business includes the aggregates product line and aggregates-related downstream product lines, which include asphalt, ready mixed concrete and road paving products. 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
516,283
481,616
922,721
813,830
Asphalt and Paving
65,609
58,021
76,967
74,790
Ready Mixed Concrete
214,887
149,750
401,673
277,323
Gross profit (loss):
164,353
137,272
245,431
178,690
12,876
7,891
6,714
3,116
25,293
9,341
43,380
11,424
202,522
154,504
295,525
193,230
24,002
30,414
56,559
49,400
21,692
21,224
44,662
41,402
(1,515
(5,989
(5,411
(9,618
For the three months ended June 30, 2015, gross profit for the California cement operations was $3,424,000. For the six months ended June 30, 2015, the operation’s gross loss was $647,000.
Page 21 of 61
9.
Supplemental Cash Flow Information
The components of the change in other assets and liabilities, net, are as follows:
Other current and noncurrent assets
(9,691
(5,501
(7,808
(13,794
(256
(1,278
Accrued income taxes
(8,495
(19,902
Accrued pension, postretirement and postemployment benefits
11,757
16,283
Other current and noncurrent liabilities
(8,002
(4,878
The change in accrued salaries, benefits and payroll taxes in 2016 compared to 2015 was primarily attributable to TXI-related severance payments made in 2015. The change in accrued income taxes was attributable to higher taxable income in 2016 compared to 2015.
Noncash investing and financing activities are as follows:
Noncash investing and financing activities:
Acquisition of assets through capital lease
1,331
Acquisition of assets through asset exchange
5,000
10.Business Combination
During the first quarter 2016, the Corporation acquired the outstanding stock of Rocky Mountain Materials and Asphalt, Inc., and Rocky Mountain Premix Inc. The acquisition provides more than 500 million tons of mineral reserves and expands the Corporation’s presence along the Front Range of the Rocky Mountains, home to 80% of Colorado’s population. The acquired operations are reported through the West Group. The Corporation has recorded preliminary fair values of the assets acquired and liabilities assumed; however, certain amounts are subject to change as additional reviews are performed, including asset and liability verification and review of seller’s final tax return. Specific accounts subject to ongoing purchase accounting include property, plant and equipment; goodwill; accrued expenses and deferred income taxes. The acquisition was not financially material; therefore, pro forma information is not required.
Page 22 of 61
11. Stock-Based Compensation
During the quarter ended March 31, 2016, the Corporation awarded its annual grant of stock-based compensation, which included 75,421 of performance stock units and 68,720 of restricted stock units. The grant-date fair value of each award is $142.02 for the performance stock units and $124.41 for the restricted stock units. No stock options are expected to be awarded in 2016. In past years, annual stock-based compensation awards were primarily made in the second quarter of the year. The change in the composition of the awards and the timing of the annual grant resulted in higher expense recorded in the first half of the year compared with prior years. For the six months ended June 30, 2016 and 2015, stock-based compensation expense was $12,801,000 and $7,524,000, respectively.
Page 23 of 61
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter Ended June 30, 2016
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 products, including ready mixed concrete, asphalt 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, ready mixed concrete and asphalt products from a network of more than 400 quarries, underground mines, distribution facilities and plants in 26 states, Nova Scotia and the Bahamas. 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
Product Lines
Aggregates (crushed stone, sand and gravel)
Aggregates (crushed stone, sand and gravel), ready mixed concrete, asphalt and road paving
Types of Aggregates Locations
Quarries and Distribution Facilities
Quarries, Plants and
Distribution Facilities
Modes of Transportation for Aggregates Product Line
Truck and Rail
Truck, Rail and Water
Page 24 of 61
The Cement business produces Portland and specialty 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 and Hunter, Texas, north of San Antonio. Limestone reserves used as a raw material are owned by the Corporation and located on property adjacent to each of the plants. In addition to the manufacturing facilities, the Corporation operates cement distribution terminals.
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, 2015. There were no changes to the Corporation’s critical accounting policies during the six months ended June 30, 2016.
Except as indicated, the comparative analysis in this Management’s Discussion and Analysis of Financial Condition and Results of Operations 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, 2016 and 2015 in accordance with GAAP and reconciliations of the ratios as percentages of total revenues to percentages of net sales.
Consolidated Gross Margin in Accordance with GAAP
Gross profit
Gross margin
25.2
%
21.7
22.2
17.0
Page 25 of 61
Consolidated Gross Margin Excluding Freight and Delivery Revenues
Less: Freight and delivery revenues
(61,862
(71,170
(116,636
(130,641
Net sales
Gross margin excluding freight and delivery revenues
26.9
23.5
23.7
18.5
Consolidated Operating Margin in Accordance with GAAP
Earnings from operations
Operating margin
19.2
14.9
15.4
10.1
Consolidated Operating Margin Excluding Freight and Delivery Revenues
Operating margin excluding freight and delivery revenues
20.5
16.1
16.5
11.0
Page 26 of 61
Aggregates Business Margin in Accordance with GAAP
1,502,206
23.8
20.6
19.7
15.1
Aggregates Business Gross Margin Excluding Freight and Delivery Revenues
(54,415
(61,015
(100,845
(110,541
25.4
22.4
21.1
16.6
Aggregates Product Line Gross Margin in Accordance with GAAP
565,774
536,845
1,013,859
914,802
29.0
25.6
24.2
19.5
Page 27 of 61
Aggregates Product Line Gross Margin Excluding Freight and Delivery Revenues
(49,491
(55,229
(91,138
(100,972
31.8
28.5
26.6
22.0
Ready Mixed Concrete Product Line Gross Margin in Accordance with GAAP
215,248
150,052
402,331
277,855
11.8
6.2
10.8
4.1
Ready Mixed Concrete Product Line Gross Margin Excluding Freight and Delivery Revenues
(361
(302
(658
(532
Page 28 of 61
Aggregates-Related Downstream Operations Gross Margin in Accordance with GAAP
38,169
17,232
50,094
14,540
285,420
213,557
488,348
361,682
13.4
8.1
10.3
4.0
Aggregates-Related Downstream Operations Gross Margin Excluding Freight and Delivery Revenues
(4,924
(5,786
(9,708
(9,569
280,496
207,771
478,640
352,113
13.6
8.3
10.5
Cement Business Gross Margin in Accordance with GAAP
38.4
28.7
41.6
Page 29 of 61
Cement Business Gross Margin Excluding Freight and Delivery Revenues
(2,677
(5,494
(6,355
(11,029
40.1
30.3
43.6
25.1
Cement Business, Excluding California Cement Operations, Gross Margin in Accordance with GAAP
26,990
50,047
70,580
138,325
38.2
36.2
Cement Business, Excluding California Cement Operations, Gross Margin Excluding Freight and Delivery Revenues
(4,335
(8,622
66,245
129,703
40.7
38.6
Page 30 of 61
Magnesia Specialties Gross Margin in Accordance with GAAP
34.1
32.6
34.9
32.3
Magnesia Specialties Gross Margin Excluding Freight and Delivery Revenues
(4,770
(4,661
(9,435
(9,071
36.8
35.1
37.7
34.7
Earnings before interest, income taxes, depreciation, depletion 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 operating cash flow. EBITDA is as follows:
(dollars in thousands)
Consolidated Earnings Before Interest, Income Taxes, Depreciation, Depletion and Amortization
266,480
206,903
419,102
298,109
Page 31 of 61
A reconciliation of Net Earnings Attributable to Martin Marietta Materials, Inc. to Consolidated EBITDA is as follows:
(Dollars in thousands)
Add back:
Income tax expense for controlling interests
53,406
38,914
73,073
38,088
Depreciation, depletion and amortization expense
70,728
66,964
138,654
133,538
Consolidated EBITDA
EBITDA Margin as a Percentage of Net Sales
29.1
24.3
20.1
Incremental consolidated 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. Due to the significant amount of fixed costs, gross margin (excluding freight and delivery revenues) typically increases at a disproportionate rate in periods of increased shipments. The following shows the calculation of incremental consolidated gross margin (excluding freight and delivery revenues) for the period ended June 30:
Three Months
Six Months
Ended
Consolidated net sales for the period ended June 30, 2016
Consolidated net sales for the period ended June 30, 2015
Incremental net sales
65,187
167,272
Consolidated gross profit for the period ended June 30, 2016
Consolidated gross profit for the period ended June 30, 2015
Incremental gross profit
46,548
116,921
Incremental consolidated gross margin (excluding freight and delivery
revenues) for period ended June 30, 2016
71.4
69.9
Page 32 of 61
The Corporation presents the increase in cement business shipments, excluding shipments attributable to the California cement operations which were divested in September 2015, from the prior-year quarter. Management presents this measure as it presents the growth in cement shipments on a comparable basis. (shipments in thousands)
Cement shipments
854
1,203
Less: Cement shipments attributable to the California cement operations
(367
Cement shipments excluding shipments attributable to the California cement operations
836
Increase in cement shipments, excluding shipments attributable to the California cement operations
2.2
Significant items for the quarter ended June 30, 2016 (unless noted, all comparisons are versus the prior-year quarter):
·
Record consolidated net sales of $915.4 million compared with $850.2 million, an increase of 7.7%
Aggregates product line price increase of 6.8%; aggregates product line volume increase of 1.3%
─
Aggregates product line volume increase in Mid-America and Southeast Groups of 4.9% and 1.9%, respectively
Cement business net sales of $59.8 million and gross profit of $24.0 million
Magnesia Specialties net sales of $58.9 million and gross profit of $21.7 million
Consolidated gross margin (excluding freight and delivery revenues) of 26.9%, an increase of 340 basis points
Consolidated selling, general and administrative expenses (“SG&A”) of $61.5 million, or 6.7% of net sales
Consolidated earnings from operations of $187.7 million compared with $137.0 million
Earnings per diluted share of $1.90 compared with $1.22
Page 33 of 61
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, 2016 and 2015. 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:
100.0
443,387
Total Heritage Aggregates Business
785,051
Total Heritage Consolidated
903,708
Acquisitions:
Aggregates Business – West Group
11,728
92,610
35.8
80,177
33.8
15,547
18.8
9,493
12.4
94,473
21.3
64,834
17.3
202,630
25.8
246,809
27.3
(108
Page 34 of 61
Selling, general & administrative expenses:
13,416
5.2
13,304
5.6
4,552
5.5
4,503
5.9
17,434
3.9
16,055
4.3
35,402
4.5
33,862
4.9
6,095
10.2
6,647
6.6
2,452
4.2
2,391
17,388
13,883
61,337
6.8
6.7
172
1.5
31.1
28.2
14.0
6.3
77,688
17.5
13.1
169,788
21.6
35.6
32.7
31.0
188,026
20.8
(284
For the three months ended June 30, 2015, net sales, gross profit, SG&A and loss from operations for the California cement operations were $34,160,000, $3,424,000, $2,491,000 and $485,000, respectively.
Page 35 of 61
Aggregates Business
Net sales by product line for the Aggregates business, which reflect the elimination of inter-product line sales, are as follows:
511,623
64,951
208,477
Total Heritage
4,660
658
6,410
Total Acquisitions
The following tables present volume and pricing data and shipments data for the aggregates product line.
June 30, 2016
Volume
Pricing
Volume/Pricing Variance (1)
Heritage Aggregates Product Line (2):
1.9
West Group (3)
(5.0
)%
10.4
Heritage Aggregates Operations(2)
0.4
7.0
Aggregates Product Line (4)
1.3
Page 36 of 61
(Tons in Thousands)
Shipments
20,088
19,144
5,375
5,274
West Group(3)
16,700
17,585
42,163
42,003
Acquisitions
391
42,554
Tons to external customers
39,557
39,651
Internal tons used in other product lines
2,606
2,352
Total heritage aggregates tons
310
81
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 year.
(3)
Including the recently acquired Colorado operations in the current-year quarter, the volume variance is (2.8)% and the pricing variance is 10.0% for the three months ended June 30, 2016.
(4)
Aggregates Product Line includes all acquisitions from the date of acquisition and divestitures through the date of disposal.
Aggregates product line shipments to the infrastructure market comprised 43% of quarterly volumes and increased 1.3%. Growth was led by the Southeast Group, which increased 8.9%. The Mid-America and West Groups were impacted by significant rainfall and project delays in April and May, which deferred shipments and led to flat public-sector volumes. Growth in the Southeast was primarily attributable to large projects in Georgia, a state that is benefitting from legislation passed in 2015 increasing near- and long-term state infrastructure spending. In a January 2016 study, SC Market Analytics, Inc. estimated the Fixing America’s Surface Transportation Act (“FAST Act”) could allow
Page 37 of 61
state departments of transportation to purchase and use an additional 114 million tons of aggregates over the 5-year tenor of the FAST Act. The analysis further indicates certain areas of the United States – including the Southeast, West, Mountain and Northeastern regions – are expected to reap the benefits under the FAST Act.
The nonresidential market represented 33% of quarterly aggregates product line shipments and increased 2.8%. The Mid-America Group achieved a 13.7% increase, followed by an increase of 1.6% in the Southeast Group. Notably, a broader improving economy is driving business investment in office and retail development, which are experiencing a rebound in markets not seen in the past several years. The West Group noted a decline in nonresidential activity, primarily related to weather deferrals and further reductions in shale energy demand.
The residential market accounted for 17% of quarterly aggregates product line shipments. Volumes to this segment increased 10.8%, due to the continued and expanding housing recovery, notably in the southeastern region of the country. While housing activity in the United States generally remains well below historic averages, strong growth in permits, starts and completions among the Corporation’s top states reflects steady momentum in housing construction and indicates additional future gains from increased residential investment. In fact, Dallas and Atlanta, key Martin Marietta markets, are ranked first and second in the country, respectively, in permits growth. Further, during the second quarter, North Carolina, Iowa, Florida and South Carolina all reported double-digit growth in housing starts. The ChemRock/Rail market accounted for the remaining 7% of aggregates product line volumes. The volume decline to this segment reflects reduced ballast driven by reduced coal demand, which impacts transportation and results in lower capital and maintenance activity by railroads.
Overall, aggregates product line shipments increased 1.3%. Geographically, growth was led by the Mid-America Group, which increased 4.9%, while the Southeast Group achieved a 1.9% increase. This growth offset the weather-impacted decline in the West Group.
The average per-ton selling price for the heritage aggregates product line was $12.78 and $11.94 for the three months ended June 30, 2016 and 2015, respectively. The heritage aggregates product line pricing increase of 7.0% reflects growth in all reportable groups, led by the 10.4% increase in the West Group. The most significant improvement was achieved in the north Texas/Oklahoma region. The Southeast Group and Mid-America Group reported increases of 6.2% and 4.2%, respectively. For the three months ended June 30, 2016 the average per-ton selling price for the acquired aggregates product line was $10.21. The acquired locations, which are in the Colorado market, have a lower average selling price due to its inherent trucking market compared to the Corporation’s overall aggregates business.
Page 38 of 61
The Corporation’s aggregates-related downstream product lines include ready mixed concrete, asphalt and 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:
Asphalt
$37.20/ton
$42.20/ton
$105.16/yd3
$91.35/yd³
$44.13/ton
$112.86/yd³
The decline in asphalt pricing is primarily attributable to the divestiture of the San Antonio Asphalt operations sold in third quarter 2015, which had a higher average selling price. Additionally, asphalt and paving contracts in the Rocky Mountain Division contain accelerator clauses to reflect cost fluctuations in the raw materials. Liquid asphalt, a key raw material in the manufacturing process, declined during the quarter, resulting in a lower average selling price.
Unit shipments by product line for the Corporation’s aggregates-related downstream product lines are as follows:
Asphalt Product Line (in thousands):
250
356
Internal tons used in road paving business
469
456
Total heritage asphalt tons
719
812
13
115
Total acquisitions asphalt tons
128
Ready Mixed Concrete (in thousands of cubic yards):
Heritage
1,942
1,613
Total cubic yards
1,997
The decline in asphalt product line shipments is primarily attributable to the divestiture of San Antonio Asphalt operations, sold in third quarter 2015, which contributed 158,000 tons during the three months ended June 30, 2015.
Page 39 of 61
The heritage ready mixed concrete product line benefitted from strong demand and improved operating conditions, driving a reported 20% increase in shipments and a 15% increase in average selling price, resulting in a 39% increase in net sales and a 570-basis-point improvement in gross margin (excluding freight and delivery revenues).
Cement Business
For the quarter, the Cement business generated $59.8 million of net sales and $24.0 million of gross profit. Cement shipments increased 2.2% while pricing was slightly down (excluding the impact of the California cement operations sold in 2015). The business’ reported quarterly gross margin (excluding freight and delivery revenues) of 40.1% was flat compared to prior year (excluding the impact of the California cement operations sold in 2015).
During the second quarter 2016, the business incurred $5.7 million in planned cement kiln maintenance costs, and expects to incur $2.0 million and $7.8 million in the third and fourth quarters, respectively. Kiln maintenance costs in 2015 for the Texas plants were $3.5 million, $3.2 million and $9.3 million for the second, third and fourth quarters, respectively.
Cement shipments and adjusted average-selling price for the three months ended June 30, 2016 and 2015 were (tons in thousands):
578
994
276
209
Total cement tons
Less: California cement tons
367
Adjusted cement tons
Adjusted average-selling price per ton1
101.04
102.96
1 Excludes the impact of the California cement operations
The decline in 2016 shipments is attributable to the prior-year divestiture of the California operations, which accounted for 367,000 tons in the second-quarter of 2015.
The Portland Cement Association, or PCA, forecasts continued favorable supply/demand imbalance in Texas over the next several years and growth each year through 2019.
Magnesia Specialties Business
Magnesia Specialties continued to deliver strong performance and generated second-quarter net sales of $58.9 million. Gross margin (excluding freight and delivery revenues) of 36.8% in the quarter expanded 170 basis points. Second-quarter earnings from operations were $19.2 million compared with $18.8 million. Expansion in gross margin is primarily due to lower energy and maintenance costs compared to the prior year.
Page 40 of 61
The following presents a rollforward of consolidated gross profit (dollars in thousands):
Consolidated gross profit, quarter ended June 30, 2015
Heritage aggregates product line:
1,589
35,467
Cost increases, net
(9,138
Change in heritage aggregates product line gross profit
27,918
Heritage aggregates-related downstream product lines
20,208
Acquired aggregates business operations
Cement*
(6,412
468
Change in consolidated gross profit
Consolidated gross profit, quarter ended June 30, 2016
*Includes impact of California cement operations
Gross profit (loss) by business is as follows:
165,190
12,620
24,820
(837
256
473
Page 41 of 61
The consolidated heritage gross margin (excluding freight and delivery revenues) for the quarter was 27.3%, a 380-basis-point improvement compared with the prior-year quarter. The increase reflects pricing growth, management’s cost-disciplined approach and divesting the California cement operations in the third quarter of 2015.
Consolidated Operating Results
Consolidated SG&A was 6.7% of net sales, flat compared with 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 income of $3.4 million in 2016 and an expense of $4.3 million in 2015. Operating income and expenses, net, for 2016 reflects a favorable settlement of commodity contracts assumed in a 2014 acquisition in the Cement business that were priced above market at that date.
Other nonoperating income and expenses, net, includes foreign currency transaction gains and losses, interest and other miscellaneous income and equity adjustments for nonconsolidated affiliates. Consolidated other nonoperating income and expenses, net, was income of $8.1 million and $3.0 million for the quarter ended June 30, 2016 and 2015, respectively. The increase in income in 2016 compared to 2015 is attributable to higher earnings by a nonconsolidated affiliate.
The estimated effective income tax rate for the quarter was 30.4%, in line with annual guidance. For the year, the Corporation expects to fully utilize the remaining allowable net operating loss carryforwards of $33 million acquired with TXI.
Significant items for the six months ended June 30, 2016 (unless noted, all comparisons are versus the prior-year period):
Consolidated net sales of $1.6 billion compared with $1.5 billion, an increase of 11%
Aggregates product line volume increase of 6.2%; aggregates product line price increase of 7.4%
Heritage aggregates product line volume increase of 5.4%
Cement business net sales of $129.7 million and gross profit of $56.6 million
Magnesia Specialties net sales of $118.4 million and gross profit of $44.7 million
Consolidated gross margin (excluding freight and delivery revenues) of 23.7%, an increase of 520 basis points
Consolidated SG&A of $121.4 million, or 7.4% of net sales
Consolidated earnings from operations of $271.5 million compared with $162.6 million
Earnings per diluted share of $2.60 compared with $1.30
Page 42 of 61
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, 2016 and 2015. 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.
802,007
1,384,328
1,632,363
17,033
120,034
27.8
87,321
25,876
12,593
9.2
151,050
93,316
14.1
296,960
21.5
392,770
24.1
(1,435
Page 43 of 61
26,550
6.1
26,249
7.1
8,431
8,792
6.5
34,251
31,764
4.8
69,232
5.0
66,805
5.7
12,351
9.5
13,322
4,797
4,757
34,715
21,349
121,095
7.4
7.2
275
1.6
17.1
12.3
2.4
West Group(1)
117,916
14.7
9.6
231,411
16.7
11.1
Cement(2)
36.7
17.6
33.6
30.7
273,227
(1,715
Page 44 of 61
Net sales by product line for the Aggregates business are follows:
915,673
76,090
392,565
7,048
877
9,108
12.8
4.4
3.5
(0.8
5.4
7.5
Page 45 of 61
33,010
29,255
9,693
9,364
31,978
32,220
74,681
70,839
537
75,218
Including the recently acquired Colorado operations in the current-year period, the volume variance is 0.9% and the pricing variance is 10.7% for the six months ended June 30, 2016.
70,160
66,783
4,521
4,056
451
86
The per-ton average selling price for the aggregates product line was $12.89 and $11.99 for the six months ended June 30, 2016 and 2015, respectively.
Page 46 of 61
Average selling prices by product line for the Corporation’s aggregates-related downstream operations are as follows:
$38.09/ton
$42.56/ton
$103.79/yd³
$91.52/yd³
$43.79/ton
$113.74/yd³
Unit shipments by product line for the Corporation’s aggregates-related downstream operations are as follows:
319
569
534
513
853
1,082
139
3,705
2,977
3,783
Page 47 of 61
Cement shipments and adjusted average-selling price per ton for the six months ended June 30, 2016 and 2015 were (tons in thousands):
1,263
2,019
548
401
1,811
2,420
743
1,677
100.51
99.78
1 Excludes the impact of the divested California cement operations
For 2016, Magnesia Specialties reported net sales of $118.4 million, relatively flat compared with the prior-year period. Earnings from operations were $39.8 million compared with $36.5 million. The increase in earnings from operations was primarily attributable to lower production costs, specifically related to energy and maintenance expenses.
Consolidated gross margin (excluding freight and delivery revenues) was 23.7% for 2016 versus 18.5% for 2015. The following presents a rollforward of the Corporation’s gross profit (dollars in thousands):
Consolidated gross profit, six months ended June 30, 2015
45,326
67,545
(44,111
68,760
34,970
7,159
3,260
4,207
Consolidated gross profit, six months ended June 30, 2016
Page 48 of 61
247,450
6,689
42,821
(2,019
25
559
Consolidated SG&A expenses were 7.4% of net sales, up 20 basis points compared with the prior-year period, driven by higher incentive compensation, including share based compensation.
For the first six months, consolidated other operating income and expenses, net, was income of $2.9 million in 2016 compared with expense of $1.9 million in 2015, predominantly due to a favorable settlement of commodity contracts assumed in a 2014 acquisition in the Cement business that were priced above market at that date. Additionally, in 2015, the Corporation reserved two large accounts and wrote-off a customer account who declared bankruptcy.
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, 2016 was income of $9.1 million compared with income of $2.1 million in 2015, primarily driven by increased income from nonconsolidated affiliates in 2016.
Page 49 of 61
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the six months ended June 30, 2016 was $203.4 million compared with $127.1 million for the same period in 2015. The increase was primarily attributable to higher earnings before depreciation, depletion and amortization expense. 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
124,627
119,807
Depletion
7,293
6,452
Amortization
7,697
8,699
The seasonal nature of the construction aggregates business impacts quarterly operating cash flow when compared with the full year. Full-year 2015 net cash provided by operating activities was $573.2 million compared with $127.1 million for the first six months of 2015.
During the first six months ended June 30, 2016, the Corporation invested $210.6 million of capital into its business. Full-year capital spending is expected to approximate $350 million.
In the first quarter of 2016, the Corporation acquired the outstanding stock of Rocky Mountain Materials and Asphalt, Inc., and Rocky Mountain Premix Inc. The acquisition included four aggregates plants, two asphalt plants and two ready mixed concrete operations, and provides more than 500 million tons of mineral reserves and expands the Corporation’s presence along the Front Range of the Rocky Mountains, home to 80% of Colorado’s population.
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 first six months, the Corporation repurchased 1,244,000 shares of common stock for $190 million. At June 30, 2016, 15,471,000 shares of common stock were remaining under the Corporation’s repurchase authorization.
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
Page 50 of 61
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 accordance with the amended Credit Agreement, the Corporation adjusted consolidated EBITDA to add back 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.
At June 30, 2016, the Corporation’s ratio of consolidated debt to consolidated EBITDA, as defined, for the trailing-twelve months EBITDA was 1.98 times and was calculated as follows:
July 1, 2015 to
Earnings from continuing operations attributable to Martin Marietta
367,774
78,197
Income tax expense
159,778
266,567
18,867
Acquisition-related expenses, net, related to the TXI acquisition
19,119
Deduct:
Interest income
(527
Consolidated EBITDA, as defined
909,775
Consolidated debt, including debt for which the Corporation is a co-borrower,
at June 30, 2016
1,801,954
Consolidated debt to consolidated EBITDA, as defined, at June 30, 2016
for the trailing-twelve months EBITDA
1.98x
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. Outstanding amounts on the Trade Receivable Facility have been classified as a current liability on the Corporation’s consolidated balance sheet. Management intends to renew the Trade Receivable Facility beyond September 30, 2016.
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
Page 51 of 61
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, allow for payment of dividends for the foreseeable future and enable the buyback of shares through the share repurchase program. At June 30, 2016, the Corporation had $377 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 Floating Rate Notes have been classified as a noncurrent liability as the Corporation has the intent and ability to refinance on a long-term basis before or at its maturity of June 30, 2017.
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 and Trade Receivable Facility at June 30, 2016. 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.
TRENDS AND RISKS
The Aggregates business, both production and demand, and the demand in the Cement business are 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.
The Corporation outlined the risks associated with its business in its Annual Report on Form 10-K for the year ended December 31, 2015. Management continues to evaluate its exposure to all operating risks on an ongoing basis.
OUTLOOK
The Corporation is encouraged by positive trends in the markets it serves and its ability to execute its strategic business plans. Notably:
For the public sector, continued modest growth is expected in 2016 as new monies begin to flow into the system, particularly in the second half of the year. Additionally, state initiatives to finance infrastructure projects, including support from the Transportation Infrastructure Finance and Innovation Act (“TIFIA”), are expected to grow and continue to play an expanded role in public-sector activity.
Nonresidential construction is expected to increase in both the heavy industrial and commercial sectors. The Dodge Momentum Index is near its highest level since 2009 and signals continued growth. Additionally,
Page 52 of 61
energy-related economic activity, including follow-on public and private construction activities in its primary markets, will be mixed with overall strength in large downstream construction projects, providing a counterbalance to declines in shale exploration-related volumes.
Residential construction is expected to continue to experience good growth metrics, driven by positive employment gains, historically low levels of construction activity over the previous several years, low mortgage rates, significant lot absorption, and higher multi-family rental rates.
RISKS TO OUTLOOK
The 2016 outlook includes management’s assessment of the likelihood of certain risks and uncertainties that will affect performance, including but 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; the volatility in the commencement of 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 further decline in energy-related construction 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 sustained reduction in capital investment by the railroads; an increase in the cost of compliance with governmental laws, rules and regulations; and unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to its cement production facilities. 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 essentially runs at 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, 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 fluctuation in the price of coal affects costs. The Magnesia Specialties business is sensitive to changes in domestic steel capacity utilization as well as the absolute price and fluctuation in the cost of natural gas.
Transportation in the Corporation’s long-haul network, particularly the supply of rail cars and locomotive power and condition of rail infrastructure to move trains, affects the Corporation’s efficient transportation of aggregate into certain markets, most notably Texas, Colorado, Florida and the Gulf Coast. In addition, availability of rail cars and locomotives affects the Corporation’s movement of essential dolomitic lime for magnesia chemicals, to both the Corporation’s plant
Page 53 of 61
in Manistee, Michigan, and customers. The availability of trucks, drivers and railcars to transport the Corporation’s product, 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 resulting from 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.
OTHER MATTERS
If you are interested in Martin Marietta Materials, Inc. 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 management’s 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 Form 10-Q include 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 being subject to significant changes in supply, demand and price; the termination, capping and/or reduction or suspension 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 further slowdown in energy-related construction 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
Page 54 of 61
conveyor belts, and with respect to the Magnesia Specialties business, 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 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, 2015, 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) 510-4776
Website address: www.martinmarietta.com
Information included on the Corporation’s website is not incorporated into, or otherwise create a part of, this report.
Page 55 of 61
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 and cement products, particularly in the infrastructure construction market, is affected by federal and state budget and deficit issues. Further, delays or cancellations of 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 have maintained the federal funds rate near zero percent during the six months ended June 30, 2016, unchanged since 2008. The residential construction market accounted for 17% of the Corporation’s aggregates product line shipments in 2015.
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, 2016, 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 $433 million, which was the collective outstanding balance at June 30, 2016, would increase interest expense by $4.3 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, 2015.
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, which expires December 31, 2016, for approximately 40% of its diesel fuel to reduce its diesel fuel price risk. The Magnesia Specialties business has fixed price agreements covering half of its 2016 coal requirements and the cement business has fixed pricing agreements on 100% of its 2016 coal requirements. A hypothetical 10% change in the Corporation’s energy prices in 2016 as compared with 2015, assuming constant volumes, would change 2016 energy expense by $25.7 million. However, the impact would be partially offset by the change in the amount capitalized into inventory standards.
Page 56 of 61
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 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 2016 of $300 million to $320 million, a hypothetical 10% change in sales price would impact net sales by $30 million to $32 million.
Item 4. Controls and Procedures
As of June 30, 2016, 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, 2016. There were no changes in the Corporation’s internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Page 57 of 61
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, 2015.
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, 2015.
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, 2016 - April 30, 2016
15,686,143
May 1, 2016 - May 31, 2016
June 1, 2016 - June 30, 2016
215,184
185.89
15,470,959
Total for the period ended
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 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.
Page 58 of 61
Exhibit No.
Document
10.01
Martin Marietta Amended and Restated Stock Based Award Plan (File No. 1-12744)*
10.02
Martin Marietta Executive cash Incentive Plan (File No. 1-12744)*
31.01
Certification dated August 4, 2016 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 4, 2016 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 4, 2016 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 4, 2016 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
Page 59 of 61
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 4, 2016
By:
/s/ Anne H. Lloyd
Anne H. Lloyd
Executive Vice President and
Chief Financial Officer
Page 60 of 61
EXHIBIT INDEX
Page 61 of 61