SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
☐
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 ☑ No ☐
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,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
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 May 2, 2018
Common Stock, $0.01 par value
62,951,453
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended March 31, 2018
Page
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets – March 31, 2018, December 31, 2017 and March 31, 2017
3
Consolidated Statements of Earnings and Comprehensive Earnings – Three-Months Ended March 31, 2018 and 2017
4
Consolidated Statements of Cash Flows – Three-Months Ended March 31, 2018 and 2017
5
Consolidated Statement of Total Equity – Three-Months Ended March 31, 2018
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
38
Item 4. Controls and Procedures
39
Part II. Other Information:
Item 1. Legal Proceedings
40
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
41
Signatures
42
Page 2 of 42
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
(UNAUDITED) CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
2018
2017
(Dollars in Thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
1,422,373
1,446,364
55,418
Accounts receivable, net
466,465
487,240
479,215
Inventories, net
606,794
600,591
537,000
Other current assets
106,298
96,965
51,609
Total Current Assets
2,601,930
2,631,160
1,123,242
Property, plant and equipment
6,523,364
6,498,067
6,211,813
Allowances for depreciation, depletion and amortization
(2,940,870
)
(2,905,254
(2,744,168
Net property, plant and equipment
3,582,494
3,592,813
3,467,645
Goodwill
2,160,290
2,159,398
Operating permits, net
437,438
439,116
440,411
Other intangibles, net
61,338
67,233
67,318
Other noncurrent assets
104,560
101,899
135,777
Total Assets
8,948,050
8,992,511
7,393,791
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable
162,328
183,638
188,399
Accrued salaries, benefits and payroll taxes
23,329
44,255
22,760
Pension and postretirement benefits
12,812
13,652
8,136
Accrued insurance and other taxes
52,413
64,958
49,535
Current maturities of long-term debt and short-term
facilities
300,006
299,909
290,048
Accrued interest
39,720
19,825
23,649
Other current liabilities
60,371
67,979
49,031
Total Current Liabilities
650,979
694,216
631,558
Long-term debt
2,728,102
2,727,294
1,556,246
Pension, postretirement and postemployment benefits
248,501
244,043
252,568
Deferred income taxes, net
413,570
410,723
667,160
Other noncurrent liabilities
227,068
233,758
210,305
Total Liabilities
4,268,220
4,310,034
3,317,837
Equity:
Common stock, par value $0.01 per share
628
626
Preferred stock, par value $0.01 per share
—
Additional paid-in capital
3,381,280
3,368,007
3,349,813
Accumulated other comprehensive loss
(127,485
(129,104
(128,425
Retained earnings
1,422,207
1,440,069
851,354
Total Shareholders' Equity
4,676,630
4,679,600
4,073,368
Noncontrolling interests
3,200
2,877
2,586
Total Equity
4,679,830
4,682,477
4,075,954
Total Liabilities and Equity
See accompanying notes to the consolidated financial statements.
Page 3 of 42
(UNAUDITED) CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
Three-Months Ended
(In Thousands, Except Per Share Data)
Products and services revenues
753,305
792,316
Freight revenues
48,699
51,543
Total Revenues
802,004
843,859
Cost of revenues - products and services
641,620
644,617
Cost of revenues - freight
49,992
52,175
Total Cost of Revenues
691,612
696,792
Gross Profit
110,392
147,067
Selling, general & administrative expenses
70,121
69,535
Acquisition-related expenses
711
22
Other operating expense, net
479
360
Earnings from Operations
39,081
77,150
Interest expense
35,087
20,851
Other nonoperating income, net
(8,503
(536
Earnings before income tax expense
12,497
56,835
Income tax expense
2,457
14,528
Consolidated net earnings
10,040
42,307
Less: Net earnings (loss) attributable to noncontrolling
interests
17
(27
Net Earnings Attributable to Martin Marietta Materials, Inc.
10,023
42,334
Consolidated Comprehensive Earnings: (See Note 1)
Earnings attributable to Martin Marietta Materials, Inc.
11,642
44,596
Earnings (Loss) attributable to noncontrolling interests
(26
11,659
44,570
Per Common Share:
Basic attributable to common shareholders
0.16
0.67
Diluted attributable to common shareholders
Weighted-Average Common Shares Outstanding:
Basic
62,957
63,024
Diluted
63,222
63,319
Cash Dividends Per Common Share
0.44
0.42
Page 4 of 42
(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile consolidated net earnings to net cash
provided by operating activities:
Depreciation, depletion and amortization
76,821
70,376
Stock-based compensation expense
9,760
10,275
(Gain) Loss on divestitures and sales of assets
(951
73
Deferred income taxes
2,029
2,827
Other items, net
(2,269
(179
Changes in operating assets and liabilities, net of effects of acquisitions
and divestitures:
20,951
(21,305
(8,873
(15,375
7,925
8,536
Other assets and liabilities, net
(10,421
(23,670
Net Cash Provided by Operating Activities
105,012
73,865
Cash Flows from Investing Activities:
Additions to property, plant and equipment
(96,259
(102,095
Proceeds from divestitures and sales of assets
2,528
539
Payment of railcar construction advances
(8,430
(37,011
Reimbursement of railcar construction advances
8,430
37,011
Investments in life insurance contracts, net
99
181
Net Cash Used for Investing Activities
(93,632
(101,375
Cash Flows from Financing Activities:
Borrowings of debt
205,000
Repayments of debt
(13
(45,012
Payments on capital lease obligations
(829
(761
Debt issuance costs
(3,194
Contributions by owners of noncontrolling interest
129
Dividends paid
(27,885
(26,560
Proceeds from exercise of stock options
2,801
3,917
Shares withheld for employees' income tax obligations
(6,380
(3,695
Repurchases of common stock
(99,999
Net Cash (Used for) Provided by Financing Activities
(35,371
32,890
Net (Decrease) Increase in Cash and Cash Equivalents
(23,991
5,380
Cash and Cash Equivalents, beginning of period
50,038
Cash and Cash Equivalents, end of period
Page 5 of 42
(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, 2016
63,176
630
3,334,461
(130,687
935,574
4,139,978
2,612
4,142,590
Other comprehensive earnings,
net of tax
2,262
1
2,263
Dividends declared
Issuances of common stock for stock
award plans
60
5,077
5,078
(458
(5
(99,994
Balance at March 31, 2017
62,778
Balance at December 31, 2017
62,873
1,619
75
9,893
Shares withheld for employees' income
tax obligations
Contributions from owners of
noncontrolling interest
306
Balance at March 31, 2018
62,948
Page 6 of 42
(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Significant Accounting Policies
Organization
Martin Marietta Materials, Inc. (the Company or Martin Marietta) is a natural resource-based building materials company. The Company supplies aggregates (crushed stone, sand and gravel) through its network of 282 quarries, mines and distribution yards to its customers in 30 states, Canada, the Bahamas and the Caribbean Islands. In the western United States, Martin Marietta also provides cement and downstream products, namely, ready mixed concrete, asphalt and paving services, in vertically-integrated structured markets where the Company has a leading aggregates position. The Company’s heavy-side building materials are used in infrastructure, nonresidential and residential construction projects. Aggregates are also used in agricultural, utility and environmental applications and as railroad ballast. The aggregates, cement, ready mixed concrete and asphalt and paving product lines are reported collectively as the “Building Materials” business.
The Company’s Building Materials business includes three reportable segments: the Mid-America Group, the Southeast Group and the West Group.
BUILDING MATERIALS 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
Product Lines
Aggregates
Aggregates, Cement, Ready Mixed Concrete, Asphalt and Paving
The Company has a Magnesia Specialties business with manufacturing facilities in Manistee, Michigan, and Woodville, Ohio. The Magnesia Specialties business produces magnesia-based chemicals products used in industrial, agricultural and environmental applications, and dolomitic lime sold primarily to customers in the steel and mining industries.
Page 7 of 42
(Continued)
Significant Accounting Policies (continued)
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information and with the instructions to the Quarterly Report on Form 10-Q and in Article 10 of Regulation S-X. Other than the required adoption of two new accounting pronouncements described below, the Company has continued to follow the accounting policies set forth in the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. 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 three-months ended March 31, 2018 are not indicative of the results expected for other interim periods or the full year. The consolidated balance sheet at December 31, 2017 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
New Accounting Pronouncements
Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which changes the evaluation and accounting for revenue recognition under contracts with customers and enhances financial statement disclosures. The Company implemented ASU 2014-09 using the modified retrospective approach. The adoption resulted in insignificant changes to the Company’s policies in reporting revenues and had an immaterial impact on the Company’s financial position and results of operations but required new disclosures (see Note 2).
Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15), which provides clarification or additional guidance on certain transactions and its classification on the statement of cash flows on a retrospective basis. Notably, ASU 2016-15 states settlement proceeds from corporate-owned life insurance policies should be classified as investing activities and premiums paid may be presented as either investing or operating activities or a combination of both. At March 31, 2017, the Company reclassified $181,000 from operating activities to investing activities.
Page 8 of 42
Pending Accounting Pronouncement
Lease Standard
In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard, Accounting Codification Standard 842 – 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. The FASB recently proposed to eliminate the need for retrospective presentation of comparative financial statements and to allow the use of certain practical expedients in the adoption of the new standard. The Company is currently assessing the impact of the new standard on the Company’s financial statements. The Company believes the new standard will have a material effect on its balance sheet but has not quantified the impact at this time.
Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss
Consolidated comprehensive earnings/loss and accumulated other comprehensive loss 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 Company’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 earnings, net of tax
Comprehensive earnings attributable to Martin Marietta
Materials, Inc.
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 (loss) attributable to noncontrolling interests
Comprehensive earnings (loss) attributable to
noncontrolling interests
Page 9 of 42
Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)
Changes in accumulated other comprehensive earnings (loss), net of tax, are as follows:
Unamortized
Value of
Terminated
Accumulated
Pension and
Forward Starting
Other
Postretirement
Foreign
Interest Rate
Comprehensive
Benefit Plans
Currency
Swap
Loss
Three-Months Ended March 31, 2018
Balance at beginning of period
(128,802
(22
(280
Other comprehensive loss before
reclassifications, net of tax
(587
Amounts reclassified from accumulated
other comprehensive earnings, net of tax
1,996
210
2,206
Other comprehensive earnings (loss), net of tax
Balance at end of period
(126,806
(609
(70
Three-Months Ended March 31, 2017
(128,373
(1,162
(1,152
Other comprehensive earnings before
137
1,910
215
2,125
(126,463
(1,025
(937
Page 10 of 42
Changes in net noncurrent deferred tax assets recorded in accumulated other comprehensive loss are as follows:
Net Noncurrent
Deferred Tax
Assets
79,938
178
80,116
Tax effect of other comprehensive earnings
(658
(137
(795
79,280
79,321
82,044
749
82,793
(1,185
(141
(1,326
80,859
608
81,467
Page 11 of 42
Reclassifications out of accumulated other comprehensive loss are as follows:
Affected line items in the consolidated
statements of earnings and
comprehensive earnings
Pension and postretirement benefit plans
Amortization of:
Prior service credit
(585
(357
Actuarial loss
3,239
3,452
2,654
3,095
Tax benefit
Unamortized value of terminated
forward starting interest rate swap
Additional interest expense
347
356
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 Company’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 Company’s Board of Directors under certain stock-based compensation arrangements if the conversion is dilutive. For the three-months ended March 31, 2018 and 2017, the diluted per-share computations reflect the number of common shares outstanding to include the number of additional shares that would have been outstanding if the potentially dilutive common shares had been issued.
Page 12 of 42
The following table reconciles the numerator and denominator for basic and diluted earnings per common share:
(In Thousands)
Less: Distributed and undistributed earnings
attributable to unvested awards
63
153
Basic and diluted net earnings available to common shareholders
attributable to Martin Marietta Materials, Inc.
9,960
42,181
Basic weighted-average common shares outstanding
Effect of dilutive employee and director awards
265
295
Diluted weighted-average common shares outstanding
2.
Revenue Recognition
Total revenues include sales of products and services to customers, net of any discounts or allowances, and freight revenues. Product revenues are recognized when control of the promised good is transferred to the customer, typically when finished products are shipped. Intersegment and interproduct revenues are eliminated in consolidation. Service revenues are derived from the paving business and recognized using the percentage-of-completion method under the revenue-cost approach. Under the revenue-cost approach, recognized contract revenue is determined by multiplying the total estimated contract revenue by the estimated percentage of completion. Contract costs are recognized as incurred. The percentage of completion is determined on a contract-by-contract basis using project costs incurred to date as a percentage of total estimated project costs. The Company believes the revenue-cost approach is appropriate as the use of asphalt in a paving contract is relatively consistent with the performance of the paving service. Paving contracts, notably with governmental entities, may contain performance bonuses based on quality specifications. Given the uncertainty of meeting the criteria until the performance obligation is completed, performance bonuses are recognized as revenues when and if determined to be achieved. Performance bonuses are not material to the Company’s consolidated results of operations for the three-months ended March 31, 2018 and 2017. Freight revenues reflect delivery arranged by the Company using a third party on behalf of the customer and are recognized consistent with the timing of the product revenues.
Performance Obligations. Performance obligations are contractual promises to transfer or provide a distinct good or service for a stated price. The Company’s product sales agreements are single-performance obligations that are satisfied at a point in time. Performance obligations within paving service agreements are satisfied over time, primarily ranging from one day to 20 months. For product revenues and freight revenues, customer payment terms are generally 30 days from invoice date. Customer payments for the paving operations are based on a contractual billing schedule and are due 30 days from invoice date.
Page 13 of 42
2.Revenue Recognition (continued)
Future revenues from unsatisfied performance obligations at March 31, 2018 and 2017 were $88,054,000 and $145,921,000, respectively, where the remaining periods to complete these obligations ranged from one day to 20 months and one day to 11 months, respectively.
Sales Taxes. The Company is deemed to be an agent when collecting sales taxes from customers. Sales taxes collected are initially recorded as liabilities until remitted to taxing authorities and are not reflected in the consolidated statements of earnings as revenues and expenses.
Revenue by Category. The following table presents the Company’s total revenues by category for each reportable segment:
March 31, 2018
Products and Services
Freight
Total
167,890
10,891
178,781
77,563
2,676
80,239
442,983
30,739
473,722
Total Building Materials Business
688,436
44,306
732,742
Magnesia Specialties
64,869
4,393
69,262
March 31, 2017
177,407
11,612
189,019
86,726
3,556
90,282
463,881
32,100
495,981
728,014
47,268
775,282
64,302
4,275
68,577
Service revenues, which includes paving operations located in Colorado, were $11,143,000 and $16,000,000 for the three-months ended March 31, 2018 and 2017, respectively.
Page 14 of 42
Contract Balances. Costs in excess of billings relate to the conditional right to consideration for completed contractual performance and are contract assets on the consolidated balance sheets. Costs in excess of billings are reclassified to accounts receivable when the right to consideration becomes unconditional. Billings in excess of costs relate to customers invoiced in advance of contractual performance and are contract liabilities on the consolidated balance sheets. The following table presents information about the Company’s contract balances:
December 31, 2017
Costs in excess of billings
1,310
1,815
Billings in excess of costs
6,136
7,204
5,953
Revenue recognized from beginning balance of contract liabilities for the three-months ended March 31, 2018 and 2017 were $4,199,000 and $3,835,000, respectively.
Retainage represents amounts that have been billed to customers but payment withheld until final acceptance of the performance obligation by the customer. Included on the Company’s consolidated balance sheets, retainage was $4,824,000, $9,029,000 and $5,759,000 at March 31, 2018, December 31, 2017 and March 31, 2017, respectively.
Warranties. The Company’s construction contracts contain warranty provisions generally for a period of nine months to one year after project completion and cover materials, design or workmanship defects. Historically, the Company has not experienced material costs for warranties. The ready mixed concrete product line carries longer warranty periods, for which the Company has accrued an estimate of warranty cost based on experience with the type of work and any known risks relative to the project. In total, warranty costs were not material to the Company’s consolidated results of operations for the three-months ended March 31, 2018 and 2017.
Policy Elections. When the Company arranges third party freight to deliver products to customers, the Company has elected the delivery to be a fulfillment activity rather than a separate performance obligation. Further, the Company acts as a principal in the delivery arrangements and the related revenues and costs are included in the consolidated statements of earnings.
3.
Inventories, Net
Finished products
563,315
552,999
495,793
Products in process and raw materials
62,857
62,761
61,815
Supplies and expendable parts
128,754
128,792
120,054
754,926
744,552
677,662
Less: Allowances
(148,132
(143,961
(140,662
Page 15 of 42
4.
Long-Term Debt
6.60% Senior Notes, due 2018
299,967
299,871
299,579
7% Debentures, due 2025
124,203
124,180
124,112
6.25% Senior Notes, due 2037
228,048
228,033
227,989
4.25% Senior Notes, due 2024
395,959
395,814
395,392
4.250% Senior Notes, due 2047
591,416
591,688
3.500% Senior Notes, due 2027
494,402
494,352
3.450% Senior Notes, due 2027
296,705
296,628
Floating Rate Senior Notes, due 2019, interest rate of 2.70%
and 2.13% at March 31, 2018 and December 31, 2017,
respectively
298,704
298,102
Floating Rate Notes, due 2020, interest rate of 2.55% and 2.10%
at March 31, 2018 and December 31, 2017, respectively
298,408
298,227
Floating Rate Notes, due 2017, interest rate of 2.10% at
298,878
Revolving Facility, due 2022, interest rate of 1.89% at March 31,
210,000
Trade Receivable Facility, interest rate of 1.51% at March 31,
290,000
Other notes
296
308
344
Total debt
3,028,108
3,027,203
1,846,294
Less: Current maturities of long-term debt and short-term
(300,006
(299,909
(290,048
The Company, through a wholly-owned special-purpose subsidiary, has a $300,000,000 trade receivable securitization facility (the Trade Receivable Facility) that is scheduled to mature September 26, 2018. The Trade Receivable Facility, with SunTrust Bank, Regions Bank, PNC Bank, N.A., The Bank of Tokyo-Mitsubishi UFJ, LTD., New York Branch, 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 $349,283,000, $338,784,000 and $362,693,000 at March 31, 2018, December 31, 2017 and March 31, 2017, respectively. These receivables are originated by the Company and then sold to the wholly-owned special-purpose subsidiary by the Company. The Company 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 London Inter-bank Offered Rate, or LIBOR, plus 0.725%, subject to change in the event that this rate no longer reflects the lender’s cost of lending. The Trade Receivable Facility contains a cross-default provision to the Company’s other debt agreements.
Page 16 of 42
Long-Term Debt (continued)
The Company has a $700,000,000 five-year senior unsecured revolving facility (the Revolving Facility) with JPMorgan Chase Bank, N.A., as Administrative Agent, Branch Banking and Trust Company (BB&T), Deutsche Bank Securities, Inc., SunTrust Bank and Wells Fargo Bank, N.A., as Co-Syndication Agents, and the lenders party thereto. The Revolving Facility requires the Company’s ratio of consolidated debt-to-consolidated earnings before interest, taxes, depreciation and amortization (EBITDA), as defined by the Revolving Facility, for the trailing-twelve months (the Ratio) to not exceed 3.50x as of the end of any fiscal quarter, provided that the Company may exclude from the Ratio debt incurred in connection with certain acquisitions during such quarter or the three preceding quarters so long as 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 Company is a co-borrower, may be reduced by the Company’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. The Company was in compliance with this Ratio at March 31, 2018.
Available borrowings under the Revolving Facility are reduced by any outstanding letters of credit issued by the Company under the Revolving Facility. The Company had $2,301,000 of outstanding letters of credit issued under the Revolving Facility at March 31, 2018 and December 31, 2017 and $2,507,000 at March 31, 2017.
Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. For the three-months ended March 31, 2018 and 2017, the Company recognized $347,000 and $356,000, respectively, as additional interest expense. The amortization of the terminated value of the forward starting interest rate swap agreements will be complete with the maturity of the related debt in April 2018.
5.
Financial Instruments
The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, bank overdrafts, 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 Company’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.
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 not publicly traded. Management estimates that the fair value of notes receivable approximates the carrying amount due to the short-term nature of the receivables.
Bank overdrafts, when applicable, represent amounts to be funded to financial institutions for checks that have cleared the bank. The estimated fair value of bank overdrafts 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.
Page 17 of 42
Financial Instruments (continued)
The carrying values and fair values of the Company’s long-term debt were $3,028,108,000 and $3,037,069,000, respectively, at March 31, 2018; $3,027,203,000 and $3,144,902,000, respectively, at December 31, 2017; and $1,846,294,000 and $1,937,310,000, respectively, at March 31, 2017. 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.
6.
Income Taxes
The Company’s effective income tax rate for the three-months ended March 31, 2018 was 19.7%. The effective income tax rate reflects the effect of federal and state income taxes and the impact of differences in book and tax accounting arising from the net permanent benefits associated with the statutory depletion deduction for mineral reserves. For the three-months ended March 31, 2018, the effective income tax rate also reflects two discrete events: a favorable impact of $1,325,000, or 1,060 basis points, related to the vesting and exercise of stock-based compensation awards and an unfavorable impact of $1,097,000, or 880 basis points, related to an estimate of the transition tax on undistributed foreign earnings, a provision of the Tax Cuts and Jobs Act of 2017 (2017 Tax Act). The enactment of the 2017 Tax Act reduced the federal statutory corporate income tax rate from 35% to 21% beginning in 2018. Therefore, the effective income tax rate of 25.6% for the three-months ended March 31, 2017 is not comparable.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118) to address situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. As such, due to the timing of the enactment date and the Company’s reporting periods, the Company recognized provisional amounts for the remeasurement of deferred tax assets and liabilities as of December 31, 2017 and transition tax on undistributed foreign earnings as of March 31, 2018, and continues to analyze and assess other provisions of the 2017 Tax Act. In accordance with SAB 118, the Company may record additional provisional amounts during the measurement period not to extend beyond one year of the enactment date and expects the accounting to be complete when the Company’s 2017 U.S. corporate income tax return is filed in 2018. Any future measurement period adjustments will be recognized as income tax expense or benefit in 2018.
The Company records interest accrued in relation to unrecognized tax benefits as income tax expense. Penalties, if incurred, are recorded as operating expenses in the consolidated statements of earnings and comprehensive earnings.
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7.
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 March 31,
Pension
Postretirement Benefits
Service cost
8,148
6,572
Interest cost
8,361
9,008
125
185
Expected return on assets
(10,629
(9,936
Prior service cost (credit)
26
78
(611
(435
Actuarial loss (gain)
3,296
3,524
(57
(72
Net periodic benefit cost (credit)
9,202
9,246
(521
(298
The service cost component of net periodic benefit cost (credit) is included in cost of revenues – products and services and selling, general and administrative expenses while all other components are included in other nonoperating income, net, in the consolidated statements of earnings and comprehensive earnings.
8.
Commitments and Contingencies
Legal and Administrative Proceedings
The Company 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 Company and its subsidiaries, will have a material adverse effect on the overall results of the Company’s operations, its cash flows or its financial position.
Borrowing Arrangements with Affiliate
The Company is a co-borrower with an unconsolidated affiliate for a $15,500,000 revolving line of credit agreement with BB&T with a maturity date of March 2020. The affiliate has agreed to reimburse and indemnify the Company for any payments and expenses the Company may incur from this agreement. The Company 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 Company has a $6,000,000 interest-only loan, due December 31, 2019, outstanding from this unconsolidated affiliate as of March 31, 2018, December 31, 2017 and March 31, 2017. The interest rate is one-month LIBOR plus 1.75%.
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9.
Business Segments
The Building Materials business contains three reportable business segments: Mid-America Group, Southeast Group and West Group. The Company also has a Magnesia Specialties segment. The Company’s evaluation of performance and allocation of resources are based primarily on earnings from operations. Consolidated earnings from operations include total revenues less cost of revenues, selling, general and administrative expenses, acquisition-related expenses, other operating income and expenses, net, and exclude interest expense, other nonoperating income and expenses, net, and taxes on income. Corporate loss from operations primarily includes depreciation on capitalized interest, unallocated expenses for corporate administrative functions, acquisition-related expenses, and other nonrecurring income and expenses excluded from the Company’s evaluation of business segment performance and resource allocation. All debt and related interest expense is held at Corporate.
The following table displays selected financial data for the Company’s reportable business segments. Total revenues, as well as the consolidated statements of earnings and comprehensive earnings, exclude intersegment revenues which represent sales from one segment to another segment, which are eliminated. Prior-year information has been reclassified to conform to current year revenue presentation.
Total revenues:
Products and services revenues:
Earnings (Loss) from operations:
6,167
13,342
2,041
10,115
34,951
61,232
43,159
84,689
21,237
19,881
Corporate
(25,315
(27,420
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10.
Revenues and Gross Profit
The Building Materials business includes the aggregates, cement, ready mixed concrete and asphalt and paving product lines. All cement, ready mixed concrete and asphalt and paving product lines reside in the West Group. The following table, which is reconciled to consolidated amounts, provides total revenues and gross profit by product line.
Building Materials Business:
Products and services:
425,016
451,055
Cement
89,183
93,554
Ready mixed concrete
218,537
222,378
Asphalt and paving services
16,365
21,737
Less: interproduct revenues
(60,665
(60,710
Products and services
Magnesia Specialties:
Total Magnesia Specialties
Gross profit (loss):
53,002
78,954
23,734
30,780
15,641
19,790
(7,639
(4,740
84,738
124,784
(119
407
84,619
125,191
25,063
23,354
(1,174
(1,039
23,889
22,315
1,884
(439
Page 21 of 42
11.
Supplemental Cash Flow Information
The components of the change in other assets and liabilities, net, are as follows:
Other current and noncurrent assets
(9,032
(22,914
(13,833
(21,335
(12,545
(10,557
Accrued income taxes
7,357
3,330
Accrued pension, postretirement and postemployment benefits
6,273
6,421
Other current and noncurrent liabilities
11,359
21,385
Noncash investing and financing activities are as follows:
Noncash investing and financing activities:
Accrued liabilities for purchases of property, plant and equipment
35,639
34,666
Acquisition of assets through capital lease
192
149
Supplemental disclosures of cash flow information are as follows:
Cash paid for interest
12,458
12,216
Cash (refund of) paid for income taxes
(7,527
6,240
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12.
Subsequent Events
Debt Repayment
The Company repaid the $300,000,000 of 6.60% Senior Notes with cash on hand on April 16, 2018, the maturity date.
Facility Limit Increase
On April 17, 2018, the Company and its wholly-owned subsidiary amended its Trade Receivable Facility to increase the facility limit to $400,000,000.
Bluegrass Acquisition
On April 27, 2018, the Company successfully completed its previously announced acquisition of Bluegrass Materials Company (Bluegrass), the largest privately-held, pure-play aggregates company in the United States, for $1,625,000,000 in cash. Bluegrass’ operations include 23 active sites with more than 125 years of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Company’s existing southeastern footprint and provides a new growth platform within the southern portion of the Northeast Megaregion. The Company reached an agreement with the U.S. Department of Justice (DOJ), approved by the district court for the District of Columbia, which resolves all competition issues with respect to the acquisition. Under the terms of the agreement with the DOJ, Martin Marietta divested its Forsyth aggregates quarry north of Atlanta, Georgia, and will divest Bluegrass’ Beaver Creek aggregates quarry in western Maryland.
The acquisition reflects a stock transaction where the Company acquired 100% of the voting interest. The Company acquired accounts receivable; inventories; property, plant and equipment; intangible assets; prepaid and other assets; and assumed accounts payable; accrued liabilities and deferred tax assets and liabilities. The Company did not acquire any of Bluegrass’ cash and cash equivalents nor did it assume any of Bluegrass’ outstanding debt. The Company is in the process of determining the fair value of assets acquired and liabilities assumed, and as of May 8, 2018, the initial accounting for the business combination has not been completed.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Quarter Ended March 31, 2018
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
The Company conducts its Building Materials 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
Plant Types
Quarries, Mines and Distribution Facilities
Quarries, Mines, Plants and
Distribution Facilities
Modes of Transportation
Truck and Railcar
Truck, Railcar and Water
The Company also has a Magnesia Specialties business that produces magnesia-based chemicals products used in industrial, agricultural and environmental applications and dolomitic lime sold primarily to customers in the steel and mining industry.
CRITICAL ACCOUNTING POLICIES
The Company outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2017. There were no changes to the Company’s critical accounting policies during the three-months ended March 31, 2018.
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For the Quarter March 31, 2018
The Building Materials business is significantly affected by weather patterns and seasonal changes. Production and shipment levels for aggregates, cement, ready mixed concrete and asphalt and paving materials correlate with general construction activity levels, most of which occur 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 production, shipments and profitability in all markets served by the Company. Because of the potentially significant impact of weather on the Company’s operations, current period and year-to-date results are not indicative of expected performance for other interim periods or the full year.
Earnings before interest, income taxes, depreciation and amortization (EBITDA) is a widely accepted financial indicator of a company’s ability to service and/or incur indebtedness. EBITDA is not defined by generally accepted accounting principles and, as such, should not be construed as an alternative to net earnings, operating earnings or operating cash flow. However, the Company’s management believes that EBITDA may provide additional information with respect to the Company’s performance or ability to meet its future debt service, capital expenditures or working capital requirements. Because EBITDA excludes some, but not all, items that affect net earnings and may vary among companies, EBITDA presented by the Company may not be comparable to similarly titled measures of other companies.
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
2,438
14,522
Depreciation, depletion and amortization expense
75,714
70,007
Consolidated EBITDA
123,262
147,714
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Significant items for the quarter ended March 31, 2018 (unless noted, all comparisons are versus the prior-year quarter):
♦
Consolidated total revenues of $802.0 million compared with $843.9 million
Building Materials business products and services revenues of $688.4 million compared with $728.0 million and Magnesia Specialties product revenues of $64.9 million compared with $64.3 million
Consolidated gross profit of $110.4 compared with $147.1 million
Consolidated earnings from operations of $39.1 million compared with $77.2 million
Net earnings attributable to Martin Marietta of $10.0 million compared with $42.3 million
EBITDA of $123.3 million compared with $147.7 million
Earnings per diluted share of $0.16 compared with $0.67
The following table presents total revenues, gross profit (loss), selling, general and administrative expenses and earnings (loss) from operations data for the Company and its reportable segments for the three-months ended March 31, 2018 and 2017. In each case, the data is stated as a percentage of total revenues of the Company or the relevant segment, as the case may be. Prior-year information has been reclassified to conform to current year revenue presentation.
Amount
% of Total Revenues
Building Materials Business
100.0
Page 26 of 42
18,255
10.2
26,285
13.9
7.7
14,369
15.9
60,197
12.7
84,537
17.0
11.5
16.1
34.5
32.5
13.8
17.4
Selling, general & administrative expenses:
13,130
7.3
13,544
7.2
4,416
5.5
4,352
4.8
26,132
25,074
5.1
43,678
6.0
42,970
2,602
3.8
2,388
3.5
23,841
24,177
8.7
8.2
3.4
7.1
2.5
11.2
7.4
12.3
5.9
10.9
30.7
29.0
4.9
9.1
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Products and services revenues by product line for the Building Materials business are as follows:
Ready Mixed Concrete
Asphalt and Paving
Less: Interproduct revenues
The following tables present aggregates products volume and pricing variance data and shipments data by segment:
Volume
Pricing
Volume/Pricing variance (1)
(9.9
)%
%
(12.4
2.2
(4.7
0.8
Aggregates Product Line
(7.9
2.3
(1)
Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.
The average selling price by product line for the Building Materials business is as follows:
% Change
Aggregates (per ton)
14.04
13.73
Cement (per ton)
106.86
102.54
4.2
Ready Mixed Concrete (per cubic yard)
106.34
105.84
0.5
Asphalt (per ton)
42.81
37.97
Average selling prices improved across all product lines and geographies despite lower shipment volumes. Aggregates average selling price improvement was led by a 4.9% increase in the Mid-America Group, driven by continued price discipline and favorable product mix.
Page 28 of 42
(Tons in Thousands)
Shipments
11,473
12,738
4,405
5,028
14,142
14,845
30,020
32,611
The following table presents shipments data for the Building Materials business by product line.
Aggregates Product Line (in thousands):
Tons to external customers
27,877
30,418
Internal tons used in other product lines
2,143
2,193
Total aggregates tons
Cement (in thousands):
527
606
Internal tons used in ready mixed concrete
298
299
Total cement tons
825
905
Ready Mixed Concrete (in thousands of cubic yards)
2,009
2,056
Asphalt (in thousands):
116
Internal tons used in paving business
76
124
Total asphalt tons
277
Aggregates shipments returned to levels more in-line with historical trends and patterns. Winter weather traditionally limits the ability of outdoor contractors to perform work. First quarter aggregates shipments declined 7.9% compared with the prior-year quarter when the weather was unseasonably favorable. Additionally, the volume decline was impacted by transportation logistics issues in the first quarter 2018.
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Aggregates shipments to the infrastructure market decreased 11% as significant precipitation and cold temperatures delayed the start to the construction season. As state Departments of Transportation (DOTs) and contractors continue to address labor constraints and the construction industry benefits from further regulatory reform, management remains confident that infrastructure demand will improve from the funding provided by the Fixing America’s Surface Transportation Act (FAST Act) and numerous state and local transportation initiatives. Overall, aggregates shipments to the infrastructure market comprised 36% of first-quarter aggregates volumes, well below the Company’s most recent five-year average of 43%.
Aggregates shipments to the nonresidential market decreased 10% overall, driven by weather-impacted challenges in office and retail construction activity. Notably, the Mideast Division, and more specifically, the Ohio District, reported strong heavy industrial growth, as a large pipeline project commenced construction after obtaining long-awaited federal clearance. Continued project approvals, coupled with higher oil prices, underpins management’s expectation that the next wave of large energy-sector projects, particularly along the Gulf Coast, should notably contribute to increased aggregates consumption. The nonresidential market represented 31% of first-quarter aggregates shipments.
Aggregates shipments to the residential market, which tends to be the least weather-constrained end use, were flat for the first quarter. The outlook for residential construction remains robust across the Company’s geographic footprint, driven by favorable demographics, job growth, land availability and efficient permitting. Notably, Texas, Florida, North Carolina, Georgia, Colorado and South Carolina, key geographies for the Building Materials business, comprised six of the top ten states for growth in single-family housing unit starts for the trailing-twelve-months ended March 2018. The residential market accounted for 24% of first-quarter aggregates shipments.
Aggregates shipments to the ChemRock/Rail market declined 11% versus the prior-year quarter. Lower ballast shipments reflect weather constraints and the timing of certain purchases by East Coast railroads in the prior-year quarter. Additionally, in line with expectations, agricultural lime shipments declined 8%, driven by more typical winter precipitation. The ChemRock/Rail market accounted for the remaining 9% of first-quarter aggregates shipments.
Magnesia Specialties Business
Magnesia Specialties reported first-quarter total revenues of $69.3 million compared with $68.6 million. Gross profit was $23.9 million compared with $22.3 million and earnings from operations were $21.2 million compared with $19.9 million. Lower contract services and maintenance costs contributed to increased profitability.
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The following presents a rollforward of consolidated gross profit (dollars in thousands):
Consolidated gross profit, quarter ended March 31, 2017
Aggregates product:
(36,976
10,956
Cost increase, net
68
Change in aggregates product gross profit
(25,952
Cement products and downstream products and services
(14,094
Magnesia Specialties products
1,709
2,323
(661
Change in consolidated gross profit
(36,675
Consolidated gross profit, quarter ended March 31, 2018
Gross profit (loss) by business is as follows:
Page 31 of 42
Cement outage costs, which reflect planned and unplanned plant shutdowns, were $7.3 million for the quarter compared with $4.4 million for the prior-year quarter.
Consolidated Operating Results
Consolidated SG&A was 8.7% of total revenues compared with 8.2% in the prior-year quarter. The increase of 50 basis points reflects the negative impact of weather on total revenues. Earnings from operations for the quarter were $39.1 million compared with $77.2 million in 2017.
Among other items, other operating expense, 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 first quarter, consolidated other operating expense, net, was $0.5 million in 2018 and $0.4 million in 2017.
Other nonoperating income, net, includes interest income; pension and postretirement benefit cost, excluding service cost; foreign currency transaction gains and losses; equity in earnings or losses of nonconsolidated affiliates and other miscellaneous income. For the first quarter, nonoperating income, net, was $8.5 million and $0.5 million in 2018 and 2017, respectively. Nonoperating income, net, for 2018 reflects a $5.2 million increase in interest income and an increase in equity investment income.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the three-months ended March 31 was $105.0 million in 2018 compared with $73.9 million in 2017. 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
69,151
62,988
Depletion
3,141
3,436
Amortization
4,529
3,952
The seasonal nature of construction activity impacts the Company’s quarterly operating cash flow when compared with the full year. Full-year 2017 net cash provided by operating activities was $657.6 million, reflective of the reclassification of net proceeds and payments of corporate-owned life insurance of $0.3 million from operating activities to investing activities, compared with $73.9 million for the first three months of 2017.
During the three-months ended March 31, 2018, the Company paid $96.3 million for capital investments. Full-year capital spending is expected to approximate $450 million to $500 million.
The Company 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
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deems appropriate. The Company did not make any repurchases of common stock during the first quarter. At March 31, 2018, 14,669,000 shares of common stock were remaining under the Company’s repurchase authorization.
On April 27, 2018, the Company successfully completed its previously announced acquisition of Bluegrass Materials Company (Bluegrass), the largest privately-held, pure-play aggregates company in the United States, for $1.625 billion in cash. Bluegrass’ operations include 23 active sites with more than 125 years of strategically-located, high-quality reserves in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Company’s existing southeastern footprint and provides a new growth platform within the southern portion of the Northeast Megaregion. The Company reached an agreement with the U.S. Department of Justice (DOJ), approved by the district court for the District of Columbia, which resolves all competition issues with respect to the acquisition. Under the terms of the agreement with the DOJ, Martin Marietta divested its Forsyth aggregates quarry north of Atlanta, Georgia, and will divest Bluegrass’ Beaver Creek aggregates quarry in western Maryland. The acquisition reflects a stock transaction where the Company acquired 100% of the voting interest. The Company did not acquire any of Bluegrass’ cash and cash equivalents nor did it assume any of Bluegrass’ outstanding debt. The Company expects to realize annual synergies of approximately $15 million within twelve months of the transaction’s close date.
The $700 million Revolving Facility requires the Company’s ratio of consolidated debt-to-consolidated 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 Company may exclude from the Ratio debt incurred in connection with certain acquisitions during the quarter or the three preceding quarters so long as the Ratio calculated without such exclusion does not exceed 3.75x. Additionally, if there are no amounts outstanding under the Revolving Facility and the $300 million Trade Receivable Facility, consolidated debt, including debt for which the Company is a co-borrower, may be reduced by the Company’s unrestricted cash and cash equivalents in excess of $50 million, such reduction not to exceed $200 million, for purposes of the covenant calculation.
The Ratio is calculated as debt, including debt for which the Company is a co-borrower, divided by consolidated EBITDA, as defined by the Company’s Revolving Facility, for the trailing-twelve months. Consolidated EBITDA is generally defined as earnings before interest expense, income tax expense, and depreciation 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 items, if they occur, can affect the calculation of consolidated EBITDA.
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At March 31, 2018, the Company’s ratio of consolidated debt-to-consolidated EBITDA, as defined by the Company’s Revolving Facility, for the trailing-twelve months was 1.62 times and was calculated as follows:
April 1, 2017 to
Earnings from continuing operations attributable to Martin Marietta
681,031
105,723
299,822
29,945
9,292
Deduct:
Interest income
(5,814
Income tax benefit
(106,599
Consolidated EBITDA, as defined by the Company’s Revolving Facility
1,013,400
Consolidated net debt, as defined and including debt for which the
Company is a co-borrower, at March 31, 2018
1,643,372
Consolidated debt-to-consolidated EBITDA, as defined by the Company’s
Revolving Facility, at March 31, 2018 for the trailing-twelve
months EBITDA
1.62x
The Trade Receivable Facility contains a cross-default provision to the Company’s other debt agreements. In the event of a default on the Ratio, the lenders can terminate the Revolving Facility 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 Company’s consolidated balance sheet.
Cash on hand, along with the Company’s projected internal cash flows and availability of financing resources, including its access to debt and equity capital markets, is expected to continue to be sufficient to provide the capital resources necessary to support anticipated operating needs, cover debt service requirements, address near-term debt maturities, meet capital expenditures and discretionary investment needs, and certain acquisition opportunities that may arise and allow for payment of dividends for the foreseeable future. The Company financed the Bluegrass acquisition using proceeds from issuances of senior notes in December 2017 and borrowings under credit facilities. Any future significant strategic acquisition for cash would likely require an appropriate balance of newly-issued equity with debt in order to maintain a composite investment-grade credit rating. Subsequent to borrowings made to partially finance the Bluegrass acquisition, the Company had $502.7 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 December 5, 2021 and the Trade Receivable Facility expires on September 26, 2018.
The Company repaid the $300 million of 6.60% Senior Notes with cash on hand on April 16, 2018, the maturity date.
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On May 22, 2017, the Company issued $300 million aggregate principal amount of Floating Rate Senior Notes due in 2020 and $300 million aggregate principal amount of 3.450% Senior Notes due in 2027. On December 20, 2017, the Company issued $300 million aggregate principal amount of Floating Rate Senior Notes due 2019, $500 million aggregate principal amount of 3.500% Senior Notes due 2027 and $600 million aggregate principal amount of 4.250% Senior Notes due 2047. The Company repaid $300 million aggregate principal amount of Floating Rate Senior at its maturity in June 2017.
The Company is exposed to the credit markets, through the interest cost related to its variable-rate debt, which included borrowings under its Revolving Facility and Trade Receivable Facility and the obligations in respect of the Floating Rate Notes. The Company is currently rated at an investment-grade level by all three credit rating agencies.
TRENDS AND RISKS
The Company outlined the risks associated with its business in its Annual Report on Form 10-K for the year ended December 31, 2017. Management continues to evaluate its exposure to all operating risks on an ongoing basis.
OUTLOOK
The Company remains optimistic about the Company’s about its near-term and long-term outlook given its continued ability to successfully execute its strategic business plan and the largely positive trends in the markets it serves. The Company expects growth in all three primary construction end-use markets as the current broad-based recovery continues on a steady and extended basis.
Management reaffirms its full-year 2018 guidance for its legacy business. Specifically:
Heritage aggregates average selling price is expected to increase in a range of 3% to 5% and shipments by end-use market compared with 2017 levels are as follows:
•
Infrastructure shipments to increase in the mid-single digits.
Nonresidential shipments to increase in the low- to mid-single digits.
Residential shipments to increase in the high-single digits.
ChemRock/Rail shipments to remain stable.
OTHER MATTERS
If you are interested in Martin Marietta stock, management recommends that, at a minimum, you read the Company’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 Company’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 Company’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 Company’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 Company believes in good faith are reasonable but which may be materially different from actual results. These statements, which are forward-looking statements under the Private Securities Litigation Reform Act of 1995, give the investor the Company’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
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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.
The Company’s outlook is subject to various risks and uncertainties, and is based on assumptions that the Company believes in good faith are reasonable but which may be materially different from actual results. Factors that the Company currently believes could cause actual results to differ materially from the forward-looking statements in this Form 10-Q (including the outlook) include, but are not limited to: include, the performance of the United States economy, including shipment declines resulting from economic events beyond the Company’s control; widespread decline in aggregates pricing, including a decline in aggregates volume negatively affecting aggregates price; the history of both cement and ready mixed concrete being subject to significant changes in supply, demand and price fluctuations; 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 or local transportation funding, most particularly in Texas, North Carolina, Iowa, Colorado, Georgia and Maryland, including a significant change in the funding patterns for federal, state and/or local infrastructure projects or the United States Congress’ inability to reach agreement among themselves or with the current Administration on policy issues that impact the federal budget; 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 Company serves, volatility in the commencement of infrastructure projects and other funding pressures that impact profitability; a reduction in defense spending, and the subsequent impact on construction activity on or near military bases; a decline in the commercial component of the nonresidential construction market, notably office and retail space; a slowdown 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, particularly in Texas; a slowdown in residential construction recovery; unfavorable weather conditions, particularly Atlantic Ocean and Gulf Coast 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 Company, any of which can significantly affect production schedules, volumes and profitability; the volatility of fuel costs, particularly diesel fuel, and the impact on the cost, or the availability generally, of other consumables, namely steel, explosives, tires and conveyor belts, and with respect to the Company’s Magnesia Specialties business, natural gas; continued increases in the cost of other repair and supply parts; construction labor shortages and/or supply‐chain challenges; unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to production facilities; increasing governmental regulation, including environmental laws; transportation availability or a sustained reduction in capital investment by the railroads, notably the availability of railcars, and locomotive power and the condition of rail infrastructure to move trains to supply the Company’s Texas, Colorado, Florida, North Carolina and the Gulf Coast markets, including the movement of essential dolomitic lime for magnesia chemicals to the Company’s plant in Manistee, Michigan and its customers; increased transportation costs, including increases from higher or fluctuating passed-through energy costs or fuel surcharges, 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 Company’s materials; availability and cost of construction equipment in the United States; weakening in the steel industry markets served by the Company’s dolomitic lime products; a trade dispute with one or more nations impacting the U.S. economy, including the impact of tariffs on the steel industry; unplanned changes in costs or realignment of customers that introduce volatility to earnings, including that of the Magnesia Specialties business that is running at capacity; proper functioning of information technology and automated operating systems to manage or support operations; inflation and its effect on both production and interest costs; the concentration of customers in construction markets and the
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increased risk of potential losses on customer receivables; the impact of the level of demand in the Company’s end-use markets, production levels and management of production costs on the operating leverage and therefore profitability of the Company; the possibility that the expected synergies from acquisitions (including the acquisition of Bluegrass) will not be realized or will not be realized within the expected time period, including achieving anticipated profitability to maintain compliance with the Company’s leverage ratio debt covenant; changes in tax laws, the interpretation of such laws and/or administrative practices that would increase the Company’s tax rate; violation of the Company’s debt covenant if price and/or volumes return to previous levels of instability; downward pressure on the Company’s common stock price and its impact on goodwill impairment evaluations; reduction of the Company’s credit rating to non-investment grade resulting from strategic acquisitions; and other risk factors listed from time to time found in the Company’s filings with the SEC. Other factors besides those listed here may also adversely affect the Company, and may be material to the Company. The Company assumes no obligation to update any such forward-looking statements.
You should consider these forward-looking statements in light of risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, the Current Report on Form 8-K filed on March 16, 2018 and other periodic filings made with the SEC. All of the Company’s forward-looking statements should be considered in light of these factors. In addition, other risks and uncertainties not presently known to the Company or that the Company considers immaterial could affect the accuracy of the Company’s 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, 2017, 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 Company’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 Company’s website is not incorporated into, or otherwise create a part of, this report.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company’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 Company’s business. Demand for aggregates 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 raised the federal funds rate to 1.7% during the three-months ended March 31, 2018. The residential construction market accounted for 21% of the Company’s aggregates product line shipments in 2017.
Aside from these inherent risks from within its operations, the Company’s earnings are also affected by changes in short-term interest rates. However, rising interest rates are not necessarily predictive of weaker operating results. Historically, the Company’s profitability increased during periods of rising interest rates. In essence, the Company’s underlying business generally serves as a natural hedge to rising interest rates.
Variable-Rate Borrowing Facilities. At March 31, 2018, the Company had a $700 million Credit Agreement and a $300 million Trade Receivable Facility. The Company also has $600 million variable-rate senior notes. Borrowings under these facilities bear interest at a variable interest rate. A hypothetical 100-basis-point increase in interest rates on borrowings of $600.0 million, which was the collective outstanding balance at March 31, 2018, would increase interest expense by $6.0 million on an annual basis.
Pension Expense. The Company’s results of operations are affected by its pension expense. Assumptions that affect pension expense include the discount rate and, for the qualified defined benefit pension plan only, the expected long-term rate of return on assets. Therefore, the Company has interest rate risk associated with these factors. The impact of hypothetical changes in these assumptions on the Company’s annual pension expense is discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Energy Costs. Energy costs, including diesel fuel, natural gas, coal and liquid asphalt, represent significant production costs of the Company. The cement operations and Magnesia Specialties business have fixed price agreements covering 100% of its 2018 coal requirements. Energy prices for the three-months ended March 31, 2018 increased 20% over the prior-year quarter. A hypothetical 20% change in the Company’s energy prices for the full year 2018 as compared with 2017, assuming constant volumes, would change full year 2018 energy expense by $50.0 million.
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 Company’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 Company’s business, financial condition and results of operations. Assuming total revenues for cement for full-year 2018 of $415 million to $445 million, a hypothetical 10% change in sales price would impact net sales by $41.5 million to $44.5 million.
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As of March 31, 2018, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and the operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2018. There were no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II- OTHER INFORMATION
Item 1. Legal Proceedings.
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, 2017.
Item 1A. Risk Factors.
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, 2017.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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
January 1, 2018 - January 31, 2018
14,668,891
February 1, 2018 - February 28, 2018
March 1, 2018 - March 31, 2018
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 Company’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.
Item 4. Mine Safety Disclosures.
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K (17 CFR 229.104) is included in Exhibit 95 to this Quarterly Report on Form 10-Q.
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Item 6. Exhibits.
Exhibit No.
Document
31.01
Certification dated May 8, 2018 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 May 8, 2018 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 May 8, 2018 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 May 8, 2018 of Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
95
Mine Safety Disclosures
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: May 8, 2018
By:
/s/ James A. J. Nickolas
James A. J. Nickolas
Sr. Vice President and
Chief Financial Officer
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