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 September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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 November 1, 2018
Common Stock, $0.01 par value
62,712,073
MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
For the Quarter Ended September 30, 2018
Page
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Balance Sheets – September 30, 2018, December 31, 2017 and September 30, 2017
3
Consolidated Statements of Earnings and Comprehensive Earnings – Three- and Nine-Months Ended September 30, 2018 and 2017
4
Consolidated Statements of Cash Flows – Nine-Months Ended September 30, 2018 and 2017
5
Consolidated Statement of Total Equity – Nine-Months Ended September 30, 2018 and 2017
6
Notes to Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
51
Item 4. Controls and Procedures
52
Part II. Other Information:
Item 1. Legal Proceedings
53
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
54
Signatures
55
Page 2 of 55
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
(UNAUDITED) CONSOLIDATED BALANCE SHEETS
September 30,
December 31,
2018
2017
(Dollars in Thousands)
ASSETS
Current Assets:
Cash and cash equivalents
$
53,961
1,446,364
35,219
Accounts receivable, net
644,835
487,240
582,532
Inventories, net
651,295
600,591
576,429
Other current assets
104,717
96,965
83,809
Total Current Assets
1,454,808
2,631,160
1,277,989
Property, plant and equipment
8,183,412
6,498,067
6,375,813
Allowances for depreciation, depletion and amortization
(3,080,017
)
(2,905,254
(2,854,236
Net property, plant and equipment
5,103,395
3,592,813
3,521,577
Goodwill
2,399,434
2,160,290
2,160,060
Operating permits, net
434,177
439,116
440,846
Other intangibles, net
74,799
67,233
63,740
Other noncurrent assets
121,558
101,899
102,573
Total Assets
9,588,171
8,992,511
7,566,785
LIABILITIES AND EQUITY
Current Liabilities:
Bank overdraft
—
1,047
Accounts payable
191,381
183,638
163,597
Accrued salaries, benefits and payroll taxes
45,234
44,255
37,885
Pension and postretirement benefits
9,292
13,652
12,073
Accrued insurance and other taxes
69,513
64,958
70,323
Current maturities of long-term debt and short-term
facilities
380,041
299,909
80,038
Accrued interest
31,708
19,825
28,082
Other current liabilities
45,517
67,979
75,458
Total Current Liabilities
772,686
694,216
468,503
Long-term debt
2,829,657
2,727,294
1,642,502
Pension, postretirement and postemployment benefits
108,454
244,043
230,212
Deferred income taxes, net
692,881
410,723
662,982
Other noncurrent liabilities
242,165
233,758
228,604
Total Liabilities
4,645,843
4,310,034
3,232,803
Equity:
Common stock, par value $0.01 per share
626
628
627
Preferred stock, par value $0.01 per share
Additional paid-in capital
3,391,133
3,368,007
3,362,744
Accumulated other comprehensive loss
(121,491
(129,104
(122,928
Retained earnings
1,669,126
1,440,069
1,090,778
Total Shareholders' Equity
4,939,394
4,679,600
4,331,221
Noncontrolling interests
2,934
2,877
2,761
Total Equity
4,942,328
4,682,477
4,333,982
Total Liabilities and Equity
See accompanying notes to the consolidated financial statements.
Page 3 of 55
(UNAUDITED) CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
Three-Months Ended
Nine-Months Ended
(In Thousands, Except Per Share Data)
Products and services revenues
1,142,218
1,022,487
3,024,300
2,811,646
Freight revenues
77,422
65,245
199,747
183,470
Total Revenues
1,219,640
1,087,732
3,224,047
2,995,116
Cost of revenues - products and services
828,110
730,459
2,282,159
2,097,272
Cost of revenues - freight
78,546
65,595
202,595
185,006
Total Cost of Revenues
906,656
796,054
2,484,754
2,282,278
Gross Profit
312,984
291,678
739,293
712,838
Selling, general & administrative expenses
68,441
57,219
209,632
195,127
Acquisition-related expenses, net
89
1,314
12,925
3,319
Other operating expenses (income), net
3,792
6,181
(26,960
(2,575
Earnings from Operations
240,662
226,964
543,696
516,967
Interest expense
35,468
23,141
103,526
68,037
Other nonoperating income, net
(4,248
(479
(19,873
(6,434
Earnings before income tax expense
209,442
204,302
460,043
455,364
Income tax expense
29,089
52,763
84,147
119,277
Consolidated net earnings
180,353
151,539
375,896
336,087
Less: Net earnings (loss) attributable to noncontrolling
interests
132
(7
275
(72
Net Earnings Attributable to Martin Marietta Materials, Inc.
180,221
151,546
375,621
336,159
Consolidated Comprehensive Earnings: (See Note 1)
Earnings attributable to Martin Marietta Materials, Inc.
184,613
154,524
383,234
343,918
Earnings (Loss) attributable to noncontrolling interests
1
276
(62
184,745
154,525
383,510
343,856
Per Common Share:
Basic attributable to common shareholders
2.86
2.40
5.95
5.33
Diluted attributable to common shareholders
2.85
2.39
5.93
5.30
Weighted-Average Common Shares Outstanding:
Basic
62,932
62,896
62,970
62,940
Diluted
63,167
63,158
63,224
63,218
Cash Dividends Per Common Share
0.48
0.44
1.36
1.28
Page 4 of 55
(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
253,200
221,418
Stock-based compensation expense
23,084
23,698
Gain on divestitures and sales of assets
(35,167
(17,970
Deferred income taxes
68,833
6,543
Other items, net
(2,107
(9,894
Changes in operating assets and liabilities, net of effects of acquisitions
and divestitures:
(132,176
(124,622
(8,015
(54,804
42,995
3,182
Other assets and liabilities, net
(145,005
34,484
Net Cash Provided by Operating Activities
441,538
418,122
Cash Flows from Investing Activities:
Additions to property, plant and equipment
(262,155
(308,745
Acquisitions, net
(1,640,698
(7,200
Proceeds from divestitures and sales of assets
63,460
33,138
Payment of railcar construction advances
(56,033
(42,954
Reimbursement of railcar construction advances
56,033
40,930
Investments in life insurance contracts, net
771
Net Cash Used for Investing Activities
(1,838,622
(284,555
Cash Flows from Financing Activities:
Borrowings of debt
875,000
1,011,244
Repayments of debt
(695,039
(975,035
Payments of deferred acquisition consideration
(6,707
-
Payments on capital lease obligations
(2,589
(2,708
Debt issuance costs
(3,194
(1,989
Change in bank overdraft
Contributions by owners of noncontrolling interest
211
Dividends paid
(86,190
(80,961
Proceeds from exercise of stock options
6,993
10,017
Shares withheld for employees' income tax obligations
(10,416
(10,213
Purchase of remaining interest in existing joint venture
(12,800
Repurchases of common stock
(60,377
(99,999
Net Cash Provided by (Used for) Financing Activities
4,681
(148,386
Net Decrease in Cash and Cash Equivalents
(1,392,403
(14,819
Cash and Cash Equivalents, beginning of period
50,038
Cash and Cash Equivalents, end of period
Page 5 of 55
(UNAUDITED) CONSOLIDATED STATEMENTS 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
7,759
10
7,769
Dividends declared
Issuances of common stock for stock
award plans
141
2
14,798
14,800
Shares withheld for employees' income
tax obligations
(458
(5
(99,994
Contributions by owners of
noncontrolling interest
Balance at September 30, 2017
62,859
Balance at December 31, 2017
62,873
7,613
7,614
144
14,038
14,039
(305
(3
(60,374
Noncontrolling interest acquired in
business combination
9,001
Purchase of remaining interest in existing
joint venture
(3,580
(9,220
Balance at September 30, 2018
62,712
Page 6 of 55
(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 more than 300 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, Pennsylvania, 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 55
(Continued)
Significant Accounting Policies (continued)
Basis of Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (U.S. 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- and nine-months ended September 30, 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 U.S. 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 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. The adoption had an immaterial impact on the Company’s statement of cash flows.
Page 8 of 55
Pending Accounting Pronouncement
Lease Standard
In February 2016, the Financial Accounting Standards Board (FASB) issued a new accounting standard, Accounting Standards Codification 842 – Leases (ASC 842), 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 as right-to-use assets and lease liabilities on the balance sheet and provides guidance on the recognition of lease expense and income. Effective January 1, 2019, with early adoption permitted, ASC 842 requires the modified retrospective transition approach, applying the new standard to all leases existing at the date of initial application. An entity may use either 1) its effective date or 2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company will adopt the new standard effective January 1, 2019 and will use the effective date as the date of initial application. As such, financial information will not be updated and disclosures required under ASC 842 will not be provided for dates and periods prior to January 1, 2019.
The new standard provides a number of practical expedients for transition and policy elections for ongoing accounting. The Company expects to elect the “package of practical expedients”, which permits the Company to not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company plans to elect the practical expedients pertaining to the use of hindsight and to land easements. The standard provides policy election options for recognition exemption for short-term leases and separation of lease and non-lease components. The Company will elect the short-term lease recognition exemption and expects to elect not to separate lease and non-lease components for all underlying asset classes with the exceptions of railcars and fleet leases.
Although the Company has not determined the full impact of ASC 842, the Company expects the adoption of ASC 842 to have a material impact on its financial statements, specifically right-to-use assets and lease liabilities on the balance sheet and note disclosures pertaining to leasing activities.
Page 9 of 55
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
4,392
2,978
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
8
Comprehensive earnings (loss) attributable to
noncontrolling interests
Page 10 of 55
Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)
Changes in accumulated other comprehensive 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 September 30, 2018
Balance at beginning of period
(124,798
(1,085
(125,883
Other comprehensive earnings before
reclassifications, net of tax
365
Amounts reclassified from accumulated
other comprehensive loss, net of tax
4,027
Balance at end of period
(120,771
(720
Three-Months Ended September 30, 2017
(124,553
(636
(717
(125,906
838
1,918
222
2,140
(122,635
202
(495
Page 11 of 55
Nine-Months Ended September 30, 2018
(128,802
(22
(280
Other comprehensive loss before
(698
8,031
280
8,311
Other comprehensive earnings (loss), net of tax
Nine-Months Ended September 30, 2017
(128,373
(1,162
(1,152
1,364
5,738
657
6,395
Page 12 of 55
Changes in net noncurrent deferred tax assets recorded in accumulated other comprehensive loss are as follows:
Net Noncurrent
Deferred Tax
Assets
78,619
Tax effect of other comprehensive earnings
(1,326
77,293
79,675
464
80,139
(1,193
(147
(1,340
78,482
317
78,799
79,938
178
80,116
(2,645
(178
(2,823
82,044
749
82,793
(3,562
(432
(3,994
Page 13 of 55
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 expense
2,692
Amortization of:
Prior service credit
(492
(402
(1,479
(1,070
Actuarial loss
3,153
3,513
9,463
10,370
5,353
3,111
10,676
9,300
Tax benefit
Unamortized value of terminated
forward starting interest rate swap
Additional interest expense
369
458
1,089
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- and nine-months ended September 30, 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 14 of 55
The following table reconciles the numerator and denominator for basic and diluted earnings per common share:
(In Thousands)
Net earnings attributable to Martin Marietta
Less: Distributed and undistributed earnings
attributable to unvested awards
271
399
672
1,000
Basic and diluted net earnings available to common
shareholders attributable to Martin Marietta
179,950
151,147
374,949
335,159
Basic weighted-average common shares outstanding
Effect of dilutive employee and director awards
235
262
254
278
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- and nine-months ended September 30, 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.
Page 15 of 55
Revenue Recognition (continued)
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.
Future revenues from unsatisfied performance obligations at September 30, 2018 and 2017 were $111,721,000 and $107,953,000, respectively, where the remaining periods to complete these obligations ranged from one month to 27 months and one month to 21 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:
September 30, 2018
Products and Services
Freight
Total
348,429
28,576
377,005
121,661
3,886
125,547
603,763
39,802
643,565
Total Building Materials Business
1,073,853
72,264
1,146,117
Magnesia Specialties
68,365
5,158
73,523
September 30, 2017
287,085
21,387
308,472
91,427
3,416
94,843
584,086
36,426
620,512
962,598
61,229
1,023,827
59,889
4,016
63,905
Service revenues, which include paving operations located in Colorado, were $82,232,000 and $94,503,000 for the three-months ended September 30, 2018 and 2017, respectively.
Page 16 of 55
841,897
64,480
906,377
308,306
10,443
318,749
1,672,707
110,467
1,783,174
2,822,910
185,390
3,008,300
201,390
14,357
215,747
734,406
53,984
788,390
266,690
10,784
277,474
1,620,632
106,110
1,726,742
2,621,728
170,878
2,792,606
189,918
12,592
202,510
Services revenues, which include paving operations located in Colorado, were $162,944,000 and $179,553,000 for the nine-months ended September 30, 2018 and 2017, respectively.
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
5,581
1,310
8,727
Billings in excess of costs
9,111
7,204
5,981
Page 17 of 55
Revenues recognized from the beginning balance of contract liabilities for the three-months ended September 30, 2018 and 2017 were $6,203,000 and $4,439,000, respectively, and for the nine-months ended September 30, 2018 and 2017 were $6,816,000 and $8,231,000, respectively.
Retainage, which primarily relates to the paving services, 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 $8,733,000, $9,029,000 and $7,680,000 at September 30, 2018, December 31, 2017 and September 30, 2017, respectively.
Warranties. The Company’s construction contracts generally contain warranty provisions typically 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- and nine-months ended September 30, 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, as required by the accounting standard, the related revenues and costs are presented gross and are included in the consolidated statements of earnings.
3.
Business Combination
On April 27, 2018, the Company successfully completed its acquisition of Bluegrass Materials Company (Bluegrass), the largest privately-held, pure-play aggregates company in the United States. The final purchase price was $1,617,357,000, inclusive of the working capital true up. Bluegrass’ operations include 23 active sites with more than 125 years of reserves, collectively, in Georgia, South Carolina, Tennessee, Maryland, Kentucky and Pennsylvania. These operations complement the Company’s existing southeastern footprint in its Mid-America and Southeast Groups and provide new growth platforms within Maryland and Kentucky. The Company reached an agreement with the U.S. Department of Justice (DOJ), approved by the federal district court for the District of Columbia, which resolved all competition issues with respect to the acquisition. Under the terms of the agreement with the DOJ, Martin Marietta divested its heritage Forsyth aggregates quarry north of Atlanta, Georgia, and the legacy Bluegrass Beaver Creek aggregates quarry in western Maryland. In connection with the sale of its Forsyth quarry, the Company recognized a pretax gain of $14,785,000, which is included in acquisition-related expenses, net, in the consolidated statements of earnings and comprehensive earnings. There was no gain or loss on the Beaver Creek divestiture.
The Bluegrass acquisition was a stock transaction wherein the Company acquired 100% of the voting interest of the owners. The Company acquired accounts receivable; inventories; property, plant and equipment, which primarily consists of mineral reserves; intangible assets; prepaid and other assets; and assumed accounts payable; accrued liabilities and deferred tax liabilities, net. The Company did not assume any of Bluegrass’ outstanding debt.
Page 18 of 55
Business Combination (continued)
The Company has determined preliminary fair values of the assets acquired and liabilities assumed. Although initial accounting for the business combination has been recorded, these amounts are subject to change during the measurement period which extends no longer than one year from consummation date based on additional reviews, such as asset verification and completion of deferred tax estimates based on the determination of the historic tax basis in assets acquired. Specific accounts subject to ongoing purchase accounting adjustments include, but are not limited to, property, plant and equipment; goodwill; and deferred income tax liabilities. Therefore, the measurement period remains open as of September 30, 2018. The following is a summary of the estimated fair values of the assets acquired and the liabilities assumed (dollars in thousands).
Assets:
Cash
1,159
Receivables
25,479
Inventory
46,156
1,029
1,522,386
Intangible assets, other than goodwill
19,125
239,360
Total assets
1,854,694
Liabilities:
Accounts payable and accrued expenses
17,893
Deferred income tax liabilities, net
210,443
Noncontrolling interest
Total liabilities
237,337
Total consideration
1,617,357
Goodwill represents the excess purchase price over the fair values of assets acquired and liabilities assumed and reflects projected operating synergies from the transaction, including expected overhead savings. It has not yet been determined if any of the goodwill generated by the transaction will be deductible for income tax purposes.
Total revenues and earnings from operations attributable to acquired operations included in the consolidated earnings statements for the three-months ended September 30, 2018 were $68,656,000 and $11,531,000, respectively, and for the nine-months ended September 30, 2018 were $115,007,000 and $18,276,000, respectively.
Acquisition-related expenses were $89,000 and $27,710,000 for the three- and nine-months ended September 30, 2018, respectively.
Page 19 of 55
Unaudited Pro Forma Financial Information
The unaudited pro forma financial information in the table below summarizes the combined results of operations for the Company and Bluegrass as though the companies were combined as of January 1, 2017. Financial information for periods prior to the April 27, 2018 acquisition date included in the pro forma earnings does not reflect any cost savings or associated costs to achieve such savings from operating efficiencies or synergies that result from the combination. Consistent with the assumed acquisition date of January 1, 2017, the pro forma financial results for the nine-months ended September 30, 2017 include acquisition-related expenses of $27,710,000, the $14,785,000 gain on the required divestiture of assets and the one-time $19,893,000 increase in cost of sales for the sale of acquired inventory.
The pro forma financial statements do not purport to project the future financial position or operating results of the combined company. The pro forma financial information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal year 2017.
(Dollars in Thousands, except per share data)
Total revenues
1,148,787
3,279,455
3,154,563
185,051
151,986
399,113
300,458
Diluted EPS
2.93
2.41
6.31
4.75
On August 31, 2018, the Company purchased the remaining noncontrolling interest in a consolidated joint venture where the initial controlling interest was acquired as part of the Bluegrass acquisition.
4.
Goodwill and Other Intangibles
Mid-America
Southeast
West
Group
Balance at January 1, 2018
281,403
50,346
1,828,541
Acquisitions
147,333
92,738
240,071
Divestitures
(927
428,736
142,157
Page 20 of 55
Goodwill and Other Intangibles (continued)
Intangible assets subject to amortization consist of the following:
Gross
Amount
Amortization
Net
Balance
Noncompetition agreements
12,024
(11,105
919
Customer relationships
56,530
(18,325
38,205
Operating permits
458,952
(31,375
427,577
Use rights and other
19,564
(10,789
8,775
Trade names
12,800
(9,387
3,413
559,870
(80,981
478,889
Intangible assets deemed to have an indefinite life and not being amortized consist of the following:
Building Materials Business
6,600
Use rights
20,642
2,565
2,845
27,522
30,087
Intangibles acquired during the year are as follows:
Weighted-average
amortization period
Subject to amortization:
20,620
12 years
Not subject to amortization:
Water rights
1,100
N/A
21,720
Page 21 of 55
Total amortization expense for intangible assets for the nine-months ended September 30, 2018 and 2017 was $10,549,000 and $10,710,000, respectively.
The estimated amortization expense for intangible assets for the last three months of 2018 and for each of the next four years and thereafter is as follows:
October - December 2018
3,398
2019
13,429
2020
13,393
2021
12,703
2022
11,232
Thereafter
424,734
5.
Inventories, Net
Finished products
610,663
552,999
526,404
Products in process and raw materials
61,891
62,761
62,449
Supplies and expendable parts
139,409
128,792
126,918
811,963
744,552
715,771
Less: Allowances
(160,668
(143,961
(139,342
Page 22 of 55
6.
Long-Term Debt
6.60% Senior Notes, due 2018
299,871
299,774
7% Debentures, due 2025
124,249
124,180
124,157
6.25% Senior Notes, due 2037
228,079
228,033
228,018
4.25% Senior Notes, due 2024
396,251
395,814
395,673
4.250% Senior Notes, due 2047
591,499
591,688
3.500% Senior Notes, due 2027
494,643
494,352
3.450% Senior Notes, due 2027
296,861
296,628
296,551
Floating Rate Senior Notes, due 2019, interest rate of 2.84%
and 2.13% at September 30, 2018 and December 31, 2017,
respectively
299,074
298,102
Floating Rate Notes, due 2020, interest rate of 2.96%, 2.10% and
1.96% at September 30, 2018, December 31, 2017 and September
30, 2017, respectively
298,773
298,227
298,046
Revolving Facility, due 2022, interest rate of 3.29% at
100,000
Trade Receivable Facility, interest rate of 2.83% and 1.96% at
September 30, 2018 and 2017, respectively
380,000
80,000
Other notes
269
308
321
Total debt
3,209,698
3,027,203
1,722,540
Less: Current maturities of long-term debt and short-term
(380,041
(299,909
(80,038
On April 17, 2018, the Company, through a wholly-owned special-purpose subsidiary, increased its trade receivable securitization facility (the Trade Receivable Facility) to $400,000,000. 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 $465,217,000, $338,784,000 and $402,754,000 at September 30, 2018, December 31, 2017 and September 30, 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. On September 25, 2018, the Company extended the maturity date of Trade Receivable Facility, which contains a cross-default provision to the Company’s other debt agreements, to September 25, 2019.
On April 16, 2018, the maturity date, the Company repaid the $300,000,000 of the 6.6% Senior Notes with cash on hand.
Page 23 of 55
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 September 30, 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 September 30, 2018 and December 31, 2017 and $1,963,000 at September 30, 2017.
Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. The amortization of the terminated value of the forward starting interest rate swap agreements was complete with the maturity of the related debt in April 2018. For the nine-months ended September 30, 2018, the Company recognized $458,000 as additional interest expense. For the three- and nine-months ended September 30, 2017, the Company recognized $369,000 and $1,089,000, respectively, as additional interest expense.
7.
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 24 of 55
Financial Instruments (continued)
The carrying values and fair values of the Company’s long-term debt were $3,209,698,000 and $3,144,615,000, respectively, at September 30, 2018; $3,027,203,000 and $3,144,902,000, respectively, at December 31, 2017; and $1,722,540,000 and $1,830,750,000, respectively, at September 30, 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.
8.
Income Taxes
The Company’s effective income tax rate for the nine-months ended September 30, 2018 was 18.3%. The effective income tax rate reflects the effect of federal and state income taxes on earnings and the impact of differences in book and tax accounting arising from the net permanent tax benefits associated with the statutory depletion deduction for mineral reserves. For the nine-months ended September 30, 2018, the effective income tax rate also reflects a permanent net income tax benefit of $15,454,000 resulting primarily from (i) the Company making additional contributions of $125,000,000 for a total of $150,000,000 discretionary contributions to its qualified pension plan during the quarter ended September 30, 2018, which is deductible on the Company’s 2017 income tax return; and (ii) changes in the Company’s method of accounting for income tax purposes to accelerate the deduction of various expenses. Prior to the quarter ended September 30, 2018, the Company had included an estimate of $25,000,000 of discretionary pension plan contributions in its 2017 tax provision. The tax benefit resulted from the difference in the federal tax rate at which the deductions were claimed versus the tax rate at which the deferred tax assets were recorded at year end as a result of the Tax Reform Act (2017 Tax Act), net of the correlative effects of reduced deductions for domestic production deduction and percentage depletion. 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 26.2% for the nine-months ended September 30, 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, including the tax benefit mentioned above, and transition tax on undistributed foreign earnings as of September 30, 2018. 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. The Company will complete its analysis after the filing of its federal and state corporate income tax returns in the fourth quarter.
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.
Page 25 of 55
9.
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 September 30,
Pension
Postretirement Benefits
Service cost
7,911
7,457
19
20
Interest cost
8,307
9,729
130
182
Expected return on assets
(11,516
(10,691
Prior service cost (credit)
27
34
(519
(436
Actuarial loss (gain)
3,206
3,604
(53
(91
Settlement charge
Net periodic benefit cost (credit)
10,627
10,133
(423
(325
Nine-Months Ended September 30,
23,732
20,060
58
60
24,921
27,074
389
547
(34,549
(29,818
77
237
(1,556
(1,307
9,621
10,643
(158
(273
26,494
28,196
(1,267
(973
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.
In the quarter ended September 30, 2018, the Company made $150,000,000 of discretionary contributions to its qualified pension plan. No additional contributions to the qualified pension plan are expected to be made for the remainder of 2018. The Company currently estimates that it will contribute a total of $12,400,000 for the year ending December 31, 2018 to satisfy required payments under the unfunded nonqualified pension plans.
Page 26 of 55
10.
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 September 30, 2018, December 31, 2017 and September 30, 2017. The interest rate is one-month LIBOR plus 1.75%.
Employees
The Company maintains collective bargaining agreements relating to the union employees within the Building Materials business and Magnesia Specialties segment. Of the Magnesia Specialties segment, 100% of its hourly employees are represented by labor unions. The Manistee collective bargaining agreement expires in August 2019; the Woodville collective bargaining agreement expires June 2022.
11.
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, net; 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, net; 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. The acquired Bluegrass operations are located in the Mid-America Group and Southeast Group. 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.
Page 27 of 55
Business Segments (continued)
Total revenues:
Products and services revenues:
Earnings (Loss) from operations:
120,344
106,235
235,221
204,939
26,372
17,882
60,464
42,331
92,090
96,522
249,885
270,246
238,806
220,639
545,570
517,516
23,301
17,590
65,867
58,589
Corporate
(21,445
(11,265
(67,741
(59,138
Assets employed:
(Dollars in thousands)
2,802,054
1,532,867
1,538,594
1,300,090
616,344
604,144
5,032,662
5,014,231
5,032,103
9,134,806
7,163,442
7,174,841
141,998
152,257
148,581
311,367
1,676,812
243,363
As of September 30, 2018, the increase in assets employed compared with September 30, 2017 primarily reflect the assets acquired from the Bluegrass acquisition completed in second quarter 2018.
Page 28 of 55
12.
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:
687,800
590,312
1,778,124
1,619,282
Cement
98,223
88,470
300,554
280,961
Ready mixed concrete
254,686
240,222
750,424
704,471
Asphalt and paving services
99,983
110,973
199,489
215,652
Less: interproduct revenues
(66,839
(67,379
(205,681
(198,638
Products and services
Magnesia Specialties:
Total Magnesia Specialties
Gross profit (loss):
209,082
187,065
460,624
439,032
32,543
27,459
97,582
87,608
20,632
23,913
66,226
70,542
25,606
28,873
36,479
44,446
287,863
267,310
660,911
641,628
(47
1,012
432
2,040
287,816
268,322
661,343
643,668
26,823
21,272
76,756
69,425
(1,076
(1,362
(3,280
(3,576
25,747
19,910
73,476
65,849
(579
3,446
4,474
3,321
Page 29 of 55
13.
Supplemental Cash Flow Information
The components of the change in other assets and liabilities, net, are as follows:
Other current and noncurrent assets
(32,572
(29,342
5,986
(6,234
4,555
10,230
Accrued income taxes
6,220
16,393
Accrued pension, postretirement and postemployment benefits
(131,963
(5,807
Other current and noncurrent liabilities
2,769
49,244
Noncash investing and financing activities are as follows:
Noncash investing and financing activities:
Accrued liabilities for purchases of property, plant and equipment
24,930
20,339
Acquisition of assets through capital lease
449
196
Settlement of royalty obligation via asset sale
900
Supplemental disclosures of cash flow information are as follows:
Cash paid for interest
84,522
49,564
Cash paid for income taxes
7,253
96,643
14.
Other operating expenses and income, net
Other operating expenses and income, net, for the quarter ended September 30, 2018, include a $7,113,000 restructuring charge, which primarily consists of asset impairment charges and severance costs in the Company’s Southwest ready mixed concrete operations. These operations are reported in the West Group reportable segment. For the nine-months ended September 30, 2018, in addition to the restructuring charge, other operating expenses and income, net, includes a net gain on legal settlements of $7,677,000 and a gain on the sale of surplus land of $16,938,000. Other operating expenses, net, for the quarter ended September 30, 2017 include $12,425,000 of repair costs related to leased railcars.
Page 30 of 55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Third Quarter Ended September 30, 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.
Plant Types
Quarries, Mines and Distribution Facilities
Quarries, Mines, Plants and
Distribution Facilities
Modes of Transportation
Truck and Rail
Truck, Rail 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 nine-months ended September 30, 2018, other than the adoption of new accounting pronouncements as described in Note 1 to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Page 31 of 55
For the Quarter September 30, 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. Due to 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 as 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:
Add back:
Income tax expense for controlling interests
29,051
52,744
84,070
119,247
Depreciation, depletion and amortization expense
88,693
74,531
250,144
218,531
Consolidated EBITDA
333,433
301,962
813,361
741,974
Significant items for the quarter ended September 30, 2018 (unless noted, all comparisons are versus the prior-year quarter):
♦
Consolidated total revenues of $1.22 billion compared with $1.09 billion
Building Materials business products and services revenues of $1.07 billion compared with $962.6 million and Magnesia Specialties products revenue of $68.4 million compared with $59.9 million
Consolidated gross profit of $313.0 million compared with $291.7 million
Consolidated earnings from operations of $240.7 million compared with $227.0 million
Net earnings attributable to Martin Marietta of $180.2 million compared with $151.5 million
EBITDA of $333.4 million compared with $302.0 million
Earnings per diluted share of $2.85 compared with $2.39
Page 32 of 55
The following table presents total revenues, gross profit (loss), selling, general and administrative (SG&A) expenses and earnings (loss) from operations data for the Company and its reportable segments by product line for the three-months ended September 30, 2018 and 2017. In each case, the data is stated as a percentage of total products and services revenues of the Company or the relevant segment or product line, as the case may be. Prior-year information has been reclassified to conform to current-year presentation.
% of Revenues
100.0
217,710
211,800
Asphalt and paving
Less: Interproduct revenues
Magnesia Specialties Business:
Products
Total Magnesia Specialties Business
Page 33 of 55
131,072
37.6
117,965
41.1
30,899
25.4
18,391
20.1
47,111
21.6
50,709
23.9
33.1
31.0
8.1
10.0
25.6
26.0
26.8
27.8
25.1
26.2
39.2
35.5
35.0
31.2
25.7
Selling, general & administrative expenses:
14,113
12,671
4,440
4,097
26,600
24,716
45,153
41,484
2,404
2,329
20,884
13,406
5.6
5.3
Page 34 of 55
19.7
20.9
The following tables present aggregates products volume and pricing variance data and shipments data by segment:
Volume
Pricing
Volume/Pricing variance (1)
Heritage Operations:(2)
5.4
%
2.8
6.2
1.7
(0.6
)%
3.1
Total Heritage Aggregates Operations
3.2
2.9
Total Aggregates Operations(3)
14.9
1.5
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(Tons in Thousands)
Shipments
22,533
21,371
Southeast Group (4)
5,682
5,349
16,979
17,085
Heritage Aggregates Operations
45,194
43,805
5,130
50,324
(1) Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.
(2) Heritage aggregates operations exclude acquisitions that have not been included in prior-year operations for the comparable period.
(3) Total aggregates operations include acquisitions from the date of acquisition and divestitures through the date of disposal.
(4) 2017 shipments include the Forsyth, Georgia operation, which was divested in April 2018.
The following table presents aggregates shipment data and volume variance excluding the Forsyth, Georgia operation for the three-months ended September 30, 2017 to provide a more comparable analysis of aggregates volume variance.
Southeast Group:
Reported heritage aggregates shipments
Less: Aggregates shipments for the Forsyth, Georgia quarry
during periods of Martin Marietta ownership
(272
Adjusted heritage aggregates shipments
5,077
Heritage aggregates volume variance excluding shipments
for the Forsyth, Georgia quarry
11.9
Total Heritage Business:
43,533
3.8
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Volume growth accelerated during the quarter’s first two months, reflecting strong underlying product demand, most notably in Texas, North Carolina, Georgia and Iowa. Despite clear market strength, extreme weather temporarily hindered construction activity. Record precipitation in Texas, compounded by disruptions from Hurricane Florence in the Carolinas, adversely impacted September’s aggregates shipment, production and overall efficiency levels.
Heritage aggregates volume and pricing improved 3.8% and 2.9%, respectively, excluding the third-quarter 2017 shipments from the Company’s Forsyth, Georgia, quarry that was divested in April 2018.
Aggregates shipments to the infrastructure market were flat as large public projects in North Carolina and Texas were weather delayed. The Company remains encouraged by the recent acceleration of state lettings and contract awards. As state Departments of Transportation (DOTs) and contractors continue to address labor constraints, and the broader industry benefits from further regulatory reform, management remains confident that infrastructure demand will continue to improve driven by funding provided by the Fixing America’s Surface Transportation Act (FAST Act) and numerous state and local transportation initiatives. While some contractors are reporting longer lag times between contract awards and project commencement, public construction projects, once awarded, are seen through to completion. Thus, delays from weather or other factors typically serve to extend the duration of the construction cycle for the Company’s single largest end-use market. Aggregates shipments to the infrastructure market comprised 41% of third-quarter aggregates volumes. On a year-to-date basis, the infrastructure market represented 39% of aggregates shipments, remaining below the Company’s most recent five-year average of 43%.
Aggregates shipments to the nonresidential market increased 5%, driven by both commercial and heavy industrial construction activity. Looking ahead, ongoing energy-sector project approvals, supported by higher oil prices, underpin management’s expectation that the next wave of these large projects, particularly along the Gulf Coast, will contribute to increased aggregates demand for the next several years. The nonresidential market represented 33% of third-quarter aggregates shipments.
Aggregates shipments to the residential market increased 7%. Florida, Texas, Colorado, North Carolina, South Carolina and Georgia, six of the Company’s key states, ranked in the top ten nationally for growth in single-family housing unit starts for the trailing twelve months ended August 2018. The residential construction outlook across the Company’s geographic footprint remains positive for both single- and multi-family housing, driven by favorable demographics, job growth, land availability and efficient permitting. The residential market accounted for 20% of third-quarter aggregates shipments.
The ChemRock/Rail market accounted for the remaining 6% of third-quarter aggregates shipments. Shipments to this sector increased 6%, reflecting improved ballast shipments from the Midwest and Rocky Mountain Divisions.
The average selling price by product line for the Building Materials business is as follows:
% Change
Aggregates - heritage (per ton)
13.79
13.40
Aggregates - acquisition (per ton)
11.86
Cement (per ton)
110.63
107.11
3.3
Ready Mixed Concrete (per cubic yard)
112.14
109.22
2.7
Asphalt (per ton)
44.40
44.73
(0.7
Page 37 of 55
The following table presents shipments data for the Building Materials business by product line.
Aggregates (in thousands):
Heritage:
Tons to external customers
42,312
40,787
Internal tons used in other product lines
2,882
3,018
Total heritage aggregates tons
Acquisitions:
Total acquisition aggregates tons
Cement (in thousands):
587
523
Internal tons used in ready mixed concrete
292
294
Total cement tons
879
817
Ready Mixed Concrete (in thousands of cubic yards)
2,232
2,160
Asphalt (in thousands):
394
385
Internal tons used in paving business
709
829
Total asphalt tons
1,103
1,214
Third-quarter cement product revenues increased 11.0%. Shipments and pricing improved 7.6% and 3.3%, respectively, reflecting strong demand in North and South Texas and contributed to gross margin improvement of 210 basis points to 33.1%.
Ready mixed concrete shipments increased 3.3%, with solid gains throughout the Rocky Mountain and Southwest Divisions, despite September’s record rainfall in Texas. Ready mixed concrete selling prices increased 2.7%. Ongoing project delays and permitting issues contributed to the 9.1% decrease in hot mixed asphalt shipments. Asphalt pricing was essentially flat.
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Magnesia Specialties Business
Magnesia Specialties reported third-quarter total products revenue increase of 14.2% to $68.4 million, compared with $59.9 million. Products gross profit was $26.8 million compared with $21.3 million and earnings from operations were $23.3 million compared with $17.6 million. Operating efficiencies, together with lower unit energy costs, contributed to a 370-basis-point increase in third-quarter product gross margin to 39.2%.
The following presents a rollforward of consolidated gross profit (dollars in thousands):
Consolidated gross profit, quarter ended September 30, 2017
Aggregates products:
79,452
18,036
Cost increases, net
(75,471
Change in aggregates products gross profit
22,017
Cement products and downstream products and services
(1,464
Magnesia Specialties products
5,551
(4,025
(773
Change in consolidated gross profit
21,306
Consolidated gross profit, quarter ended September 30, 2018
Cost increases, net, includes the $8.3 million negative impact of selling acquired inventory after its markup to fair value as a part of acquisition accounting.
Cement outage costs, which reflect planned and unplanned plant shutdowns, were $4.2 million for the quarter compared with $2.0 million for the prior-year quarter.
Consolidated Operating Results
Consolidated SG&A was 5.6% of total revenues compared with 5.3% in the prior-year quarter. Earnings from operations for the quarter were $240.7 million in 2018 compared with $227.0 million in 2017.
Among other items, other operating income, 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 third quarter, consolidated other operating expense, net, was $3.8 million in 2018 and $6.2 million in 2017. The 2018 amount reflects $7.1 million in restructuring expenses related to the Company’s Southwest ready mixed concrete operations. The 2017 amount includes a $12.4 million expense for repair costs related to certain of the Company’s leased railcars.
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 third quarter, other nonoperating income, net, was $4.2 million and $0.5 million in 2018 and 2017, respectively. The increase in 2018 compared with 2017 primarily reflects higher earnings from nonconsolidated equity investments.
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Significant items for the nine-months ended September 30, 2018 (unless noted, all comparisons are versus the prior-year period):
Consolidated total revenues of $3.22 billion increased 7.6% compared with $3.00 billion
Building Materials business products and services revenues of $2.82 billion compared with $2.62 billion and Magnesia Specialties products revenue of $201.4 million compared with $189.9 million
Consolidated gross profit of $739.3 million compared with $712.8 million
Consolidated earnings from operations of $543.7 million compared with $517.0 million
Net earnings attributable to Martin Marietta of $375.6 million compared with $336.2 million
EBITDA of $813.4 million compared with $742.0 million
Earnings per diluted share of $5.93 compared with $5.30
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 by product line for the nine-months ended September 30, 2018 and 2017. In each case, the data is stated as a percentage of total products and services revenues of the Company or the relevant segment or product line, as the case may be. Prior-year information has been reclassified to conform to current-year presentation.
734,407
627,921
618,185
Page 40 of 55
270,270
32.1
242,926
57,543
18.7
51,758
19.4
132,811
21.2
144,348
23.4
32.5
8.8
18.3
20.6
24.5
22.0
23.0
38.1
36.6
34.1
22.9
23.8
41,260
39,934
13,689
12,896
79,892
75,665
134,841
128,495
7,512
7,146
67,279
59,486
6.5
Page 41 of 55
16.9
17.3
The following tables present volume and pricing data and shipments data for the aggregates product line.
Volume/Pricing Variance (1)
4.5
(0.9
2.4
0.2
7.4
2.3
55,453
54,624
15,465
15,579
49,186
49,637
120,104
119,840
8,558
128,662
(3) Total aggregates operations includes acquisitions from the date of acquisition and divestitures through the date of disposal.
(4) 2018 and 2017 shipments include the Forsyth, Georgia operation, which was divested in April 2018.
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The following table presents aggregates shipment data and volume variance excluding the Forsyth, Georgia operation for the nine-months ended September 30, 2018 and 2017 to provide a more comparable analysis of aggregates volume variance.
(229
(680
15,236
14,899
119,875
119,160
0.6
Page 43 of 55
Unit shipments by product line for the Company is as follows:
111,951
111,617
8,153
8,223
1,767
1,749
966
895
2,733
2,644
6,799
6,442
803
863
1,420
1,615
2,223
2,478
Average selling prices by product line for the Company were as follows:
13.87
13.43
11.95
108.92
105.26
3.5
108.36
107.34
1.0
44.39
43.08
3.0
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For the first nine months of 2018, Magnesia Specialties reported total products revenue of $201.4 million, a 6.0% increase compared with the prior-year period. Earnings from operations were $65.9 million compared with $58.6 million, a 12.4% increase.
Consolidated gross profit, nine-months ended September 30, 2017
105,813
53,029
(137,250
21,592
(2,309
7,331
1,153
(1,312
26,455
Consolidated gross profit, nine-months ended September 30, 2018
Cost increases, net, includes the $18.5 million negative impact of selling acquired inventory after its markup to fair value as a part of acquisition accounting.
For the nine-months ended September 30, 2018 and 2017, consolidated SG&A was 6.5% of total revenues. Earnings from operations for the first nine months were $543.7 million in 2018 compared with $517.0 million in 2017.
For the nine-months ended September 30, consolidated other operating income, net, was $27.0 million in 2018 and $2.6 million in 2017. The increase in other operating income, net, is primarily driven by a $16.9 million gain on the sale of surplus land and a $7.7 million net gain on litigation and related settlements of in 2018 partially offset by $7.1 million in restructuring expenses related to the Company’s Southwest ready mixed concrete operations. The 2017 amount includes a $13.5 million gain on the sale of real estate offset by a $12.4 million expense for repair costs related to certain of the Company’s lease railcars and $6.1 million of expense, including both cash and stock-based compensation components, related to the retirement of a senior executive officer.
For the nine-months ended September 30, 2018, other nonoperating income, net, was $19.9 million, a $13.4 million increase compared with prior year, reflecting higher interest income and lower pension expense.
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LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the nine-months ended September 30 was $441.5 million in 2018 compared with $418.1 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
219,019
195,009
Depletion
20,576
12,812
13,605
13,597
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 $418.1 million for the first nine months of 2017.
During the nine-months ended September 30, 2018, the Company paid $262.2 million for capital investments. Full-year capital spending is expected to approximate $375 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 deems appropriate. The Company repurchased 305,000 shares of common stock during the first nine months of the year for an aggregate purchase price of $60.4 million. At September 30, 2018, 14,364,000 shares of common stock were remaining under the Company’s repurchase authorization.
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 $400 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. During periods that include an acquisition, pre-acquisition adjusted EBITDA of the
Page 46 of 55
acquired company is added to consolidated EBITDA as if the acquisition occurred on the first day of the calculation period. Certain other nonrecurring items, if they occur, can affect the calculation of consolidated EBITDA.
At September 30, 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 2.72 times and was calculated as follows:
October 1, 2017 to
Earnings from continuing operations attributable to Martin Marietta
752,804
126,976
325,410
29,846
51,441
Noncash portion of restructuring expenses
5,245
Bluegrass EBITDA - Pre-acquisition adjusted (October 2017 to April 2018)
43,417
Deduct:
Interest income
(7,149
Income tax benefit
(129,691
Gain on divestiture
(14,785
Consolidated EBITDA, as defined by the Company’s Revolving Facility
1,183,514
Consolidated net debt, as defined and including debt for which the
Company is a co-borrower, at September 30, 2018
3,224,046
Consolidated debt-to-consolidated EBITDA, as defined by the Company’s
Revolving Facility, at September 30, 2018 for the trailing-twelve
months EBITDA
2.72x
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, fund certain acquisition opportunities that may arise, allow the repurchase of shares of the Company’s common stock and allow for payment of dividends for the foreseeable future. On April 27, 2018, the Company successfully completed its acquisition of Bluegrass Materials Company (Bluegrass), the largest privately-held, pure-play aggregates company in the United States, for $1.617 billion in cash. 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.
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At September 30, 2018, the Company had $617.7 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. On April 17, 2018, the Company and its wholly-owned subsidiary amended its Trade Receivable Facility to increase the facility limit to $400 million. On September 25, 2018, the Company extended the maturity of the Trade Receivable Facility to September 25, 2019.
The Company repaid the $300 million of 6.60% Senior Notes with cash on hand on April 16, 2018, the maturity date.
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
Management has updated its full-year 2018 guidance to reflect current trends and expectations, including the impact of extraordinary weather-related events encountered during the third quarter.
Specifically:
Heritage aggregates average selling price is expected to increase in a range of 3% to 4%.
Heritage aggregates volume is expected to be flat to up to 1% and expected shipments by end-use market, both compared with 2017 levels and excluding 2017 shipments of the Company’s Forsyth, Georgia, quarry that was divested in April 2018, are as follows:
•
Infrastructure shipments to be relatively flat.
Nonresidential shipments to increase in the low- to mid-single digits.
Residential shipments to increase in the high-single digits.
ChemRock/Rail shipments to decrease.
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.
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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 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: the performance of the United States economy; 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, state or local transportation or infrastructure projects funding, most particularly in Texas, North Carolina, Iowa, Colorado, Georgia and Maryland; 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; 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 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; continuing unfavorable weather conditions, particularly Atlantic Ocean and Gulf Coast hurricane activity, excessive rainfall in the markets served by the Company and the early onset of winter, 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; continuing 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
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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 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; continued 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.
You should consider these forward-looking statements in light of risk factors discussed in our Annual Report onForm 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, or adversely affect or be material to the Company. The Company 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, 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.
Page 50 of 55
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 has raised rates three times during 2018, increasing the federal funds rate to 2.2%. 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 September 30, 2018, the Company had a $700 million Revolving Facility and a $400 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 $1.08 billion, which was the collective outstanding balance at September 30, 2018, would increase interest expense by $10.8 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 costs for the nine-months ended September 30, 2018 increased approximately 13% over the prior-year period. A hypothetical 15% 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 $37.4 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 September 30, 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 September 30, 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 and the Current Report on Form 8-K of Marin Marietta Materials, Inc. filed on March 16, 2018.
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
July 1, 2018 - July 31, 2018
14,668,891
August 1, 2018 - August 31, 2018
175,000
202.49
14,493,891
September 1, 2018 - September 30, 2018
129,568
192.49
14,364,323
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
10.1
Tenth Amendment to Credit and Security Agreement, dated as of September 25, 2018, among Martin Marietta Funding LLC, as borrower, Martin Marietta Materials, Inc., as servicer, and SunTrust Bank, as lender together with the other lenders from time to time party thereto, and SunTrust Bank, as administrative agent for the lenders (incorporated by reference to Exhibit 10.1 to the Martin Marietta Materials, Inc. Current Report on Form 8-K, filed on September 25, 2018 (Commission File No. 1-12744))
31.01
Certification dated November 7, 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 November 7, 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 November 7, 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 November 7, 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 – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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: November 7, 2018
By:
/s/ James A. J. Nickolas
James A. J. Nickolas
Sr. Vice President and
Chief Financial Officer
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