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MARTIN MARIETTA MATERIALS INC - Quarter Report: 2017 June (Form 10-Q)

 

 

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 June 30, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-12744

 

MARTIN MARIETTA MATERIALS, INC.

(Exact name of registrant as specified in its charter)

 

 

 North Carolina

 

56-1848578

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

2710 Wycliff Road, Raleigh, NC

 

27607-3033

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code 919-781-4550

Former name: None

Former name, former address and former fiscal year, if changes since last report.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

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 July 26, 2017

Common Stock, $0.01 par value

 

62,839,694

 

 

 

 


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

 

 

Page

Part I. Financial Information:

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

Consolidated Balance Sheets – June 30, 2017, December 31, 2016 and June 30, 2016

 

3

 

 

 

Consolidated Statements of Earnings and Comprehensive Earnings – Three and Six Months Ended June 30, 2017 and 2016

 

4

 

 

 

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2017 and 2016

 

5

 

 

 

Consolidated Statement of Total Equity – Six Months Ended June 30, 2017

 

6

 

 

 

Notes to Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

45

 

 

 

Item 4. Controls and Procedures

 

46

 

 

 

Part II. Other Information:

 

 

 

 

 

Item 1. Legal Proceedings

 

47

 

 

 

Item 1A. Risk Factors

 

47

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

47

 

 

 

Item 4. Mine Safety Disclosures

 

47

 

 

 

Item 6. Exhibits

 

48

 

 

 

Signatures

 

49

 

 

 

Exhibit Index

 

50

 

 

 

Page 2 of 50


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

(UNAUDITED) CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2016

 

 

 

(Dollars in Thousands, Except Per Share Data)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,722

 

 

$

50,038

 

 

$

28,596

 

Accounts receivable, net

 

 

570,618

 

 

 

457,910

 

 

 

534,459

 

Inventories, net

 

 

549,865

 

 

 

521,624

 

 

 

504,877

 

Other current assets

 

 

87,092

 

 

 

56,813

 

 

 

53,997

 

Total Current Assets

 

 

1,244,297

 

 

 

1,086,385

 

 

 

1,121,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

6,306,083

 

 

 

6,115,530

 

 

 

5,896,512

 

Allowances for depreciation, depletion and amortization

 

 

(2,800,823

)

 

 

(2,692,135

)

 

 

(2,574,307

)

Net property, plant and equipment

 

 

3,505,260

 

 

 

3,423,395

 

 

 

3,322,205

 

Goodwill

 

 

2,160,060

 

 

 

2,159,337

 

 

 

2,136,783

 

Operating permits, net

 

 

437,713

 

 

 

442,202

 

 

 

442,349

 

Other intangibles, net

 

 

65,526

 

 

 

69,110

 

 

 

64,327

 

Other noncurrent assets

 

 

103,004

 

 

 

120,476

 

 

 

145,712

 

Total Assets

 

$

7,515,860

 

 

$

7,300,905

 

 

$

7,233,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Bank overdraft

 

$

3,794

 

 

$

 

 

$

7,143

 

Accounts payable

 

 

187,227

 

 

 

178,598

 

 

 

197,733

 

Accrued salaries, benefits and payroll taxes

 

 

36,202

 

 

 

47,428

 

 

 

24,864

 

Pension and postretirement benefits

 

 

8,802

 

 

 

9,293

 

 

 

9,120

 

Accrued insurance and other taxes

 

 

59,958

 

 

 

60,093

 

 

 

62,525

 

Current maturities of long-term debt and short-term facilities

 

 

140,037

 

 

 

180,036

 

 

 

238,155

 

Accrued interest

 

 

 

 

 

 

 

 

 

Other current liabilities

 

 

98,305

 

 

 

71,140

 

 

 

62,064

 

Total Current Liabilities

 

 

534,325

 

 

 

546,588

 

 

 

601,604

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

1,641,944

 

 

 

1,506,153

 

 

 

1,541,062

 

Pension, postretirement and postemployment benefits

 

 

253,908

 

 

 

248,086

 

 

 

236,562

 

Deferred income taxes, net

 

 

663,414

 

 

 

663,019

 

 

 

639,776

 

Other noncurrent liabilities

 

 

221,738

 

 

 

194,469

 

 

 

197,801

 

Total Liabilities

 

 

3,315,329

 

 

 

3,158,315

 

 

 

3,216,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, par value $0.01 per share

 

 

627

 

 

 

630

 

 

 

633

 

Preferred stock, par value $0.01 per share

 

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

3,355,992

 

 

 

3,334,461

 

 

 

3,318,859

 

Accumulated other comprehensive loss

 

 

(125,906

)

 

 

(130,687

)

 

 

(106,068

)

Retained earnings

 

 

967,058

 

 

 

935,574

 

 

 

800,028

 

Total Shareholders' Equity

 

 

4,197,771

 

 

 

4,139,978

 

 

 

4,013,452

 

Noncontrolling interests

 

 

2,760

 

 

 

2,612

 

 

 

3,048

 

Total Equity

 

 

4,200,531

 

 

 

4,142,590

 

 

 

4,016,500

 

Total Liabilities and Equity

 

$

7,515,860

 

 

$

7,300,905

 

 

$

7,233,305

 

 

See accompanying notes to the consolidated financial statements.

 

Page 3 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In Thousands, Except Per Share Data)

 

 

 

 

 

Net Sales

 

$

996,289

 

 

$

915,436

 

 

$

1,787,973

 

 

$

1,649,396

 

Freight and delivery revenues

 

 

67,235

 

 

 

61,862

 

 

 

119,410

 

 

 

116,636

 

Total revenues

 

 

1,063,524

 

 

 

977,298

 

 

 

1,907,383

 

 

 

1,766,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

722,195

 

 

 

668,005

 

 

 

1,366,813

 

 

 

1,256,715

 

Freight and delivery costs

 

 

67,235

 

 

 

61,862

 

 

 

119,410

 

 

 

116,636

 

Total cost of revenues

 

 

789,430

 

 

 

729,867

 

 

 

1,486,223

 

 

 

1,373,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

274,094

 

 

 

247,431

 

 

 

421,160

 

 

 

392,681

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses

 

 

68,373

 

 

 

59,781

 

 

 

137,908

 

 

 

118,130

 

Acquisition-related expenses, net

 

 

1,982

 

 

 

248

 

 

 

2,004

 

 

 

547

 

Other operating income, net

 

 

(9,113

)

 

 

(3,446

)

 

 

(8,754

)

 

 

(2,868

)

Earnings from Operations

 

 

212,852

 

 

 

190,848

 

 

 

290,002

 

 

 

276,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

24,045

 

 

 

20,294

 

 

 

44,896

 

 

 

40,328

 

Other nonoperating income, net

 

 

(5,420

)

 

 

(4,994

)

 

 

(5,956

)

 

 

(3,770

)

Earnings before taxes on income

 

 

194,227

 

 

 

175,548

 

 

 

251,062

 

 

 

240,314

 

Taxes on income

 

 

51,986

 

 

 

53,435

 

 

 

66,514

 

 

 

73,145

 

Consolidated net earnings

 

 

142,241

 

 

 

122,113

 

 

 

184,548

 

 

 

167,169

 

Less: Net (loss) earnings attributable to noncontrolling

   interests

 

 

(38

)

 

 

61

 

 

 

(65

)

 

 

122

 

Net Earnings Attributable to Martin Marietta Materials, Inc.

 

$

142,279

 

 

$

122,052

 

 

$

184,613

 

 

$

167,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Comprehensive Earnings:  (See Note 1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings attributable to Martin Marietta Materials, Inc.

 

$

144,798

 

 

$

119,817

 

 

$

189,394

 

 

$

166,601

 

(Loss) Earnings attributable to noncontrolling interests

 

 

(37

)

 

 

63

 

 

 

(63

)

 

 

155

 

 

 

$

144,761

 

 

$

119,880

 

 

$

189,331

 

 

$

166,756

 

Net Earnings Attributable to Martin Marietta Materials, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic attributable to common shareholders

 

$

2.26

 

 

$

1.91

 

 

$

2.92

 

 

$

2.61

 

Diluted attributable to common shareholders

 

$

2.25

 

 

$

1.90

 

 

$

2.91

 

 

$

2.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Common Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

62,858

 

 

 

63,532

 

 

 

62,961

 

 

 

63,845

 

Diluted

 

 

63,141

 

 

 

63,802

 

 

 

63,246

 

 

 

64,091

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per Common Share

 

$

0.42

 

 

$

0.40

 

 

$

0.84

 

 

$

0.80

 

 

 

See accompanying notes to the consolidated financial statements.

 

Page 4 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Consolidated net earnings

 

$

184,548

 

 

$

167,169

 

Adjustments to reconcile consolidated net earnings to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation, depletion and amortization

 

 

146,102

 

 

 

139,617

 

Stock-based compensation expense

 

 

17,727

 

 

 

12,801

 

Gain on divestitures and sales of assets

 

 

(17,514

)

 

 

(261

)

Deferred income taxes

 

 

2,464

 

 

 

34,389

 

Other items, net

 

 

(4,393

)

 

 

(5,767

)

Changes in operating assets and liabilities, net of effects of acquisitions

   and divestitures:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(112,708

)

 

 

(117,524

)

Inventories, net

 

 

(28,240

)

 

 

(33,131

)

Accounts payable

 

 

11,663

 

 

 

32,521

 

Other assets and liabilities, net

 

 

29,950

 

 

 

(19,970

)

Net Cash Provided by Operating Activities

 

 

229,599

 

 

 

209,844

 

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(216,089

)

 

 

(210,559

)

Acquisitions, net

 

 

(2,200

)

 

 

(123,000

)

Cash received in acquisition

 

 

 

 

 

3,446

 

Proceeds from divestitures and sales of assets

 

 

32,089

 

 

 

4,474

 

Payment of railcar construction advances

 

 

(40,930

)

 

 

 

Reimbursement of railcar construction advances

 

 

40,930

 

 

 

 

Net Cash Used for Investing Activities

 

 

(186,200

)

 

 

(325,639

)

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Borrowings of debt

 

 

941,244

 

 

 

280,000

 

Repayments of debt

 

 

(845,023

)

 

 

(70,420

)

Payments on capital lease obligations

 

 

(1,752

)

 

 

(1,563

)

Debt issuance costs

 

 

(1,055

)

 

 

 

Change in bank overdraft

 

 

3,795

 

 

 

(3,092

)

Contributions by owners of noncontrolling interest

 

 

211

 

 

 

 

Dividends paid

 

 

(53,135

)

 

 

(51,467

)

Proceeds from exercise of stock options

 

 

7,937

 

 

 

18,070

 

Shares withheld for employees' income tax obligations

 

 

(8,938

)

 

 

(5,546

)

Repurchases of common stock

 

 

(99,999

)

 

 

(190,000

)

Net Cash Used for Financing Activities

 

 

(56,715

)

 

 

(24,018

)

Net Decrease in Cash and Cash Equivalents

 

 

(13,316

)

 

 

(139,813

)

Cash and Cash Equivalents, beginning of period

 

 

50,038

 

 

 

168,409

 

Cash and Cash Equivalents, end of period

 

$

36,722

 

 

$

28,596

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

Page 5 of 50


 

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

(UNAUDITED) CONSOLIDATED STATEMENT OF TOTAL EQUITY

 

(in thousands)

 

Shares of Common Stock

 

 

Common Stock

 

 

Additional Paid-in Capital

 

 

Accumulated Other Comprehensive Loss

 

 

Retained Earnings

 

 

Total Shareholders' Equity

 

 

Noncontrolling Interests

 

 

Total Equity

 

Balance at December 31, 2016

 

 

63,176

 

 

$

630

 

 

$

3,334,461

 

 

$

(130,687

)

 

$

935,574

 

 

$

4,139,978

 

 

$

2,612

 

 

$

4,142,590

 

Consolidated net earnings (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

184,613

 

 

 

184,613

 

 

 

(65

)

 

 

184,548

 

Other comprehensive earnings,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

4,781

 

 

 

 

 

 

4,781

 

 

 

2

 

 

 

4,783

 

Dividends declared

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(53,135

)

 

 

(53,135

)

 

 

 

 

 

(53,135

)

Issuances of common stock for stock

   award plans

 

 

122

 

 

 

2

 

 

 

3,804

 

 

 

 

 

 

 

 

 

3,806

 

 

 

 

 

 

3,806

 

Repurchases of common stock

 

 

(458

)

 

 

(5

)

 

 

 

 

 

 

 

 

(99,994

)

 

 

(99,999

)

 

 

 

 

 

(99,999

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

17,727

 

 

 

 

 

 

 

 

 

17,727

 

 

 

 

 

 

17,727

 

Contributions by owners of

   noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

211

 

 

 

211

 

Balance at June 30, 2017

 

 

62,840

 

 

$

627

 

 

$

3,355,992

 

 

$

(125,906

)

 

$

967,058

 

 

$

4,197,771

 

 

$

2,760

 

 

$

4,200,531

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

Page 6 of 50


 

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Significant Accounting Policies

Organization

Martin Marietta Materials, Inc. (the Company or Martin Marietta) is engaged principally in the building materials business, including aggregates, cement, ready mixed concrete and asphalt and paving product lines, collectively reported as the Building Materials business. The aggregates product line is sold and shipped from a network of more than 270 quarries and distribution facilities in 26 states, Nova Scotia and the Bahamas. The cement, ready mixed concrete and asphalt and paving product lines are located in strategic, vertically integrated markets, predominately Texas and Colorado.  Building materials are used for construction of highways and other infrastructure projects, and in the nonresidential and residential construction industries. Aggregates and cement products are also used in the railroad, agricultural, utility and environmental industries.

Effective January 1, 2017, the Company reorganized the operations and management reporting structure of its Texas-based aggregates, cement and ready mixed concrete product lines, resulting in a change to its reportable segments.  As a result, the cement product line is reported in the West Group.   The Company’s Building Materials business includes three reportable segments: the Mid-America Group, the Southeast Group and the West Group.

 

BUILDING MATERIALS BUSINESS

Reportable Segments

  

Mid-America Group

  

Southeast Group

  

West Group

Operating Locations

  

Indiana, Iowa,

northern Kansas, Kentucky, Maryland, Minnesota, Missouri,

eastern Nebraska, North Carolina, Ohio,

South Carolina,

Virginia, Washington and

West Virginia

  

Alabama, Florida, Georgia, Tennessee,
Nova Scotia and the Bahamas

  

Arkansas, Colorado, southern Kansas,

Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah

and Wyoming

 

 

 

 

 

 

 

 

 

Product Lines

 

Aggregates

 

Aggregates

 

Aggregates, cement, ready mixed concrete and asphalt and paving

 

 

 

 

 

 

 

Products and Services

 

Crushed stone, sand and gravel

 

Crushed stone, sand and gravel

 

Crushed stone, sand and gravel; Portland and specialty cements; ready mixed concrete and asphalt and paving

The Company has a Magnesia Specialties segment with manufacturing facilities in Manistee, Michigan, and Woodville, Ohio. The Magnesia Specialties segment produces magnesia-based chemicals products used in industrial, agricultural and environmental applications and dolomitic lime sold primarily to customers in the steel industry.

 

Page 7 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles 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 adoption of two new accounting standards 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, 2016. In the opinion of management, the interim consolidated financial information provided herein reflects all adjustments, consisting of normal recurring accruals, necessary for a fair statement of the results of operations, financial position and cash flows for the interim periods. The consolidated results of operations for the six months ended June 30, 2017 are not indicative of the results expected for other interim periods or the full year. The consolidated balance sheet at December 31, 2016 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

New Accounting Pronouncements

Share-Based Payment Accounting

Effective January 1, 2017, the Company adopted Accounting Standards Update (ASU) 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), which simplifies certain aspects of accounting guidance and requirements for share-based transactions.  ASU 2016-09 requires shares withheld for employees’ income tax obligations to be presented as a financing activity in the statement of cash flows, with retrospective presentation.  For the six-months ended June 30, 2016, the Company reclassified $2,525,000 from operating activities to financing activities on the statement of cash flows.  Additionally, excess tax benefits from stock-based compensation transactions are presented as an operating activity with retrospective presentation.  The Company previously presented excess tax benefits from stock-based compensation transactions as a financing activity and, for the six-months ended June 30, 2016, reclassified $3,948,000 to operating activities on the statement of cash flows.  ASU 2016-09 also requires excess tax benefits and tax deficiencies to be recognized prospectively as income tax benefits or expense in the period awards vest or are exercised.  For the three- and six-months ended June 30, 2017, the Company recognized excess tax benefits of $2,989,000 and $5,259,000, respectively.  

 

Page 8 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

New Accounting Pronouncements

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

In March 2017, the Financial Accounting Standards Board (FASB) issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which revises the financial statement presentation for periodic pension and postretirement expense or credit, other than service cost.  ASU 2017-07 requires net periodic benefit cost or credit, with the exception of service cost, to be presented retrospectively as nonoperating expense.  As permitted by ASU 2017-07, the Company used the pension and other postretirement benefit plan disclosures for the prior comparative periods as a practical expedient to estimate amounts for retrospective application.  Service cost will remain a component of earnings from operations and represent the only cost of pension and postretirement expense eligible for capitalization, notably in the Company’s inventory standards. The Company early adopted this standard effective January 1, 2017.  For the three-months ended June 30, 2016, the Company reclassified $730,000, $1,728,000 and $648,000 from cost of sales; selling, general and administrative expenses; and other operating income and expenses, respectively, to nonoperating expense.  For the six-months ended June 30, 2016, the Company reclassified $1,346,000, $3,240,000 and $774,000 from cost of sales; selling, general and administrative expenses; and other operating income and expenses, respectively, to nonoperating expense.

Pending Accounting Pronouncements

Revenue Recognition Standard

The FASB issued an accounting standards update that amends the accounting guidance on revenue recognition. The new standard intends to provide a more robust framework for addressing revenue issues, improve comparability of revenue recognition practices and improve disclosure requirements. The new standard is effective January 1, 2018 and can be applied on a full retrospective or modified retrospective approach. The Company has completed its initial assessment of the provisions of the new standard and, at this time, does not expect the impact to be material to its results of operations and expects to adopt using the full retrospective approach.

Lease Standard

In February 2016, the FASB issued a new accounting standard, Accounting Codification Standard 842 – Leases, intending to improve financial reporting of leases and to provide more transparency into off-balance sheet leasing obligations.  The guidance requires virtually all leases, excluding mineral interest leases, to be recorded on the balance sheet and provides guidance on the recognition of lease expense and income.  The new standard is effective January 1, 2019 and must be applied on a modified retrospective approach.  The Company is currently assessing the impact of the updated standard on the Company’s financial statements. The Company believes the updated standard will have a material effect on its balance sheet but has not quantified the impact at this time.

Reclassifications

Prior-year information has been reclassified to conform to the presentation of the Company’s current reportable segments and for the adoption of the two accounting pronouncements aforementioned.

 

Page 9 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

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:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Net earnings attributable to Martin Marietta Materials, Inc.

 

$

142,279

 

 

$

122,052

 

 

$

184,613

 

 

$

167,047

 

Other comprehensive earnings (loss), net of tax

 

 

2,519

 

 

 

(2,235

)

 

 

4,781

 

 

 

(446

)

Comprehensive earnings attributable to Martin Marietta

   Materials, Inc.

 

$

144,798

 

 

$

119,817

 

 

$

189,394

 

 

$

166,601

 

 

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:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Net (loss) earnings attributable to noncontrolling interests

 

$

(38

)

 

$

61

 

 

$

(65

)

 

$

122

 

Other comprehensive earnings, net of tax

 

 

1

 

 

 

2

 

 

 

2

 

 

 

33

 

Comprehensive (loss) earnings attributable to

   noncontrolling interests

 

$

(37

)

 

$

63

 

 

$

(63

)

 

$

155

 

 

 

Page 10 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)

Changes in accumulated other comprehensive earnings (loss), net of tax, are as follows:  

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Unamortized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terminated

 

 

Accumulated

 

 

 

Pension and

 

 

 

 

 

 

Forward Starting

 

 

Other

 

 

 

Postretirement

 

 

Foreign

 

 

Interest Rate

 

 

Comprehensive

 

 

 

Benefit Plans

 

 

Currency

 

 

Swap

 

 

Loss

 

 

 

Three Months Ended June 30, 2017

 

Balance at beginning of period

 

$

(126,463

)

 

$

(1,025

)

 

$

(937

)

 

$

(128,425

)

Other comprehensive earnings before reclassifications,

   net of tax

 

 

 

 

 

389

 

 

 

 

 

 

389

 

Amounts reclassified from accumulated other

   comprehensive earnings, net of tax

 

 

1,910

 

 

 

 

 

 

220

 

 

 

2,130

 

Other comprehensive earnings, net of tax

 

 

1,910

 

 

 

389

 

 

 

220

 

 

 

2,519

 

Balance at end of period

 

$

(124,553

)

 

$

(636

)

 

$

(717

)

 

$

(125,906

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

Balance at beginning of period

 

$

(101,907

)

 

$

(149

)

 

$

(1,777

)

 

$

(103,833

)

Other comprehensive loss before reclassifications,

   net of tax

 

 

(3,736

)

 

 

(232

)

 

 

 

 

 

(3,968

)

Amounts reclassified from accumulated other

   comprehensive earnings, net of tax

 

 

1,529

 

 

 

 

 

 

204

 

 

 

1,733

 

Other comprehensive (loss) earnings, net of tax

 

 

(2,207

)

 

 

(232

)

 

 

204

 

 

 

(2,235

)

Balance at end of period

 

$

(104,114

)

 

$

(381

)

 

$

(1,573

)

 

$

(106,068

)

 

 

Page 11 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)

 

 

 

(Dollars in Thousands)

 

 

 

 

 

 

 

 

 

 

 

Unamortized

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terminated

 

 

Accumulated

 

 

 

Pension and

 

 

 

 

 

 

Forward Starting

 

 

Other

 

 

 

Postretirement

 

 

Foreign

 

 

Interest Rate

 

 

Comprehensive

 

 

 

Benefit Plans

 

 

Currency

 

 

Swap

 

 

Loss

 

 

 

Six Months Ended June 30, 2017

 

Balance at beginning of period

 

$

(128,373

)

 

$

(1,162

)

 

$

(1,152

)

 

$

(130,687

)

Other comprehensive earnings before reclassifications,

   net of tax

 

 

 

 

 

526

 

 

 

 

 

 

526

 

Amounts reclassified from accumulated other

   comprehensive earnings, net of tax

 

 

3,820

 

 

 

 

 

 

435

 

 

 

4,255

 

Other comprehensive earnings, net of tax

 

 

3,820

 

 

 

526

 

 

 

435

 

 

 

4,781

 

Balance at end of period

 

$

(124,553

)

 

$

(636

)

 

$

(717

)

 

$

(125,906

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016

 

Balance at beginning of period

 

$

(103,380

)

 

$

(264

)

 

$

(1,978

)

 

$

(105,622

)

Other comprehensive loss before reclassifications,

   net of tax

 

 

(3,830

)

 

 

(117

)

 

 

 

 

 

(3,947

)

Amounts reclassified from accumulated other

   comprehensive earnings, net of tax

 

 

3,096

 

 

 

 

 

 

405

 

 

 

3,501

 

Other comprehensive (loss) earnings, net of tax

 

 

(734

)

 

 

(117

)

 

 

405

 

 

 

(446

)

Balance at end of period

 

$

(104,114

)

 

$

(381

)

 

$

(1,573

)

 

$

(106,068

)

 

 

Page 12 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)

Changes in net noncurrent deferred tax assets recorded in accumulated other comprehensive loss are as follows:

 

 

 

(Dollars in Thousands)

 

 

 

Pension and

Postretirement

Benefit Plans

 

 

Unamortized

Value of

Terminated

Forward Starting

Interest Rate

Swap

 

 

Net Noncurrent

Deferred Tax

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

Balance at beginning of period

 

$

80,859

 

 

$

608

 

 

$

81,467

 

Tax effect of other comprehensive earnings

 

 

(1,184

)

 

 

(144

)

 

 

(1,328

)

Balance at end of period

 

$

79,675

 

 

$

464

 

 

$

80,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

Balance at beginning of period

 

$

65,523

 

 

$

1,159

 

 

$

66,682

 

Tax effect of other comprehensive earnings

 

 

1,408

 

 

 

(136

)

 

 

1,272

 

Balance at end of period

 

$

66,931

 

 

$

1,023

 

 

$

67,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

Balance at beginning of period

 

$

82,044

 

 

$

749

 

 

$

82,793

 

Tax effect of other comprehensive earnings

 

 

(2,369

)

 

 

(285

)

 

 

(2,654

)

Balance at end of period

 

$

79,675

 

 

$

464

 

 

$

80,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2016

 

Balance at beginning of period

 

$

66,467

 

 

$

1,290

 

 

$

67,757

 

Tax effect of other comprehensive earnings

 

 

464

 

 

 

(267

)

 

 

197

 

Balance at end of period

 

$

66,931

 

 

$

1,023

 

 

$

67,954

 

 

Page 13 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

Consolidated Comprehensive Earnings/Loss and Accumulated Other Comprehensive Loss (continued)

Reclassifications out of accumulated other comprehensive loss are as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

Affected line items in the consolidated

 

 

June 30,

 

 

June 30,

 

 

statements of earnings and

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

comprehensive earnings

 

 

(Dollars in Thousands)

 

 

 

Pension and postretirement

   benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Settlement charge

 

$

 

 

$

 

 

$

 

 

$

59

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service credit

 

 

(358

)

 

 

(518

)

 

 

(716

)

 

 

(806

)

 

 

Actuarial loss

 

 

3,452

 

 

 

3,007

 

 

 

6,905

 

 

 

5,787

 

 

 

 

 

 

3,094

 

 

 

2,489

 

 

 

6,189

 

 

 

5,040

 

 

Nonoperating expenses

Tax benefit

 

 

(1,184

)

 

 

(960

)

 

 

(2,369

)

 

 

(1,944

)

 

Taxes on income

 

 

$

1,910

 

 

$

1,529

 

 

$

3,820

 

 

$

3,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortized value of terminated

   forward starting interest

   rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional interest expense

 

$

364

 

 

$

340

 

 

$

720

 

 

$

672

 

 

Interest expense

Tax benefit

 

 

(144

)

 

 

(136

)

 

 

(285

)

 

 

(267

)

 

Taxes on income

 

 

$

220

 

 

$

204

 

 

$

435

 

 

$

405

 

 

 

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 six months ended June 30, 2017 and 2016, the diluted per-share computations reflect a change in the number of common shares outstanding to include the number of additional shares that would have been outstanding if the potentially dilutive common shares had been issued.

 

 

Page 14 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

1.

Significant Accounting Policies (continued)

Earnings per Common Share

The following table reconciles the numerator and denominator for basic and diluted earnings per common share:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(In Thousands)

 

Net earnings attributable to Martin Marietta

   Materials, Inc.

 

$

142,279

 

 

$

122,052

 

 

$

184,613

 

 

$

167,047

 

Less: Distributed and undistributed earnings

   attributable to unvested awards

 

 

413

 

 

 

519

 

 

 

553

 

 

 

730

 

Basic and diluted net earnings available to common

   shareholders attributable to Martin Marietta

   Materials, Inc.

 

$

141,866

 

 

$

121,533

 

 

$

184,060

 

 

$

166,317

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted-average common shares outstanding

 

 

62,858

 

 

 

63,532

 

 

 

62,961

 

 

 

63,845

 

Effect of dilutive employee and director awards

 

 

283

 

 

 

270

 

 

 

285

 

 

 

246

 

Diluted weighted-average common shares outstanding

 

 

63,141

 

 

 

63,802

 

 

 

63,246

 

 

 

64,091

 

 

2.

Goodwill

 

 

(In Thousands)

 

 

 

Mid-America

 

 

Southeast

 

 

West

 

 

 

 

 

 

 

Group

 

 

Group

 

 

Group

 

 

Total

 

Balance at January 1, 2017

 

$

281,403

 

 

$

50,346

 

 

$

1,827,588

 

 

$

2,159,337

 

Adjustments to purchase price allocations

 

 

 

 

 

 

 

 

723

 

 

 

723

 

Balance at June 30, 2017

 

$

281,403

 

 

$

50,346

 

 

$

1,828,311

 

 

$

2,160,060

 

 

The prior-year information has been reclassified to conform to the presentation of the Company’s current reportable segments.

3.

Inventories, Net

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2016

 

 

 

(Dollars in Thousands)

 

Finished products

 

$

508,144

 

 

$

479,291

 

 

$

463,807

 

Products in process and raw materials

 

 

59,410

 

 

 

61,171

 

 

 

60,324

 

Supplies and expendable parts

 

 

120,594

 

 

 

116,024

 

 

 

113,110

 

 

 

 

688,148

 

 

 

656,486

 

 

 

637,241

 

Less: Allowances

 

 

(138,283

)

 

 

(134,862

)

 

 

(132,364

)

Total

 

$

549,865

 

 

$

521,624

 

 

$

504,877

 

 

 

Page 15 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.

Long-Term Debt

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2016

 

 

 

(Dollars in Thousands)

 

6.6% Senior Notes, due 2018

 

$

299,676

 

 

$

299,483

 

 

$

299,294

 

7% Debentures, due 2025

 

 

124,134

 

 

 

124,090

 

 

 

124,046

 

6.25% Senior Notes, due 2037

 

 

228,003

 

 

 

227,975

 

 

 

227,947

 

4.25% Senior Notes, due 2024

 

 

395,532

 

 

 

395,252

 

 

 

394,977

 

3.45% Senior Notes, due 2027

 

 

296,456

 

 

 

 

 

 

 

Floating Rate Notes, due 2020, interest rate of 1.82% at

   June 30, 2017

 

 

297,847

 

 

 

 

 

 

 

Floating Rate Notes, due 2017, interest rate of 2.10% and 1.73% at

   December 31, 2016 and June 30, 2016, respectively

 

 

 

 

 

299,033

 

 

 

298,793

 

Term Loan Facility, due 2018, interest rate of 1.96% at June 30, 2016

 

 

 

 

 

 

 

 

213,571

 

Revolving Facility, due 2021, interest rate of 1.86%

   at December 31, 2016

 

 

 

 

 

160,000

 

 

 

 

Trade Receivable Facility, interest rate of 1.78%, 1.34% and 1.16% at

   June 30, 2017, December 31, 2016 and June 30, 2016,

   respectively

 

 

140,000

 

 

 

180,000

 

 

 

220,000

 

Other notes

 

 

333

 

 

 

356

 

 

 

589

 

Total debt

 

 

1,781,981

 

 

 

1,686,189

 

 

 

1,779,217

 

Less: Current maturities of long-term debt and short-term facilities

 

 

(140,037

)

 

 

(180,036

)

 

 

(238,155

)

Long-term debt

 

$

1,641,944

 

 

$

1,506,153

 

 

$

1,541,062

 

 

On May 22, 2017, the Company issued $300,000,000 aggregate principal amount of Floating Rate Senior Notes due in 2020 (the Floating Rate Notes) and $300,000,000 principal amount of 3.450% Senior Notes due in 2027 (the 3.450% Senior Notes, and together with the Floating Rate Notes, the Senior Notes).  The Senior Notes are senior unsecured obligations of the Company.  The 3.450% Senior Notes may be redeemed in whole or in part prior to March 1, 2027 at a make-whole redemption price, or on or after March 1, 2027 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, in either case plus unpaid interest, if any, accrued thereon to, but excluding, the date of redemption.  The Floating Rate Notes may not be redeemed prior to their stated maturity date of May 22, 2020.  The Floating Rate Notes bear interest at a rate, reset quarterly, equal to the three-month LIBOR for U.S. dollars plus 0.65% (or 65 basis points).  If a change of control repurchase event, as defined, occurs, the Company will be required to make an irrevocable offer to repurchase all or, at the election of each holder, any part of the Senior Notes at a repurchase price equal to 101% of their principal amount, plus unpaid interest, if any, accrued thereon to, but excluding, the date of repurchase, unless, in the case of the 3.450% Senior Notes, the Company has exercised its right to redeem such notes in full. 

 

Page 16 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

4.

Long-Term Debt (continued)

The Company, through a wholly-owned special-purpose subsidiary, has a $300,000,000 trade receivable securitization facility (the Trade Receivable Facility), which matures on September 27, 2017.  Management intends to renew the Trade Receivable Facility beyond September 27, 2017.  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 $422,624,000, $333,302,000 and $391,600,000 at June 30, 2017, December 31, 2016 and June 30, 2016, 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 LIBOR plus 0.725%, subject to change in the event that this rate no longer reflects the lender’s cost of lending.  The Trade Receivable Facility contains a cross-default provision to the Company’s other debt agreements.

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, depletion 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 June 30, 2017.

Available borrowings under the Revolving Facility are reduced by any outstanding letters of credit issued by the Company under the Revolving Facility. At June 30, 2017, December 31, 2016 and June 30, 2016, the Company had $2,507,000 of outstanding letters of credit issued under the Revolving Facility.

Current maturities of long-term debt and short-term facilities consist of borrowings under the Trade Receivable Facility as well as the current portions of the other notes. The 6.65% Senior Notes, due 2018, have been classified as a noncurrent liability as the Company has the intent and ability to refinance on a long-term basis before or at its maturity on April 15, 2018.

Accumulated other comprehensive loss includes the unamortized value of terminated forward starting interest rate swap agreements. For the three and six months ended June 30, 2017, the Company recognized $364,000 and $720,000, respectively, as additional interest expense. For the three and six months ended June 30, 2016, the Company recognized $340,000 and $672,000, respectively, as additional interest expense. The ongoing amortization of the terminated value of the forward starting interest rate swap agreements will increase annual interest expense by approximately $1,400,000 until the maturity of the 6.6% Senior Notes in 2018.

 

Page 17 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

5.

Financial Instruments

The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, bank overdraft, accounts payable, publicly-registered long-term notes, debentures and other long-term debt.

Cash equivalents are placed primarily in money market funds, money market demand deposit accounts and Eurodollar time deposits. The 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.

The bank overdraft represents amounts to be funded to financial institutions for checks that have cleared the bank. The estimated fair value of the bank overdraft approximates its carrying value due to the short-term nature of the overdraft.

Accounts payable represent amounts owed to suppliers and vendors. The estimated fair value of accounts payable approximates its carrying amount due to the short-term nature of the payables.

The carrying values and fair values of the Company’s long-term debt were $1,781,981,000 and $1,885,231,000, respectively, at June 30, 2017; $1,686,189,000 and $1,752,338,000, respectively, at December 31, 2016; and $1,779,217,000 and $1,890,319,000, respectively, at June 30, 2016. The estimated fair value of the publicly-registered long-term notes was estimated based on Level 1 of the fair value hierarchy using quoted market prices. The estimated fair value of other borrowings, which primarily represents variable-rate debt, was based on Level 2 of the fair value hierarchy using quoted market prices for similar debt instruments, and approximates their carrying amounts as the interest rates reset periodically.  

6.

Income Taxes

The Company’s effective income tax rate for the six months ended June 30, 2017 was 26.5%.  The effective income tax rate reflects the effect of federal and state income taxes and the impact of differences in book and tax accounting arising from the net permanent benefits associated with the statutory depletion deduction for mineral reserves and the domestic production deduction.  For the six months ended June 30, 2017, as a result of the adoption of ASU 2016-09 (see Note 1), the effective income tax rate reflects the excess tax benefit related to the vesting and exercise of stock-based compensation awards, which are treated as discrete events, and had a favorable impact of 210 basis points on the tax rate. As previously stated in Note 1, this requirement of the ASU is prospective and therefore, the prior-year effective income tax rate of 30.4% is not comparable.  

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 18 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

7.

Pension and Postretirement Benefits

The estimated components of the recorded net periodic benefit cost (credit) for pension and postretirement benefits are as follows:

 

 

 

Three Months Ended June 30,

 

 

 

Pension

 

 

Postretirement Benefits

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Service cost

 

$

6,548

 

 

$

5,776

 

 

$

22

 

 

$

24

 

Interest cost

 

 

8,673

 

 

 

9,331

 

 

 

198

 

 

 

259

 

Expected return on assets

 

 

(10,071

)

 

 

(9,822

)

 

 

 

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost (credit)

 

 

113

 

 

 

91

 

 

 

(471

)

 

 

(609

)

Actuarial loss (gain)

 

 

3,551

 

 

 

3,146

 

 

 

(99

)

 

 

(139

)

Special termination benefit

 

 

 

 

 

638

 

 

 

 

 

 

(8

)

Net periodic benefit cost (credit)

 

$

8,814

 

 

$

9,160

 

 

$

(350

)

 

$

(473

)

 

 

 

Six Months Ended June 30,

 

 

 

Pension

 

 

Postretirement Benefits

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Service cost

 

$

13,402

 

 

$

11,082

 

 

$

40

 

 

$

43

 

Interest cost

 

 

18,030

 

 

 

17,938

 

 

 

365

 

 

 

432

 

Expected return on assets

 

 

(20,613

)

 

 

(18,848

)

 

 

 

 

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost (credit)

 

 

155

 

 

 

175

 

 

 

(871

)

 

 

(981

)

Actuarial loss (gain)

 

 

7,087

 

 

 

6,036

 

 

 

(182

)

 

 

(249

)

Settlement charge

 

 

 

 

 

59

 

 

 

 

 

 

 

Special termination benefit

 

 

 

 

 

764

 

 

 

 

 

 

(8

)

Net periodic benefit cost (credit)

 

$

18,061

 

 

$

17,206

 

 

$

(648

)

 

$

(763

)

 

The components of net periodic benefit cost (credit), other than the service cost component, are included in other nonoperating income, net, in the consolidated statements of earnings and comprehensive earnings.

 

 

Page 19 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

8.

Commitments and Contingencies

Legal and Administrative Proceedings

The Company is engaged in certain legal and administrative proceedings incidental to its normal business activities. In the opinion of management and counsel, based upon currently-available facts, it is remote that the ultimate outcome of any litigation and other proceedings, including those pertaining to environmental matters, relating to the Company and its subsidiaries, will have a material adverse effect on the overall results of the Company’s operations, its cash flows or its financial position.

Borrowing Arrangements with Affiliate

The Company is a co-borrower with an unconsolidated affiliate for a $25,000,000 revolving line of credit agreement with BB&T Bank. 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 June 30, 2017, December 31, 2016 and June 30, 2016.  The interest rate is one-month LIBOR plus 1.75%.

9.

Business Segments

The Building Materials business contains three reportable business segments: Mid-America Group, Southeast Group and West Group. The Company also has a Magnesia Specialties segment.  The Company’s evaluation of performance and allocation of resources are based primarily on earnings from operations. Consolidated earnings from operations include net sales less cost of sales, 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 consolidated loss from operations primarily includes depreciation on capitalized interest, expenses for corporate administrative functions, acquisition-related expenses, net, and other nonrecurring and/or non-operational 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 continuing operations for the Company’s reportable business segments. Total revenues and net sales in the table below, as well as the consolidated statements of earnings and comprehensive earnings, exclude intersegment sales which represent net sales from one segment to another segment which are eliminated.  

 

Page 20 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

9.

Business Segments (continued)

Effective with a management change previously discussed in Note 1, the cement product line is reported in the West Group.  Prior-year segment information has been reclassified to conform to the presentation of the Company’s current reportable segments and for the adoption of ASU 2017-07.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Total revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

290,899

 

 

$

278,676

 

 

$

479,918

 

 

$

465,023

 

Southeast Group

 

 

92,348

 

 

 

87,600

 

 

 

182,630

 

 

 

159,271

 

West Group

 

 

610,248

 

 

 

547,386

 

 

 

1,106,230

 

 

 

1,013,932

 

Total Building Materials Business

 

 

993,495

 

 

 

913,662

 

 

 

1,768,778

 

 

 

1,638,226

 

Magnesia Specialties

 

 

70,029

 

 

 

63,636

 

 

 

138,605

 

 

 

127,806

 

Total

 

$

1,063,524

 

 

$

977,298

 

 

$

1,907,383

 

 

$

1,766,032

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

269,844

 

 

$

258,988

 

 

$

447,181

 

 

$

432,360

 

Southeast Group

 

 

88,489

 

 

 

82,676

 

 

 

175,148

 

 

 

149,961

 

West Group

 

 

573,402

 

 

 

514,906

 

 

 

1,037,828

 

 

 

948,704

 

Total Building Materials Business

 

 

931,735

 

 

 

856,570

 

 

 

1,660,157

 

 

 

1,531,025

 

Magnesia Specialties

 

 

64,554

 

 

 

58,866

 

 

 

127,816

 

 

 

118,371

 

Total

 

$

996,289

 

 

$

915,436

 

 

$

1,787,973

 

 

$

1,649,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

85,363

 

 

$

80,792

 

 

$

98,705

 

 

$

95,486

 

Southeast Group

 

 

14,334

 

 

 

11,614

 

 

 

24,449

 

 

 

18,642

 

West Group

 

 

112,491

 

 

 

99,357

 

 

 

173,724

 

 

 

165,163

 

Total Building Materials Business

 

 

212,188

 

 

 

191,763

 

 

 

296,878

 

 

 

279,291

 

Magnesia Specialties

 

 

21,118

 

 

 

19,277

 

 

 

40,999

 

 

 

39,887

 

Corporate

 

 

(20,454

)

 

 

(20,192

)

 

 

(47,875

)

 

 

(42,306

)

Total

 

$

212,852

 

 

$

190,848

 

 

$

290,002

 

 

$

276,872

 

 

 

Page 21 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

9.

Business Segments (continued)

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 net sales and gross profit by business: Building Materials (further divided by product line) and Magnesia Specialties.  

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregates

 

$

578,388

 

 

$

547,293

 

 

$

1,029,767

 

 

$

978,153

 

Cement

 

 

99,016

 

 

 

87,440

 

 

 

192,700

 

 

 

184,300

 

Ready Mixed Concrete

 

 

241,894

 

 

 

214,947

 

 

 

464,275

 

 

 

401,799

 

Asphalt and Paving

 

 

111,975

 

 

 

88,081

 

 

 

138,577

 

 

 

101,918

 

Less: Interproduct Sales

 

 

(99,538

)

 

 

(81,191

)

 

 

(165,162

)

 

 

(135,145

)

Total Building Materials Business

 

 

931,735

 

 

 

856,570

 

 

 

1,660,157

 

 

 

1,531,025

 

Magnesia Specialties

 

 

64,554

 

 

 

58,866

 

 

 

127,816

 

 

 

118,371

 

Total

 

$

996,289

 

 

$

915,436

 

 

$

1,787,973

 

 

$

1,649,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aggregates

 

$

173,487

 

 

$

165,044

 

 

$

252,765

 

 

$

247,080

 

Cement

 

 

29,448

 

 

 

24,048

 

 

 

60,358

 

 

 

56,663

 

Ready Mixed Concrete

 

 

26,863

 

 

 

25,301

 

 

 

46,655

 

 

 

43,200

 

Asphalt and Paving

 

 

20,358

 

 

 

12,867

 

 

 

15,568

 

 

 

6,591

 

Total Building Materials Business

 

 

250,156

 

 

 

227,260

 

 

 

375,346

 

 

 

353,534

 

Magnesia Specialties

 

 

23,624

 

 

 

21,720

 

 

 

45,939

 

 

 

44,718

 

Corporate

 

 

314

 

 

 

(1,549

)

 

 

(125

)

 

 

(5,571

)

Total

 

$

274,094

 

 

$

247,431

 

 

$

421,160

 

 

$

392,681

 

 

10.

Other Operating Income, Net

Other operating income, net, for the quarter ended June 30, 2017, reflects a $13,500,000 gain on the sale of real estate and $6,100,000 of expense, including both cash and stock-based compensation components, related to the pending retirement of Anne Lloyd, Chief Financial Officer.  The vesting of Ms. Lloyd’s shares of restricted stock awards, performance stock awards and stock options will continue on their original vesting schedules, which extend beyond Ms. Lloyd's retirement date.  Accordingly, the Company recognized all remaining expense related to the stock-based awards.

 

Page 22 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

11.

Supplemental Cash Flow Information

The components of the change in other assets and liabilities, net, are as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Other current and noncurrent assets

 

$

(32,332

)

 

$

(9,691

)

Accrued salaries, benefits and payroll taxes

 

 

(7,892

)

 

 

(7,808

)

Accrued insurance and other taxes

 

 

(134

)

 

 

(256

)

Accrued income taxes

 

 

28,047

 

 

 

(8,495

)

Accrued pension, postretirement and postemployment benefits

 

 

11,521

 

 

 

11,757

 

Other current and noncurrent liabilities

 

 

30,740

 

 

 

(5,477

)

 

 

$

29,950

 

 

$

(19,970

)

 

The change in other current and noncurrent assets and other current and noncurrent liabilities is primarily attributable to an accrual of insurance claims over the deductible limits.  Additionally, the change in other current and noncurrent liabilities is due to retirement expense in the current year and the write-off of coal contracts in the prior year.  The change in accrued income taxes is attributable to net operating loss carryforwards utilized in the prior year.

Noncash investing and financing activities are as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued liabilities for purchases of property, plant and equipment

 

$

34,714

 

 

$

33,959

 

Acquisition of assets through capital lease

 

$

149

 

 

$

 

Settlement of royalty obligation via asset sale

 

$

900

 

 

$

 

 

Supplemental disclosures of cash flow information are as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Cash paid for interest

 

$

38,111

 

 

$

36,630

 

Cash paid for income taxes

 

$

33,264

 

 

$

47,159

 

 

 

Page 23 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(UNAUDITED) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

12.

Business Combinations

In the first quarter 2016, the Company acquired the outstanding stock of Rocky Mountain Materials and Asphalt, Inc., and Rocky Mountain Premix Inc.  The acquisition provides more than 500 million tons of mineral reserves and expands the Company’s presence along the Front Range of the Rocky Mountains, home to 80% of Colorado’s population.  The acquired operations are reported through the West Group.  

In July 2016, the Company acquired the remaining interest in Ratliff Ready-Mix, L.P. (Ratliff), which operates ready mixed concrete plants in central Texas.  Prior to the acquisition, the Company owned a 40% interest in Ratliff which was accounted for under the equity method.  The Company was required to re-measure the existing 40% interest to fair value upon closing of the transaction, resulting in a gain of $5,863,000, which was recorded in other nonoperating income in third quarter 2016.  These operations are reported in the West Group.  The Company recorded fair values of the assets acquired and liabilities assumed; however, deferred income taxes and goodwill are subject to change upon review of the seller’s final tax return.

The impact of these acquisitions on the operating results was not considered material; therefore, pro forma financial information is not included.

13.

Pending Acquisition of Bluegrass Materials

On June 26, 2017, the Company announced a definitive agreement to acquire Bluegrass Materials Company (Bluegrass) for $1,625,000,000 in cash.  The purchase price will be increased dollar-for-dollar by any cash on hand held by Bluegrass and decreased by the amount of any outstanding debt of Bluegrass, each as of the closing of the transaction.  Bluegrass is the largest privately held, pure-play aggregates business in the United States and has a portfolio of 23 active sites with more than 125 years of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland and Kentucky.  These operations complement the Company’s existing southeastern footprint and provides a new growth platform within the southern portion of the Northeast Megaregion.  The transaction is expected to close in the fourth quarter of 2017, subject to regulatory approvals and other customary closing conditions.

 

 

 

Page 24 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

Martin Marietta Materials, Inc. (the Company or Martin Marietta) is a leading supplier of building materials, including aggregates, cement, ready mixed concrete and asphalt and paving (collectively herein referred to as the Building Materials business).  The aggregates product line is sold and shipped from a network of more than 270 quarries and distribution facilities in 26 states, Nova Scotia and the Bahamas.  The cement, ready mixed concrete and asphalt and paving product lines are located in strategic, vertically-integrated markets, predominately Texas and Colorado.  The Company’s annual consolidated net sales and earnings from operations are predominately derived from its Building Materials business which sells to all sectors of the public infrastructure, environmental industries, nonresidential and residential construction industries, as well as agriculture, railroad ballast, chemical, utility and other uses.  The Building Materials business’ products are used primarily by commercial customers principally in domestic construction of highways and other infrastructure projects and for nonresidential and residential building development.

Effective January 1, 2017, the Company reorganized the operations and management reporting structure of its Texas-based aggregates, ready mixed concrete and cement product lines, resulting in a change to its reportable segments.  The Company currently conducts its Building Materials business through three reportable business segments: Mid-America Group, Southeast Group and West Group.

 

BUILDING MATERIALS BUSINESS

Reportable Segments

 

Mid-America Group

 

Southeast Group

 

West Group

Operating Locations

  

Indiana, Iowa, northern Kansas, Kentucky, Maryland, Minnesota, Missouri, eastern Nebraska, North Carolina, Ohio, South Carolina, Virginia, Washington and West Virginia

  

Alabama, Florida, Georgia, Tennessee, Nova Scotia and the Bahamas

  

Arkansas, Colorado, southern Kansas, Louisiana, western Nebraska, Nevada, Oklahoma, Texas, Utah and Wyoming

 

 

 

 

Product Lines

  

Aggregates (crushed stone, sand and gravel)

  

Aggregates (crushed stone, sand and gravel)

  

Aggregates (crushed stone, sand and gravel), cement (Portland and specialty cements), ready mixed concrete and asphalt and paving

 

 

 

 

Plant Types

  

Quarries and Distribution Facilities

  

Quarries and Distribution Facilities

  

Quarries, Plants and

Distribution Facilities

 

 

 

 

Modes of Transportation

  

Truck and Rail

  

Truck, Rail and Water

  

Truck and Rail

 

The Company also has a Magnesia Specialties segment that produces magnesia-based chemicals products used in industrial, agricultural and environmental applications and dolomitic lime sold primarily to customers in the steel industry.

 

Page 25 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

CRITICAL ACCOUNTING POLICIES

The Company outlined its critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2016. There were no changes to the Company’s critical accounting policies during the six months ended June 30, 2017.

RESULTS OF OPERATIONS

Except as indicated, the comparative analysis in this Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on net sales and cost of sales.  Gross margin and operating margin calculated as percentages of total revenues represent the most directly comparable financial measures calculated in accordance with generally accepted accounting principles (GAAP).  However, gross margin as a percentage of net sales and operating margin as a percentage of net sales represent non-GAAP measures.  The Company presents these ratios calculated based on net sales, as it is consistent with the basis by which management reviews the Company’s operating results. Further, management believes it is consistent with the basis by which investors analyze the Company’s operating results given that freight and delivery revenues and costs represent pass-throughs and have no profit mark-up. The following tables present the calculations of gross margin and operating margin for the three and six months ended June 30, 2017 and 2016 in accordance with GAAP and reconciliations of the ratios as percentages of total revenues to percentages of net sales.

Consolidated Gross Margin in Accordance with GAAP

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Gross profit

 

$

274,094

 

 

$

247,431

 

 

$

421,160

 

 

$

392,681

 

Total revenues

 

$

1,063,524

 

 

$

977,298

 

 

$

1,907,383

 

 

$

1,766,032

 

Gross margin

 

 

25.8

%

 

 

25.3

%

 

 

22.1

%

 

 

22.2

%

 

Consolidated Gross Margin Excluding Freight and Delivery Revenues

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Gross profit

 

$

274,094

 

 

$

247,431

 

 

$

421,160

 

 

$

392,681

 

Total revenues

 

$

1,063,524

 

 

$

977,298

 

 

$

1,907,383

 

 

$

1,766,032

 

Less: Freight and delivery revenues

 

 

(67,235

)

 

 

(61,862

)

 

 

(119,410

)

 

 

(116,636

)

Net sales

 

$

996,289

 

 

$

915,436

 

 

$

1,787,973

 

 

$

1,649,396

 

Gross margin excluding freight and delivery revenues

 

 

27.5

%

 

 

27.0

%

 

 

23.6

%

 

 

23.8

%

 

 

Page 26 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

Consolidated Operating Margin in Accordance with GAAP

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Earnings from operations

 

$

212,852

 

 

$

190,848

 

 

$

290,002

 

 

$

276,872

 

Total revenues

 

$

1,063,524

 

 

$

977,298

 

 

$

1,907,383

 

 

$

1,766,032

 

Operating margin

 

 

20.0

%

 

 

19.5

%

 

 

15.2

%

 

 

15.7

%

 

Consolidated Operating Margin Excluding Freight and Delivery Revenues

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Earnings from operations

 

$

212,852

 

 

$

190,848

 

 

$

290,002

 

 

$

276,872

 

Total revenues

 

$

1,063,524

 

 

$

977,298

 

 

$

1,907,383

 

 

$

1,766,032

 

Less: Freight and delivery revenues

 

 

(67,235

)

 

 

(61,862

)

 

 

(119,410

)

 

 

(116,636

)

Net sales

 

$

996,289

 

 

$

915,436

 

 

$

1,787,973

 

 

$

1,649,396

 

Operating margin excluding freight and delivery revenues

 

 

21.4

%

 

 

20.8

%

 

 

16.2

%

 

 

16.8

%

 

Earnings before interest, income taxes, depreciation, depletion and amortization (EBITDA) is a widely accepted financial indicator of a company’s ability to service and/or incur indebtedness.  EBITDA is not defined by generally accepted accounting principles and, as such, should not be construed as an alternative to net earnings, 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 exclude some, but not all, items that affect net earnings and may vary among companies, the EBITDA presented by the Company may not be comparable to similarly titled measures of other companies.

A reconciliation of net earnings attributable to Martin Marietta Materials, Inc. to consolidated EBITDA is as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(Dollars in thousands)

 

Net Earnings Attributable to Martin Marietta Materials, Inc.

 

$

142,279

 

 

$

122,052

 

 

$

184,613

 

 

$

167,047

 

Add back:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

24,045

 

 

 

20,294

 

 

 

44,896

 

 

 

40,328

 

Income tax expense for controlling interests

 

 

51,981

 

 

 

53,406

 

 

 

66,503

 

 

 

73,073

 

Depreciation, depletion and amortization expense

 

 

73,993

 

 

 

70,728

 

 

 

144,000

 

 

 

138,654

 

Consolidated EBITDA

 

$

292,298

 

 

$

266,480

 

 

$

440,012

 

 

$

419,102

 

 

Page 27 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

Significant items for the quarter ended June 30, 2017 (unless noted, all comparisons are versus the prior-year quarter), which reflect records for second-quarter:

 

Consolidated net sales of $996.3 million increased 8.8% compared with $915.4 million

 

Building Materials net sales of $931.7 million compared with $856.6 million, an increase of 8.8%, and Magnesia Specialties record net sales of $64.6 million compared with $58.9 million, an increase of 9.7%

 

Consolidated gross profit of $274.1 million compared with $247.4 million

 

Consolidated earnings from operations of $212.9 million compared with $190.8 million, an increase of 11.5%

 

Earnings per diluted share of $2.25 compared with $1.90, an increase of 18.4%

 

EBITDA of $292.3 million compared with $266.5 million, an increase of 9.7%

The following table presents net sales, gross profit (loss), selling, general and administrative expenses and earnings (loss) from operations data for the Company and its reportable segments for the three months ended June 30, 2017 and 2016. In each case, the data is stated as a percentage of net sales of the Company or the relevant segment, as the case may be.  Prior-year information has been reclassified to conform to the presentation of the Company’s current reportable segments and for the adoption of the accounting pronouncement discussed in Note 1 of the consolidated financial statements.

 

 

 

Three Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

 

 

(Dollars in Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

269,844

 

 

 

100.0

 

 

$

258,988

 

 

 

100.0

 

Southeast Group

 

 

88,489

 

 

 

100.0

 

 

 

82,676

 

 

 

100.0

 

West Group

 

 

573,402

 

 

 

100.0

 

 

 

514,906

 

 

 

100.0

 

Total Building Materials Business

 

 

931,735

 

 

 

100.0

 

 

 

856,570

 

 

 

100.0

 

Magnesia Specialties

 

 

64,554

 

 

 

100.0

 

 

 

58,866

 

 

 

100.0

 

Total

 

$

996,289

 

 

 

100.0

 

 

$

915,436

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 28 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

 

 

Three Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

 

 

(Dollars in Thousands)

 

Gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

98,537

 

 

 

36.5

 

 

$

92,772

 

 

 

35.8

 

Southeast Group

 

 

18,883

 

 

 

21.3

 

 

 

15,593

 

 

 

18.9

 

West Group

 

 

132,736

 

 

 

23.1

 

 

 

118,895

 

 

 

23.1

 

Total Building Materials Business

 

 

250,156

 

 

 

26.8

 

 

 

227,260

 

 

 

26.5

 

Magnesia Specialties

 

 

23,624

 

 

 

36.6

 

 

 

21,720

 

 

 

36.9

 

Corporate

 

 

314

 

 

 

 

 

 

 

(1,549

)

 

 

 

 

Total

 

$

274,094

 

 

 

27.5

 

 

$

247,431

 

 

 

27.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

13,720

 

 

 

5.1

 

 

$

13,338

 

 

 

5.2

 

Southeast Group

 

 

4,447

 

 

 

5.0

 

 

 

4,533

 

 

 

5.5

 

West Group

 

 

25,874

 

 

 

4.5

 

 

 

23,585

 

 

 

4.6

 

Total Building Materials Business

 

 

44,041

 

 

 

4.7

 

 

 

41,456

 

 

 

4.8

 

Magnesia Specialties

 

 

2,429

 

 

 

3.8

 

 

 

2,433

 

 

 

4.1

 

Corporate

 

 

21,903

 

 

 

 

 

 

 

15,892

 

 

 

 

 

Total

 

$

68,373

 

 

 

6.9

 

 

$

59,781

 

 

 

6.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

85,363

 

 

 

31.6

 

 

$

80,792

 

 

 

31.2

 

Southeast Group

 

 

14,334

 

 

 

16.2

 

 

 

11,614

 

 

 

14.0

 

West Group

 

 

112,491

 

 

 

19.6

 

 

 

99,357

 

 

 

19.3

 

Total Building Materials Business

 

 

212,188

 

 

 

22.8

 

 

 

191,763

 

 

 

22.4

 

Magnesia Specialties

 

 

21,118

 

 

 

32.7

 

 

 

19,277

 

 

 

32.7

 

Corporate

 

 

(20,454

)

 

 

 

 

 

 

(20,192

)

 

 

 

 

Total

 

$

212,852

 

 

 

21.4

 

 

$

190,848

 

 

 

20.8

 

 

Page 29 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

Building Materials Business

Net sales by product line for the Building Materials business are as follows:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

Aggregates

 

$

578,388

 

 

$

547,293

 

Cement

 

 

99,016

 

 

 

87,440

 

Ready Mixed Concrete

 

 

241,894

 

 

 

214,947

 

Asphalt and Paving

 

 

111,975

 

 

 

88,081

 

Less: Interproduct Sales

 

 

(99,538

)

 

 

(81,191

)

Total Building Materials Business

 

$

931,735

 

 

$

856,570

 

 

The following tables present volume and pricing variance data and shipments data for the aggregates product line by segment.

 

 

 

Three Months Ended

 

 

 

June 30, 2017

 

 

 

Volume

 

 

Pricing

 

Volume/Pricing Variance (1)

 

 

 

 

 

 

 

 

Mid-America Group

 

 

2.0

%

 

 

2.4

%

Southeast Group

 

 

(3.2

)%

 

 

10.6

%

West Group

 

 

3.6

%

 

 

3.4

%

Aggregates Product Line

 

 

2.0

%

 

 

3.8

%

(1)

Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Tons in Thousands)

 

Shipments

 

 

 

 

 

 

 

 

Mid-America Group

 

 

20,513

 

 

 

20,116

 

Southeast Group

 

 

5,203

 

 

 

5,375

 

West Group

 

 

17,707

 

 

 

17,091

 

Aggregates Product Line

 

 

43,423

 

 

 

42,582

 

The decline in the Southeast Group’s shipments is attributable to unfavorable weather in second quarter, where shipping days affected by rain were 3.5 times more than the three-year average.

 

Page 30 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

The following table presents shipments data for the Building Materials business by product line.

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Tons in Thousands)

 

Shipments

 

 

 

 

 

 

 

 

Aggregates Product Line (in thousands):

 

 

 

 

 

 

 

 

Tons to external customers

 

 

40,411

 

 

 

39,895

 

Internal tons used in other product lines

 

 

3,012

 

 

 

2,687

 

Total aggregates tons

 

 

43,423

 

 

 

42,582

 

Cement (in thousands):

 

 

 

 

 

 

 

 

Tons to external customers

 

 

620

 

 

 

578

 

Internal tons used in ready mixed concrete

 

 

302

 

 

 

276

 

Total cement tons

 

 

922

 

 

 

854

 

 

 

 

 

 

 

 

 

 

Ready Mixed Concrete (in thousands of cubic yards)

 

 

2,226

 

 

 

1,997

 

 

 

 

 

 

 

 

 

 

Asphalt (in thousands):

 

 

 

 

 

 

 

 

Tons to external customers

 

 

325

 

 

 

263

 

Internal tons used in paving business

 

 

662

 

 

 

584

 

Total asphalt tons

 

 

987

 

 

 

847

 

 

Second-quarter results were negatively affected by significant precipitation, notably in the eastern United States.  All southeastern states experienced precipitation that ranged from the 5th to the 17th wettest second quarters out of the last 123 years.  The impact of the weather partially negated the impact of a broad-based construction recovery.  Employment gains, a catalyst for construction activity, remain strong with 2.2 million jobs created in the United States for the trailing-twelve months ended May 31, 2017.  Further, Texas, Florida, Georgia, North Carolina and Colorado are each ranked in the top ten in job growth.  

For the quarter, shipments to the infrastructure market were relatively flat and comprised 41% of second-quarter aggregates product line volumes, which remains below the Company’s five-year average.  This is attributable to continued under-investment in the nation’s infrastructure and greater private-sector nonresidential and residential investments.  

The nonresidential market represented 32% of second-quarter aggregates product line shipments.  The light nonresidential market, which consists primarily of office and retail construction, increased 3.4% for the quarter; however, heavy nonresidential activity, which includes industrial building as well as energy and energy-related construction, was relatively flat, resulting in a 1.6% increase in overall nonresidential shipments. The Southeast Group reported strong industrial construction growth.  However, in-line with management’s expectations, the West Group reported a decline in nonresidential shipments due to the completion of several large energy-related projects in 2016 that were not immediately replaced in the first half of 2017.  

 

Page 31 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

The residential market accounted for 20% of aggregates product line shipments for the second quarter. Volumes to this segment increased 14.8%, driven by continued strength in housing across the Company’s geographic footprint. Texas, Florida, North Carolina, Georgia and South Carolina, key geographies for the Building Materials business, comprised five of the top ten states for single family housing starts as of May 2017.  Additionally, on the metro-level, Dallas, Tampa, Austin, Houston, Atlanta, Charlotte, Raleigh and Orlando comprised the top eight for single family unit starts.

The ChemRock/Rail market accounted for the remaining 7% of aggregates product line volumes and declined versus the prior-year quarter.

The average selling price by product line for the Building Materials business is as follows:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

% Change

 

Aggregates (per ton)

 

$

13.24

 

 

$

12.76

 

 

 

3.8

%

Cement (per ton)

 

$

106.31

 

 

$

101.04

 

 

 

5.2

%

Ready Mixed Concrete (per cubic yard)

 

$

106.90

 

 

$

105.37

 

 

 

1.5

%

Asphalt (per ton)

 

$

42.48

 

 

$

38.25

 

 

 

11.1

%

 

Solid pricing growth across the product lines and geographies reinforces management’s view of the healthy, underlying demand fundamentals that underpin the Building Materials business.  The cement product line increase further reinforces the underlying positive market conditions in Texas, and additionally, reflects partial realization against the $8.00 per ton price increase effective April 1, 2017.  

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 shipments, production and profitability in all markets served by the Company.  Because of the potentially significant impact of weather on the Company’s operations, current period and year to date results are not indicative of expected performance for other interim periods or the full year.  

Magnesia Specialties Business

Magnesia Specialties reported second-quarter net sales of $64.6 million compared with $58.9 million, reflecting growth in both the chemicals and lime product lines.  Gross profit for the second quarter was $23.6 million compared to $21.7 million and earnings from operations were $21.1 million compared to $19.3 million.  

 

Page 32 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

Gross Profit

The following presents a rollforward of consolidated gross profit (dollars in thousands):  

 

Consolidated gross profit, quarter ended June 30, 2016

 

$

247,431

 

Aggregates product line:

 

 

 

 

Volume

 

 

10,612

 

Pricing

 

 

20,940

 

Cost increases, net

 

 

(23,109

)

Change in aggregates product line gross profit

 

 

8,443

 

Vertically-integrated product lines

 

 

14,453

 

Magnesia Specialties

 

 

1,904

 

Corporate

 

 

1,863

 

Change in consolidated gross profit

 

 

26,663

 

Consolidated gross profit, quarter ended June 30, 2017

 

$

274,094

 

 

Gross profit (loss) by business is as follows:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Gross profit (loss):

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

Aggregates

 

$

173,487

 

 

$

165,044

 

Cement

 

 

29,448

 

 

 

24,048

 

Ready Mixed Concrete

 

 

26,863

 

 

 

25,301

 

Asphalt and Paving

 

 

20,358

 

 

 

12,867

 

Total Building Materials Business

 

 

250,156

 

 

 

227,260

 

Magnesia Specialties

 

 

23,624

 

 

 

21,720

 

Corporate

 

 

314

 

 

 

(1,549

)

Total

 

$

274,094

 

 

$

247,431

 

 

The consolidated gross margin (excluding freight and delivery revenues) for the quarter was 27.5%, a 50-basis-point increase over the prior-year quarter.  Gross margin (excluding freight and delivery revenues) for the Building Materials business was 26.8%, an increase of 30 basis points.  Cement kiln maintenance costs were $3.5 million for the quarter compared with $5.7 million for the prior-year quarter.

Consolidated Operating Results

Consolidated SG&A was 6.9% of net sales compared with 6.5% in the prior-year quarter. The increase of 40 basis points reflects a higher second-quarter accrual rate in performance-based incentive compensation costs compared with the

 

Page 33 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

prior-year quarter.  Earnings from operations for the quarter were $212.9 million compared with $190.8 million in 2016, an increase of 11.5%.  

Among other items, other operating income and expenses, net, includes gains and losses on the sale of assets; recoveries and writeoffs related to customer accounts receivable; rental, royalty and services income; accretion expense, depreciation expense and gains and losses related to asset retirement obligations. For the second quarter, consolidated other operating income and expenses, net, was income of $9.1 million and $3.5 million in 2017 and 2016, respectively.  The increase reflects a $13.5 million gain on the sale of real estate and $6.1 million of expense, including both cash and stock-based compensation components, related to the pending retirement of the Chief Financial Officer (CFO).  The vesting of the CFO’s shares of restricted stock awards, performance stock awards and stock options will continue on their original vesting schedules, which extend beyond the CFO’s retirement date.  Accordingly, the Company recognized all remaining expense related to the stock-based awards.  

Other nonoperating income and expenses, net, includes pension and postretirement benefit cost, excluding service cost; foreign currency transaction gains and losses; interest; equity adjustments for nonconsolidated affiliates and other miscellaneous income.  For the second quarter, nonoperating income and expenses, net, was income of $5.4 million and $5.0 million in 2017 and 2016, respectively.  

The estimated effective income tax rate for the six months ended was 26.5%, which, as a result of the adoption of ASU 2016-09 (see Note 1), reflects a 210-basis-point favorable impact from excess tax benefits related to stock-based compensation, which are treated as discrete events effective January 1, 2017.

Significant items for the six months ended June 30, 2017 (unless noted, all comparisons are versus the prior-year period):

 

Consolidated net sales of $1.79 billion increased 8.4% compared with $1.65 billion

 

Building Materials net sales of $1.66 billion compared with $1.53 billion, an increase of 8.4%, and Magnesia Specialties net sales of $127.8 million compared with $118.4 million, an increase of 8.0%

 

Consolidated gross profit of $421.2 million compared with $392.7 million, an increase of 7.3%

 

Earnings per diluted share of $2.91 compared with $2.60, an increase of 11.9%

 

EBITDA of $440.0 million compared with $419.1 million, an increase of 5%

 

Page 34 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

The following table presents net sales, gross profit (loss), selling, general and administrative expenses and earnings (loss) from operations data for the Company and its reportable segments for the six months ended June 30, 2017 and 2016. In each case, the data is stated as a percentage of net sales of the Company or the relevant segment, as the case may be.

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

 

 

(Dollars in Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

447,181

 

 

 

100.0

 

 

$

432,360

 

 

 

100.0

 

Southeast Group

 

 

175,148

 

 

 

100.0

 

 

 

149,961

 

 

 

100.0

 

West Group

 

 

1,037,828

 

 

 

100.0

 

 

 

948,704

 

 

 

100.0

 

Total Building Materials Business

 

 

1,660,157

 

 

 

100.0

 

 

 

1,531,025

 

 

 

100.0

 

Magnesia Specialties

 

 

127,816

 

 

 

100.0

 

 

 

118,371

 

 

 

100.0

 

Total

 

 

1,787,973

 

 

 

100.0

 

 

 

1,649,396

 

 

 

100.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

124,821

 

 

 

27.9

 

 

$

120,393

 

 

 

27.8

 

Southeast Group

 

 

33,252

 

 

 

19.0

 

 

 

25,960

 

 

 

17.3

 

West Group

 

 

217,273

 

 

 

20.9

 

 

 

207,181

 

 

 

21.8

 

Total Building Materials Business

 

 

375,346

 

 

 

22.6

 

 

 

353,534

 

 

 

23.1

 

Magnesia Specialties

 

 

45,939

 

 

 

35.9

 

 

 

44,718

 

 

 

37.8

 

Corporate

 

 

(125

)

 

 

 

 

(5,571

)

 

 

Total

 

$

421,160

 

 

 

23.6

 

 

$

392,681

 

 

 

23.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Page 35 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

 

Amount

 

 

% of

Net Sales

 

 

Amount

 

 

% of

Net Sales

 

 

 

(Dollars in Thousands)

 

Selling, general & administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

27,263

 

 

 

6.1

 

 

$

26,400

 

 

 

6.1

 

Southeast Group

 

 

8,799

 

 

 

5.0

 

 

 

8,392

 

 

 

5.6

 

West Group

 

 

50,948

 

 

 

4.9

 

 

 

46,548

 

 

 

4.9

 

Total Building Materials Business

 

 

87,010

 

 

 

5.2

 

 

 

81,340

 

 

 

5.3

 

Magnesia Specialties

 

 

4,817

 

 

 

3.8

 

 

 

4,759

 

 

 

4.0

 

Corporate

 

 

46,081

 

 

 

 

 

 

32,031

 

 

 

 

Total

 

$

137,908

 

 

 

7.7

 

 

$

118,130

 

 

 

7.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid-America Group

 

$

98,705

 

 

 

22.07

 

 

$

95,486

 

 

 

22.08

 

Southeast Group

 

 

24,449

 

 

 

13.96

 

 

 

18,642

 

 

 

12.43

 

West Group

 

 

173,724

 

 

 

16.74

 

 

 

165,163

 

 

 

17.41

 

Total Building Materials Business

 

 

296,878

 

 

 

17.9

 

 

 

279,291

 

 

 

18.2

 

Magnesia Specialties

 

 

40,999

 

 

 

32.1

 

 

 

39,887

 

 

 

33.7

 

Corporate

 

 

(47,875

)

 

 

 

 

 

(42,306

)

 

 

 

Total

 

$

290,002

 

 

 

16.2

 

 

$

276,872

 

 

 

16.8

 

Net sales by product line for the Building Materials business are as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Net sales:

 

 

 

 

 

 

 

 

Aggregates

 

$

1,029,767

 

 

$

978,153

 

Cement

 

 

192,700

 

 

 

184,300

 

Ready Mixed Concrete

 

 

464,275

 

 

 

401,799

 

Asphalt and Paving

 

 

138,577

 

 

 

101,918

 

Less: Interproduct Sales

 

 

(165,162

)

 

 

(135,145

)

Total Building Materials Business

 

$

1,660,157

 

 

$

1,531,025

 

 

Page 36 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

The following tables present volume and pricing data and shipments data for the aggregates product line.

 

 

 

Six Months Ended

 

 

 

June 30, 2017

 

 

 

Volume

 

 

Pricing

 

Volume/Pricing Variance (1)

 

 

 

 

 

 

 

 

Mid-America Group

 

 

0.6

%

 

 

3.2

%

Southeast Group

 

 

5.5

%

 

 

10.5

%

West Group

 

 

0.1

%

 

 

3.0

%

Aggregates Product Line

 

 

1.0

%

 

 

4.4

%

(1)

Volume/pricing variances reflect the percentage increase/(decrease) from the comparable period in the prior year.

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Tons in Thousands)

 

Shipments

 

 

 

 

 

 

 

 

Mid-America Group

 

 

33,251

 

 

 

33,054

 

Southeast Group

 

 

10,231

 

 

 

9,693

 

West Group

 

 

32,552

 

 

 

32,515

 

Aggregates Product Line

 

 

76,034

 

 

 

75,262

 

 

Page 37 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

Unit shipments by product line for the Company is as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Tons in Thousands)

 

Shipments

 

 

 

 

 

 

 

 

Aggregates Product Line (in thousands):

 

 

 

 

 

 

 

 

Tons to external customers

 

 

70,829

 

 

 

70,655

 

Internal tons used in other product lines

 

 

5,205

 

 

 

4,607

 

Total aggregates tons

 

 

76,034

 

 

 

75,262

 

 

 

 

 

 

 

 

-

 

Cement (in thousands):

 

 

 

 

 

 

 

 

Tons to external customers

 

 

1,226

 

 

 

1,263

 

Internal tons used in ready mixed concrete

 

 

601

 

 

 

548

 

Total cement tons

 

 

1,827

 

 

 

1,811

 

 

 

 

 

 

 

 

 

 

Ready Mixed Concrete (in thousands of cubic yards)

 

 

4,282

 

 

 

3,783

 

 

 

 

 

 

 

 

 

 

Asphalt (in thousands):

 

 

 

 

 

 

 

 

Tons to external customers

 

 

478

 

 

 

343

 

Internal tons used in paving business

 

 

786

 

 

 

649

 

Total asphalt tons

 

 

1,264

 

 

 

992

 

Average selling prices by product line for the Company were as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

% Change

 

Aggregates (per ton)

 

$

13.45

 

 

$

12.88

 

 

 

4.4

%

Cement (per ton)

 

$

104.44

 

 

$

100.51

 

 

 

3.9

%

Ready Mixed Concrete (per cubic yard)

 

$

106.39

 

 

$

103.99

 

 

 

2.3

%

Asphalt (per ton)

 

$

41.49

 

 

$

38.89

 

 

 

6.7

%

For the first six months of 2017, Magnesia Specialties reported net sales of $127.8 million, an 8% increase compared with the prior-year period.  Earnings from operations were $41.0 million compared with $39.9 million.  Production cost increases outpaced net sales growth due to higher natural gas prices and planned and unplanned maintenance costs at the Woodville and Manistee plants.

 

Page 38 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

Consolidated gross margin (excluding freight and delivery revenues) was 23.6% for 2017 versus 23.8% for 2016.  The following presents a rollforward of the Company’s gross profit (dollars in thousands):

 

Consolidated gross profit, six months ended June 30, 2016

 

$

392,681

 

Aggregates product line:

 

 

 

 

Volume

 

 

9,815

 

Pricing

 

 

43,252

 

Cost increases, net

 

 

(47,382

)

Change in aggregates product line gross profit

 

 

5,685

 

Vertically-integrated product lines

 

 

16,127

 

Magnesia Specialties

 

 

1,221

 

Corporate

 

 

5,446

 

Change in consolidated gross profit

 

 

28,479

 

Consolidated gross profit, six months ended June 30, 2017

 

$

421,160

 

Gross profit (loss) by business is as follows:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Gross profit (loss):

 

 

 

 

 

 

 

 

Building Materials Business

 

 

 

 

 

 

 

 

Aggregates

 

$

252,765

 

 

$

247,080

 

Cement

 

 

60,358

 

 

 

56,663

 

Ready Mixed Concrete

 

 

46,655

 

 

 

43,200

 

Asphalt and Paving

 

 

15,568

 

 

 

6,591

 

Total Building Materials Business

 

 

375,346

 

 

 

353,534

 

Magnesia Specialties

 

 

45,939

 

 

 

44,718

 

Corporate

 

 

(125

)

 

 

(5,571

)

Total

 

$

421,160

 

 

$

392,681

 

Consolidated SG&A expenses were 7.7% of net sales, up 50 basis points compared with the prior-year period, driven by higher incentive compensation, including share-based compensation and increased charitable support.

For the first six months, consolidated other operating income and expenses, net, was income of $8.8 million and $2.9 million in 2017 and 2016, respectively.  The increase in 2017 over 2016 reflects a $13.5 million gain on the sale of real estate and a $6.1 million expense related to the pending retirement of the Chief Financial Officer (CFO).  The vesting of the CFO’s shares of restricted stock awards, performance stock awards and stock options will continue on their original vesting schedules, which extend beyond the CFO’s retirement date.  Accordingly, the Company recognized all remaining expense related to the stock-based awards.

Consolidated other nonoperating income and expenses, net, for the six months ended June 30, 2017 was income of $6.0 million compared with income of $3.8 million in 2016, primarily driven by lower pension expense in 2017.

 

Page 39 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities for the six months ended June 30, 2017 was $229.6 million compared with $209.8 million for the same period in 2016.  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:

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

 

(Dollars in Thousands)

 

Depreciation

 

$

128,543

 

 

$

124,627

 

Depletion

 

 

8,290

 

 

 

7,293

 

Amortization

 

 

9,269

 

 

 

7,697

 

 

 

$

146,102

 

 

$

139,617

 

 

The seasonal nature of the aggregates-led construction business impacts quarterly operating cash flow when compared with the full year. Full-year 2016 net cash provided by operating activities was $689.2 million compared with $209.8 million for the first six months of 2016.

During the six months ended June 30, 2017, the Company had capital spending of $216.1 million. Full-year capital spending is expected to approximate $450 million to $500 million.

The Company can repurchase its common stock through open-market purchases pursuant to authority granted by its Board of Directors or through private transactions at such prices and upon such terms as the Chief Executive Officer deems appropriate. The Company did not make any repurchases of common stock during the second quarter.  At June 30, 2017, 14,669,000 shares of common stock were remaining under the Company’s repurchase authorization.  

On June 26, 2017, the Company announced a definitive agreement to acquire Bluegrass Materials Company (Bluegrass) for $1.625 billion in cash.  The purchase price will be increased dollar-for-dollar by any cash on hand held by Bluegrass and decreased by the amount of any outstanding debt of Bluegrass, each as of the closing of the transaction.  Bluegrass is the largest privately held, pure-play aggregates business in the United States and has a portfolio of 23 active sites with more than 125 years of strategically-located, high-quality reserves, in Georgia, South Carolina, Tennessee, Maryland and Kentucky.  These operations complement the Company’s existing southeastern footprint and provides a new growth platform within the southern portion of the Northeast Megaregion.  The transaction is expected to close in the fourth quarter of 2017, subject to regulatory approvals and other customary closing conditions.

On May 22, 2017, the Company issued $300 million aggregate principal amount of Floating Rate Senior Notes due in 2020 (the Floating Rate Notes) and $300 million principal amount of 3.450% Senior Notes due in 2027 (the 3.450% Senior Notes, and together with the Floating Rate Notes, the Senior Notes).  The Senior Notes are senior unsecured obligations of the Company.  The 3.450% Senior Notes may be redeemed in whole or in part prior to March 1, 2027 at a make-whole redemption price, or on or after March 1, 2027 at a redemption price equal to 100% of the principal amount of the notes to be redeemed, in either case plus unpaid interest, if any, accrued thereon to, but excluding, the date of redemption.  The Floating Rate Notes may not be redeemed prior to their stated maturity date of May 22, 2020.  The Floating Rate Notes bear interest at a rate, reset quarterly, equal to the three-month LIBOR for U.S. dollars plus 0.65% (or 65 basis points).  If

 

Page 40 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

a change of control repurchase event, as defined, occurs, the Company will be required to make an irrevocable offer to repurchase all or, at the election of each holder, any part of the outstanding Senior Notes at a repurchase price equal to 101% of their principal amount, plus unpaid interest, if any, accrued thereon to, but excluding, the date of repurchase, unless, in the case of the 3.450% Senior Notes, the Company has exercised its right to redeem such notes in full.

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 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, depletion and amortization expense for continuing operations. Additionally, stock-based compensation expense is added back and interest income is deducted in the calculation of consolidated EBITDA.  Certain other nonrecurring items, if they occur, can affect the calculation of consolidated EBITDA.

At June 30, 2017, the Company’s ratio of consolidated debt-to-consolidated EBITDA, as defined by the Company’s Revolving Facility, for the trailing-twelve months was 1.78 times and was calculated as follows:

 

 

 

July 1, 2016 to

 

 

 

June 30, 2017

 

 

 

(Dollars in thousands)

 

Earnings from continuing operations attributable to Martin Marietta

 

$

442,952

 

Add back:

 

 

 

 

Interest expense

 

 

86,245

 

Income tax expense

 

 

174,954

 

Depreciation, depletion and amortization expense

 

 

288,163

 

Stock-based compensation expense

 

 

25,406

 

Deduct:

 

 

 

 

Interest income

 

 

(316

)

Nonrecurring gain

 

 

(5,863

)

Consolidated EBITDA, as defined by the Company’s Revolving Facility

 

$

1,011,541

 

Consolidated net debt, as defined and including debt for which the

     Company is a co-borrower, at June 30, 2017

 

$

1,800,190

 

Consolidated debt-to-consolidated EBITDA, as defined by the Company’s

     Revolving Facility, at June 30, 2017 for the trailing-twelve

     months EBITDA

 

1.78x

 

 

 

Page 41 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

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, meet capital expenditures and discretionary investment needs, fund certain acquisition opportunities that may arise and allow for payment of dividends for the foreseeable future.  At June 30, 2017, the Company had $857.5 million of unused borrowing capacity under its Revolving Facility and Trade Receivable Facility, subject to complying with the related leverage covenant. The Revolving Facility expires on December 5, 2021 and the Trade Receivable Facility expires on September 27, 2017. Management intends to renew the Trade Receivable Facility beyond its expiration.

The 6.65% Senior Notes, due 2018, have been classified as a noncurrent liability as the Company has the intent and ability to refinance on a long-term basis before or at its maturity on April 15, 2018.

The Company may be required to obtain financing to fund certain strategic acquisitions, if any such opportunities arise, or to refinance outstanding debt. Any strategic acquisition of size for cash incremental to the pending Bluegrass acquisition would likely require an appropriate balance of newly-issued equity with debt in order to maintain a composite investment-grade credit rating. Furthermore, 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 at June 30, 2017 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, 2016.  Management continues to evaluate its exposure to all operating risks on an ongoing basis.

OUTLOOK

The Company is encouraged by positive trends in the markets it serves and its ability to execute its strategic business plans.  Notably:

 

Public sector growth is expected to continue in 2017 as new monies flow into the system.  FAST Act projects should accelerate through the year, supported by ongoing activity funded through Transportation Infrastructure Finance and Innovation Act.  Additionally, state and local initiatives that support infrastructure funding, including gas tax increases and other ballot initiatives passed over the past 24 months, are expected to grow and continue to play an expanded role in public-sector activity.

 

Nonresidential construction is expected to modestly increase in both the heavy industrial and commercial sectors. The Dodge Momentum Index is at its highest level since 2009, signaling continued growth.  Additional energy-related economic activity, including follow-on public and private construction, will be mixed. While $61.5 billion of new energy-related projects are scheduled to start in 2017 and 2018, the certainty and timing of commencement will affect nonresidential growth.

 

Page 42 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

 

Residential construction is expected to continue growing, particularly in key Martin Marietta markets, driven by employment gains, historically low levels of construction activity over the previous years, low mortgage rates, higher lot development and higher multi-family rental rates.

OTHER MATTERS

If you are interested in Martin Marietta stock, management recommends that, at a minimum, you read the Company’s current annual report and Forms 10-K, 10-Q and 8-K reports to the Securities and Exchange Commission (SEC) over the past year.  The Company’s recent proxy statement for the annual meeting of shareholders also contains important information.  These and other materials that have been filed with the SEC are accessible through the Company’s website at www.martinmarietta.com and are also available at the SEC’s website at www.sec.gov.  You may also write or call the Company’s Corporate Secretary, who will provide copies of such reports.

Investors are cautioned that all statements in this Form 10-Q that relate to the future involve risks and uncertainties, and are based on assumptions that the Company believes in good faith are reasonable but which may be materially different from actual results.  Forward-looking statements 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.

Factors that the Company currently believes could cause actual results to differ materially from the forward-looking statements in this Form 10-Q include the performance of the United States economy; widespread decline in aggregates pricing; the history of both cement and ready mixed concrete being subject to significant changes in supply, demand and price; the termination, capping and/or reduction or suspension of the federal and/or state gasoline tax(es) or other revenue related to infrastructure construction; the level and timing of federal and state transportation funding, most particularly in Texas, North Carolina, Iowa, Colorado and Georgia; the ability of states and/or other entities to finance approved projects either with tax revenues or alternative financing structures; levels of construction spending in the markets the 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 further slowdown in energy-related construction activity, particularly in Texas; a slowdown in residential construction recovery; a reduction in construction activity and related shipments due to a decline in funding under the domestic farm bill; unfavorable weather conditions, particularly Atlantic Ocean hurricane activity, the late start to spring or the early onset of winter and the impact of a drought or excessive rainfall in the markets served by the Company; the volatility of fuel costs, particularly diesel fuel, and the impact on the cost of other consumables, namely steel, explosives, tires and conveyor belts, and with respect to the Magnesia Specialties business, natural gas; continued increases in the cost of other repair and supply parts; unexpected equipment failures, unscheduled maintenance, industrial accident or other prolonged and/or significant disruption to production facilities; increasing governmental regulation, including environmental laws; transportation availability, notably the availability of railcars and locomotive power to move trains to supply the Company’s Texas, Florida, and Gulf Coast markets; increased transportation costs, including increases from higher passed-through energy and other costs to comply with tightening regulations as well as higher volumes of rail and water shipments; availability of trucks and licensed drivers for transport of the 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; proper functioning of information technology and automated

 

Page 43 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Second Quarter Ended June 30, 2017

(Continued)

 

operating systems to manage or support operations; inflation and its effect on both production and interest costs; ability to successfully integrate acquisitions quickly and in a cost-effective manner and achieve anticipated profitability to maintain compliance with the Company’s leverage ratio debt covenant; changes in tax laws, the interpretation of such laws and/or administrative practices that would increase the Company’s tax rate;  violation of the Company’s debt covenant if price and/or volumes return to previous levels of instability; downward pressure on the Company’s common stock price and its impact on goodwill impairment evaluations; reduction of the Company’s credit rating to non-investment grade resulting from strategic acquisitions; and other risk factors listed from time to time found in the Company’s filings with the SEC.  Other factors besides those listed here may also adversely affect the Company, and may be material to the Company.  The Company assumes no obligation to update any such forward-looking statements.

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, 2016, 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 44 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

 

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 kept the federal funds rate near one percent during the six months ended June 30, 2017. The residential construction market accounted for 21% of the Company’s aggregates product line shipments in 2016.

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 June 30, 2017, the Company had a $700 million Credit Agreement and a $300 million Trade Receivable Facility. The Company also has $300 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 $440.0 million, which was the collective outstanding balance at June 30, 2017, would increase interest expense by $4.4 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 defined benefit pension plans 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, 2016.

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 2017 coal requirements.  A hypothetical 10% change in the Company’s energy prices in 2017 as compared with 2016, assuming constant volumes, would change 2017 energy expense by $23.1 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 net sales for the cement product line for full-year 2017 of $380 million to $400 million, a hypothetical 10% change in sales price would impact net sales by $38 million to $40 million.

 

Page 45 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

(Continued)

 

Item 4. Controls and Procedures

As of June 30, 2017, 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 June 30, 2017. 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.

 

 

 

Page 46 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

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, 2016.

 

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, 2016.

 

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

 

April 1, 2017 -  April 30, 2017

 

 

 

 

$

 

 

 

 

 

 

14,668,891

 

May 1, 2017 - May 31, 2017

 

 

 

 

$

 

 

 

 

 

 

14,668,891

 

June 1, 2017 - June 30, 2017

 

 

 

 

$

 

 

 

 

 

 

14,668,891

 

 

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.

 

Page 47 of 50


MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

PART II- OTHER INFORMATION

(Continued)

 

Item 6. Exhibits.

 

Exhibit No.

  

Document

 

 

10.01

 

Offer Letter, dated as of June 9, 2017, by and between Martin Marietta Materials, Inc. and James A. J. Nickolas

 

 

 

31.01

  

Certification dated August 1, 2017 of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.02

  

Certification dated August 1, 2017 of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.01

  

Written Statement dated August 1, 2017 of Chief Executive Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.02

  

Written Statement dated August 1, 2017 of Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

95

  

Mine Safety Disclosures

 

 

101.INS

  

XBRL Instance Document

 

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase

 

 

 

 

 

 

 

Page 48 of 50


 

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.

 

 

 

 

MARTIN MARIETTA MATERIALS, INC.

 

 

 

            (Registrant)

 

 

 

 

Date: August 1, 2017

By:

 

/s/ Anne H. Lloyd

 

 

 

Anne H. Lloyd

 

 

 

Executive Vice President and

 

 

 

   Chief Financial Officer

 

 

 

 

Page 49 of 50


 

MARTIN MARIETTA MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES

FORM 10-Q

For the Quarter Ended June 30, 2017

EXHIBIT INDEX

 

Exhibit No.

  

Document

 

 

10.01

 

Offer Letter, dated as of June 9, 2017, by and between Martin Marietta Materials, Inc. and James A. J. Nickolas

 

 

 

31.01

  

Certification dated August 1, 2017 of Chief Executive Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

31.02

  

Certification dated August 1, 2017 of Chief Financial Officer pursuant to Securities and Exchange Act of 1934 rule 13a-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

32.01

  

Written Statement dated August 1, 2017 of Chief Executive Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

32.02

  

Written Statement dated August 1, 2017 of Chief Financial Officer required by 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

95

  

Mine Safety Disclosures

 

 

101.INS

  

XBRL Instance Document

 

 

101.SCH

  

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

  

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.LAB

  

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

  

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

101.DEF

  

XBRL Taxonomy Extension Definition Linkbase

 

 

 

Page 50 of 50