Business Finance Essay

Smith Materials, Ltd
Ready Mix Operations
Case Background and Overview - Confidential

Business Background
Initially acquired by the Smith family in 1960 to support its highway construction activities, Smith Materials Ltd. (SM) is a diverse construction materials company that operates in two separate business units (divisions).

Cement Division
SM’s Cement Division operates a cement plant and distribution facility in central Texas. The Cement Division produces approximately 1 million tons annually of various types of cement and is consistently very profitable.

Aggregates Division
SM’s Aggregates Division consists of two types of operations: quarrying and ready mix (concrete) operations.

Quarrying operation
SM’s quarrying operations produce limestone based crushed stone products. Over the past 2 years the Aggregates Division has acquired major new aggregate reserve deposits in the Austin area at its Marble Falls and Bar X quarries, as well as additional acreage with substantial reserves at its Delta facility. Major capital investments of over $50 million are planned over the next 2 years to build large, efficient rock crushing plants at both Marble Falls and Bar X. Delta will continue to operate its existing plant with minor modifications. Both the Marble Falls quarry and the Delta quarry primarily distribute products to the Austin market via rail through two Company owned rail terminals at Seward Junction (Northwest Austin) and Manor (east Austin). Proximity to major construction projects from downtown Austin, east past the Bar X, should position the new Bar X plant to compete successfully in the Central and South Austin markets. Implementation of these strategic moves will give the company significant production cost advantages over other competitors with aggregate production in the Austin market.

The Austin market’s consumption of crushed stone products is currently estimated at 13.5 million tons per year. The overall market is expected to grow in excess of 10% annually for at least the next 1-3 years. SM currently produces about 5.5 million tons of crushed stone products per year from its various quarries. Aggregate production from all Austin-based quarries is estimated at 24.5 million tons per year, compelling Austin-based aggregate producers to export some crushed stone products to other markets outside of Austin.

The primary sales channels for the crushed stone products coming from SM’s quarrying operations include:
(1) Austin-based hot mix operators (which produce asphalt)
(2) SM’s own internal ready-mix operations (cement and crushed stone are the prime ingredients in concrete)
(3) Various Austin-based construction contractors (including Smith Family Construction Corporation)
(4) Various clients beyond the Austin market (through the Company’s ability to transport its products via rail).

Austin Ready mix concrete operation
SM’s ready mix concrete operation is currently a major sales channel for distributing crushed stone products from SM’s quarrying operations into the Austin market. SM’s ready mix operation consumes approximately 2 million tons of crushed limestone and sand products (from the quarrying operations) per year. Additionally, the Austin-based ready mix operations consume 50-60 thousand tons of cement from the Company’s Cement Division annually. Maps denoting the locations of the Company-owned ready mix plants within the Austin market are included in the supporting case materials.

Historically the ready mix business in Austin has been highly volatile and not very profitable for SM. The business has not generated a positive cumulative cash flow since 1980. Although at times profitable, the drain on cash due to new equipment requirements and plant locations has left SM with minimal profits and a jaded view of the ready mix industry. In 2004, the business experienced near record losses and was unable to outline a clear vision for future

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